The aim of this assignment will analyse the strengths and weaknesses of the three different methods of financial rewards; individual performance related pay, profit related pay and skills based pay. A wide range of research will be explored through newspaper, books, journals and business models and how organisations tends to tackle these three methods, which will give a full insight on how these three spheres have impacted today’s modern era, and how they are driven, which will then present the overall conclusion.
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Financial reward can be seen as a motivational factor, where employees may benefit, either from promotion or a bonus, it could be seen as an appraisal system. ‘Most empirical research on pay for performance systems has investigated clear-cut programs, that is, programs based on individuals versus collective performance or behaviour. Yet, many organizations pay employees using a combination of different programs’ (Gerhart and Rynes, 2003). By setting objectives and goals for a specific project, is to maintain employee’s satisfaction at work, where performance and productivity is enhanced.
Individual Performance Related Pay
‘In recent years, performance-related pay (PRP) has been much more widely used as part of the human resource policies of organizations’. Both organisations along with its employees may benefit performance related pay. ‘It has typically been introduced alongside other HR practices as part of a package of measures, the aim of which has been to increase the input (both quantitative and qualitative) of workers to the production process’ (Whitfield and Poole, 1997). The strength of individual performance related pay is advantageous to its employees and the organisation itself. Performance related pay relates to the performance towards how well a task is carried out in the workplace by the individual, over achieving may bring good results, whereas poor achievement in the workplace could cost the organisation. According to (Lahdesmaki, 2008) ‘Performance-related pay can help improve performance and promote organizational development when it is applied properly in the right managerial context’. Therefore, organisations use this method where it motivates individuals recognising they will be rewarded towards their progress and their contribution, which would then be implemented, hence the success of that organisation.
Individual performance related pay provides the incentive, which employees can then accomplish and achieve the work targets, with this been recongnised with a reward. (OECD, 2005) states; ‘Top management has generally accepted it and is committed to its implementation. Employee organizations and unions have principally accepted the system. Employers in agencies feel that PRP is a very good incentive, as a tool for organizational development.’ Therefore employers can obtain assistances from a business structure for set objectives, which would develop and improve the productivity and the performance of employees. ‘Previous work has indicated that there is a positive relationship between PRP and earnings’ (Booth and Frank, 1999), and ‘the suggestion is that this is due to the greater work effort and/or ability of those on incentive pay’ (Barkume, 2004).
Nonetheless, organisations benefit this type of financial reward given to employees as comprehension is increased, where employees are aware of their performance and to enhance their productivity directly associated to be rewarded. ‘Furthermore, such models also ignore that PRP is only one type of payment system aimed at increasing the contribution of employees to the production process’ (McNabb and Whitfield, 2007)
Poor performance from employees can improve, with the awareness of a reward for grabs. To this, rewarding employees with better performance target, where employers would keep a hold on to the most industrious employees then those with low performed targets. As Barkume (2004) states call centers such as Carphone Warehouse offer commission to its employees due to the performance and how much quantity is sold whereas other organisations such as Alliance Leicester, whose employees are monitored on their performance, thus they are rewarded.
However as strengths convey the rewards; weaknesses remain as employees may face a low payout due to the low inflation climate, as the pay may not be as great. According to McNabb and Whitfield, 2007) ‘The results indicate that PRP schemes are costly for employers. They may help increase the input of workers, but whether this yields better financial performance depends on the relative magnitudes of the costs and benefits’. It may perhaps be focused upon as a reward to work hard rather than developmental needs where employees are simply working for the reward, despite the job role, connection to this, employees are likely to be de-motivated if targets are too complex to achieve.
(McNabb and Whitfield, 2007) states that; ‘Alternatively, it may be that PRP operates simply as a distributive mechanism, rewarding the high-achieving more and the low-achieving correspondingly less than in non-PRP workplaces’. Individual performance related pay can be targeted to over-skilled and qualified employees, whereas the unskilled and unqualified employees may find it difficult to keep on track then those further in front, which reduces pay equity and make the organisation liable if rewarding is not operated fairly. Organisations may use performance related pay as a short term for a specific project where employee’s performance would increase, but when the reward is outdrawn, the performance will then decrease where employees will expect the same reward for them to work effectively, which may even delay the collaboration. Finally, too much responsibility is relied on the supervisor or the manager as (Dickenson, 2006) states; ‘The big problem with this, performance related pay in organizations, is that it is so totally disorganized, that your performance relies so much on other people doing their job right that it is very, very difficult to get a fair idea of what of work are you doing’. It is suggest by Dickenson, (2009) that performance related pay may have an upper hand towards employee’s performance, however performance cannot be measured and predictions can only be made towards the end of the year.
Profit Related Pay
Profit related pay is an element of reward where in co-operation will ascend and descend together for the employee and the organisation. The prospect is that such method would improve employee’s job satisfaction and motivation and is seen as a wage substitution. ‘The idea that workers might be paid in part out of profits has been spreading since the mid-1980s across OECD countries along with the growth of international competition and rapid technological change’ (Amisano and Del, 2004) Profit related pay is either a given bonus due to the organisations performance or by receiving a share based on the performance of the organisation; for example John Lewis employees have a share in the organisation performance. According to (Robertson, 2007) ‘At the John Lewis Partnership, which employs 64,000 staff, for example, profit sharing remains central to its partnership ethos’.
‘The introduction of new work practices that are supposed to increase employee performance, flexibility and involvement with organizational goals has often been associated with the introduction of new compensation systems, such as pay for competencies, performance related pay and profit sharing’ (Handel and Gittleman, 2004). Handel and Gitleman (2004) stated that profit related pay can be just as equal to performance related pay, however occupation differences have an impact on the types of rewards, job-role (such as nursing, teachers and social workers) have no impact on profit sharing as individual job role is at a fixed salary whereas major organisations have to perform to increase profit and out compete competitors.
With a similar interaction between performance related pay; profit related pay consists of the organisations performance. For example, if John Lewis sales increase and profit rises, then employees are rewarded the shares due to the performance of the company. As (Robertson, 2007) states; ‘Last year, John Lewis Partnership paid out £106m through its scheme, which equated to a 14% supplement to workers’ annual salaries’. However, a weakness behind profit related pay is due to John Lewis recital and if the performance decreases, therefore the organisation profit will decrease or at worst, the outcome would lose its turnover, subsequently the employees would suffer a decrease towards their pay. According to Estrin and Bradley (1992) they have investigated John Lewis profit sharing, which have not made much of a significant difference towards employee’s performance; this is based on employees’ awareness of the terms and conditions of their contract and should be aware of the type of financial reward, which depends on the profit of John Lewis and the amount of profit shared is received.
According to Ogden (1995), Alpha Water was one the many first private limited companies that introduced profit sharing, at first such financial reward was not represented as a reward; employees carried out their job-role as usual as for Alpha Water, competition with other major water companies was at risk, therefore performance had to be increased and productivity had to be elevated. ‘Schemes may also encompass a number of different computational formats with, for example, payment varying by amount, entitlement and the profit level at which payment is triggered’ (Ogden, 1995) Therefore the employees carried on their job-role as usual, as performing to a uncertain organisation, which had outstanding competitors. Compared to this and John Lewis, which is a major department store with a high profit figures in 2009, employees are willing to perform harder due to the realisation on the amount of share that can be received from John Lewis. GlaxoSmithKline (2009), one of the major pharmaceutical company offers a profit related pay scheme where it offers share save and share reward to the employees, only if employees consider buying shares with GSK, they will get the same amount of discounted share by GSK as a reward without tax.
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Profit related pay can be seen as a benefit for John Lewis employees, as they receive a share mainly based on the company performance, whereas GSK offer these rewards only to the employees when they purchase shares. Profit related pay can either increase or decrease employees pay depending on the success of the organisation, where reward can be a vast amount or nothing at all.
Skill Based Pay
Skill based pay could be seen as a remuneration system where employees are paid wages on the foundation towards the number of skills they are assessed to have and even qualifications they have obtained. As (Silva, 1998) states; ‘Skill-based pay systems are most appropriate to enterprises which depend on a high level of skills, and in which labour costs represent a relatively small portion of total costs, unlike in labour intensive industries’. However the reward in learning a new skill to perform a task is highly motivating as employees are encouraged to learn furthermore without paying for the particular course and to perform on the job they are doing while training. ‘Skill-based pay (SBP) is a rapidly spreading pay innovation that compensates for the range, depth and types of employee skills, rather than for the jobs employees perform’ (Dong-one, 1999) However skill based pay is the incentive to learning for the individual themselves and the organisation, which requires employees to learn new skills, which brings the strengths towards job satisfaction where by rewarding to learn, could support the intrinsic job role, therefore motivation is increased, however weaknesses do remain as learning may not be associated towards pay but the individual curriculum vitae is presented with the learnt skill. For example, an individual may be working in the human resource sector and were given skill based pay to carry out a CIPD course; the training will then enhance their current knowledge, where they can carry out further duties.
‘In banks and airlines, for example, skill-based pay can be used to encourage people to work in areas where manpower is most needed at a given point of time due to customer flows’. (Silva, 1998) Therefore skill based pay is designed to promote learning and is adapted in additional functional areas within the organisation where more than one task can be carried out and the current performance is exceeded as a particular knowledge or skill needs to be learned to do a certain role. Therefore, organisations may pay for performance; if higher skill is increased, then this would create a better performance, which enhances development, as well as rewarding the individual.
The strengths of skill based pay would improve the team’s effectiveness and motivation, where productivity and performance is enhanced. It will assist the organisation as employees will have a more rapid adaptation to changes due to their skills, which will allow employees to solve the problems rather than wait for others to solve the problem. Also, commitment to goals and objectives are met rapidly hence, self esteem from job enrichment and making self decisions when covering for an absent employee temporarily. Improved skills would help to advance the productivity in problem solving along with working in a team, where set deadlines are met more rapidly as further skills have been adapted. Therefore qualification might not be necessary if the employee have already the skills to perform the job and are suited to do a multi-skilled position well enough, rather than the type of employee that has the correct qualification. Overall it saves the organisation expenditure, rather than going through the recruitment process, whereas this can be done internally.
Skill based pay may be beneficial for an organisation and the employee’s performance, however weaknesses remain as an employee may have to change their shift patterns or work over time for training, this then cost the organisation to provide expense for employees that will have to teach the training or a institution to study the course or training required. (Silva, 1998) suggests that ‘Skill-based pay is particularly consistent with knowledge-based work. It has generally been regarded as inappropriate in highly automated situations where employees have little effect on operational performance. To operates best in relatively small locations with not more than about 500 employees’. If necessary, skills may be required to be learnt; in this case employees may lack enthusiasm to be trained and may want to remain in their current role. On the other hand employees may want to gain a skill due to the increase of the pay and for that reason only.
‘The administration of the system is complex, both in regard to certification of skills acquisition and payment. Therefore, unless administered properly, the costs can outweigh the productivity and flexibility gains’ (Silva, 1998) As a result; it provides a major occurrence for the organisation is the individual have not performed than expected. Silva (1998) looked at the risks in skill based pay and the affects it may have on employees and the organisation. Employees that reach maximum skill level are likely to be de-motivated even with extra pay according to Silva (1998). Lacking in enthusiasm can occur where skill assessment difficulties, which involves the timing of the assessment required such as training, which can be time-consuming.
Adopting this type of financial reward may have its strengths and weaknesses; however it is used and performed for many reasons. Skill based pay provides employees the ability to learn new skills, which will assist the organisation’s performance and profitability by saving cost in recruitment. In today’s era, skills shortage is an immense predicament as organisations seek to find skills as an important matter to do the correct job, however teaching employees within the organisation is at the advantage towards saving the cost of recruitment process, by teaching the individual within the organisation as cost is saved and employees are benefited, as they are fully aware of the business environment.
Financial rewards are applied within organisations, especially the three analysed; individual performance related pay, profit related pay and skill based pay are the fundamental for both organisation and employees. The strengths of financial rewards is highly dependable on how it has been applied as the accurate process must be taken upon before introducing such types of financial reward, however the weaknesses are outlined if the correct practice is not applied.
Financial reward is an important, debatable constituent for organisations and its employees. Organisation mission is to save cost at all expense but retain a better performance from employees, whereas employees seek to earn extra more from the organisation. It is an obvious fundamental for employee’s lifestyle as their contribution and duties to perform their job effectively and expectation are to be met due to their hard work, however such individual performance related pay as well as skill based pay and profit relative pay is all beneficial to employees as performance and productivity is enhanced, thus motivation is increased and cost is made, as well as saved. However on the other hand, employers and their organisations correspond to a significant part of the cost by giving these types of financial rewards as the organisation will benefit itself, if the accurate procedure is implemented.
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