Reward operates like 'catalyst' to improve and enhance the performance and productivity of employees in organizations. Financial motivation plays an important and major role in improving the productivity of workforce.
Profit Sharing: Profit is shared can be on macro or micro level. The former is concerned to the entire company as a whole while the latter to a particular section or group dealing with a particular activity and/or product.
Job evaluation: Various factors of the job are isolated and then evaluate for the comparison of the inter job. Each factor is given the rating on the set scale by the higher management. The total rating makes the structure of the wage structure. But a minimum wage is decided according to the job nature and market value.
Merit rating: it is used to find out or as a parameter to judge the performance and productivity. Each employee is rated on a scale from excellent to poor on the basis of required abilities for his or her job.
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Today, organizations are looking for pay for performance models (one of the type of financial benefits) through merit ratings. The organizations are going for this model because they want to make a stronger relationship between rewards and performance outputs for those who help the organization to excel.
The model of PRP is effective and successful when the goals and performance of the employees are related to the overall mission and objectives of the company's goal. The line managers or supervisor issue the individual or team goals and objectives based on the goals and objectives of the company , but also making sure that everyone is at same and right track in regard to the company philosophy and priorities. This is known as Management By Objective (MBO).
The key to performance pay systems is the measurement required to find out the outputs on which the pay relies. The three main steps are:
Set the objectives
Getting the results of the approvals
Connecting the outcomes with pay
Money, no doubt, is a strong motivator and employees will do their best for increasing their productivity so that they can a bigger pay to their homes and in return the company gets quality of work at fast speed with satisfied workforce.
Types of PRP
The most commonly used types or models of PRP are as follows:
Piecework: This is the most ancient form of payment. The worker is paid a price for each unit he produces.
Payment by Results: Bonuses are dependent on the measured quantities or values of outcomes achieved through individuals or groups. It covers a wide variety of bonus scheme.
Plant or Organization wide Incentives: Pay levels or financial benefits are based upon the measured quantities or value for the overall organization.
Merit Pay: Pay or reward is dependant on the contribution or the performance of the employee which has been assessed.
Performance related Pay: This form of payment is based on the performance of an individual or group against the targets assigned to them. This is usually p art of performance management system.
Competence based Pay: Certain types of skills or qualifications are linked with the rewards in terms of payment.
Profit related Pay: Bonuses or share option is given to the employees but it is based on the profit performance of the organization. The employees share and enjoy the profit of the company which has been achieved due to their efforts and performance.
Causes for the introduction of PRP in organizations
Employers are bringing in PRP system in their companies for the following reasons:
To make clear the objectives and involve the employees in the company's goals and objectives
To motivate the employees by linking their achievement to the rewards and pay not by their tenure in the organization
To encourage the team work and equality and justice
To give benefits and rewards for the efforts employees have put and also recognition of their hard work
To improve the productivity and performance of the employees
To deal with the recruitment and retention of employees
Always on Time
Marked to Standard
To make the pay system flexible
To give greater power to the managers and reducing the union influence through bargaining and representation
Pros of Performance related pay
The main benefit of performance related pay is that the goals and aims of the organization become the main concern for the employee. When employees are given the goals and benefits of rewards at the achievement of those goals, then employees do work hard and out their maximum efforts, pay after achieving the goals motivates them.
Higher motivation of employees will result from goals that are not overly difficult to achieve and with the reward being perceived as worthwhile. The benefit of this to the organisation is obvious; a workforce that is more motivated towards achieving the goals of the organisation will make the organisation more productive and more efficient.
Performance related pay also allows organisations to hold on to their top performing staff as it allows them to increase pay/bonuses for these particular staff members for hard work to entice them to stay with the organisation. Having attained a more favourable level of pay these harder working employees are more likely to strive to a further high level, thus benefiting the organisation even more. A further advantage of rewarding employees with pay for good performance means that they do not have to reward them with promotion. Rewarding high achievers with promotion can lead to an organisations structure becoming overly full and complex, resulting in less efficient communication within the organisation. Promoting high achievers can also not be effective as the organisation may end up promoting someone who is not qualified or prepared for this new higher level of responsibility. Also, having performance related pay allows organisations to retain control over the employees.
Pros of performance related pay
As was previously mentioned, whilst an achievable goal can motivate employees (and thus benefit the organisation through higher productivity) an unachievable or unfair goal can de-motivate employees. This can result in lower productivity for the organisation something which it obviously doesn't want to happen. Whilst performance related pay can allow management more control over the employees it reduces the amount of independence that employees have. Whilst for some this may allow for a clearer definition of their job role other's may feel overly pressurised into acting in a certain way, lowering motivation yet again.
As performance related pay focuses on the work of an individual it can lead to a lack of teamwork in an organisation as the individual will focus solely on their own goals and not on cooperating with any groups that they may be involved in. This may lead to goals that the organisation has set for the group will not be carried out and the organisations effectiveness may be compromised. In fast moving sectors any objectives that are set for an individual may no longer be relevant after a short while of them being set. For an organisation it can mean that it's employees will not be working towards the correct goals, reducing the organisations effectiveness and how competitive they can be.
Yet another issue that can de-motivate employees and thus affect an organisations effectiveness is if an employee feels that they have been unfairly treated in comparison with their colleagues. Employees may perceive that the effort that they have put in towards the objectives matches or equals someone who received a more favourable review than themselves. This can lead to disharmony amongst the employees.
Whilst performance related pay has clear advantages and disadvantages it is not suitable for all organisations. Whilst it strives towards worker independence and less manager interference it invariably tends towards the reverse. Disharmony in the workplace will be common place as employees will often see their own efforts as being more worthwhile when compared with others who are receiving larger or more attractive rewards than them. This disharmony can lead towards an organisation that does not communicate well, operate efficiently and may not be able to compete effectively. However it can be very effective, with all employees working towards the same goals raising the companies efficiency in all these areas.
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Performance related pay when carried out fairly can be very effective, high achieving employees will receive the rewards and become more committed to the company presumably staying on and attempting to attain even more rewards within the company. Poorly achieving employees will not be rewarded and thus will be less likely to continue to work with the company, making way for possibly more hard working employees.
A 2006 study of truck drivers' safety found that an increase in remuneration based on past performance decreased the numbers of traffic accidents (Rodriguez, Targa and Belzer).