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Today, tying employee's pay to their performance on the job is widely popular. Proponents of pay-for-performance programs will tempt to and retain better employees and offer incentives to motivate and reward improved performance. They view uniform employee salary schedules as ineffective in attracting and retaining sufficient numbers of effective employees and as out of touch with compensation practices in other industries that tie salary to employee performance. Pay for performance incentive is to design to overcome the limitations of current reimbursement arrangements by aligning financial reward with improved outcomes. It is incentive programs differentiate payment among providers based on performance of quality and efficiency measures so that desired outcomes occur through changed behavior.
The label pay for performance covers a wide-spectrum of compensation systems that can be clustered two general categories such as merit plans and variable plans. The effects of performance-based pay plans on individual and organizational performance cannot be easily to relief from the broader context of an organization's structure, management strategies and personnel systems. Pay represents by the most significant and disputation element in the employment relationship, and is of equal interest to the employer, employee and government. It is important for employer because it represents a significant part of his costs, is increasingly important to his employees' performance and to competitiveness, and it will affect his ability to recruit and retain a labor force of quality. For the employee, it is fundamental to his standard of living and is a measure of the value of his services or performance. For the government, it affects aspects of macro-economic stability such as employment, inflation, purchasing power and socio-economic development in general. The Pay for performance system helps to foster a healthy spirit of competition amongst the employees and is instrumental in enhancing their motivation level.
Pay for Performance is the best resource to date on the issues of whether these concepts work and how they can be applied most effectively in the workplace. Performance-related pay systems are based on the organizations that can accurately measure the individual team or the organization outputs, as well as the individual and team outputs contribute to organizational performance.
Why it is needed to establishing pay-for performance plans or incentives plans?
First and foremost, pay-for-performance plans are different to a set of salary. It is a method of compensation where the employees are paid based on their performance. Employers normally provide incentives to workers based on the work performance. The efficacy of pay-for-performance plan is it is able to be use to motivate employees. Although Kevin Sandler, 2010, had argued that sometimes the virtue of incentives plans are uncertainty, it is costly for company to implementing or unexpected problems may occurs. It will be time consumed and effort for company to search or design for suitable incentives plans. However, its contribution should not be neglect. There have several advantages of pay-for-performance plans and incentives plans for both employers and employees.
The foremost contribution of Pay-for-performance is it can increase the motivation of employee in their work performance. It motivates employees to put more effort because the extra compensation is given to those employees who perform above the expected standard. When an employee is compensated based on their performance, he will be more likely to work effectively in order to increase their income. In other words, the opportunity for employees to earn a desired income can stimulate employees do one's level best on their task.
Other than that, pay-for-performance plans provide unlimited compensation to the workers; especially it is beneficial to those talent salespersons that are works effectively. They may be able to earn a substantial income than those workers who are paid for a set of salary since they are paid based on the volume of sales. Not only that, it also able to increase the employee's productivity. Based the employer perspective, due to the desire of employees to achieve their income goal, they strive to increase their productivity. It might result in high productivity from fewer workers. This can beneficial to employers with reducing in employer's labor cost. It can also lead to better retention.
With the high-achieving in performance, those employees who satisfy their income as well as work environment will be more likely to maintain and stay in the company. Other than that, they can help company to attain a certain level of prestige and respect from their performance. Beside, by establishing group incentives plans can encourage team cooperation because the paid is based on the result that accomplishing by a team group. It is needed for them to work together to achieving the goals. (Mattchew, 2030)
In practice, pay-for-performance helps leads to a win-win situation. In other words, it means that the employers can enjoy the benefits of improved the performance of their business as well as the employees can feast on the increased compensation as a result of their hard work. (Zimbelman. K, 1997) Pay for performance creates a clear concept that enables employees to priorities their task. So, workers can keep track on their work. Before paying management beyond a base amount, bonus pay ensures a minimum level of financial performance. Besides, this pay-for-performance plans enable the employer to share the rewards to those employees which most responsible for attaining the aim of results. It also helps employers to setting clear standards of performance and giving the authorities to the management to handle the details.
Base on the research of Rogan. P, 2009, there are three big benefits of implementing Pay for Performance System. This system helps managers to develop leadership skills by subjecting all the managers in different department to the roundtable process of objectively discussing employment performance. Secondly, Rogan had found that by using pay-for-performance system, employees are likely to drive the career pathing conversation with their managers. It helps in coincides the managers and employees of the variety of development ideas to ensure the employee reach mutually agreed upon career growth goals. Besides, this system gives a clear notion to employees that compensation will be linked to performance. It enables employees to understand that incentive is created for realistic goal setting, feedback requests and a formal performance discussion.
Pay-for-performance plan also provides the opportunity to develop employees who are underperforming. Employers should not use this plans only as a measuring tool for an employee's production, it can being used to take into consideration when an employee is misses out a simple attained incentives payment. It might be the employees are not qualified to perform the job or they are needed for better training. Thus, Root. G N, 2010, stated that manager should not think that the employee is not motivated, it may be involved other factors that is needed to be noticed on worker as well as company.
Incentives Strategy in Application
When a company want to motivate it employees by offering them compensation for excellent performance, it is called incentives plans. The course of implementing incentives system is to influence the behavior of employees as well as motivate pro-poor action in order to develop outcomes. It is critical for develop the capacity as it assisting the employees to do their best in performing their function. (UNDP, 2006)
Incentives for individual motivation
Salaries, intangible rewards, benefits, recognition are the common examples of incentives that being used to motivate employees to improve their performance. Normally, incentives are divided into two forms which are financial incentives or non-financial incentives. Financial incentives include salary, bonuses, pension, meal, clothes or housing is needed to make a distinction between a proper level of pay and special incentives. Whereas non-financial incentives can be comes in many different forms such as travel, gifts and some intangible incentives which also includes work flexibility, possibility of advancement and independence of work. It normally recognized as a function of psychological process.
On the other hands, there is also a distinction between formal and informal incentives. Salary scales and staff entitlements are the examples of formal incentives whereas informal incentives represent channels reaping personal benefits through corrupt practices or patronage. Motivators may be positive and/or negative. Rather than investing new incentives, it is more important in reducing perverse incentives that favor non-conducive behavior.
Incentives for organizational motivations
Incentive plans are essential in organizational motivation and it is also chief in assisting in analyze the understanding of the force that drive the organization. It is useful in analyzing how an organization treat its employees in rewarding and punishing him as well as the reason for staff to join an organization. A perfect organization incentives system is able to stimulate employees to be creative and innovative in improving their performance.
It is hard to deny that, incentives system can be encourage or discourage employee and the behavior of work group. Thus, organizational is needed to continually investigate the method to ensure their employees are committed to their task given. No matter it is based on perception or reality, organizational incentive systems have a real influence on the performance of employees that will directly affect organization overall performance.
Incentives for societal motivation
Suppose the pervasive structural incentives and motivators are located at the social level, the investment climate, and security, rule of law, civil service pay or legislation are conducive to civic engagement. The possibility to achieve its purpose is depends on the adequately resourced as well as the way it is resourced under prevailing rules.
The values of many of the above are directly derivate in the prevailing Governance systems. Firstly, it includes democracy and a rights-based approach to development. It is needed to have the rule of law and accurate legal system, if not there will be no incentive mechanisms or external interventions for capacity development bear results. A vibrant civil society able to deepen democracy, bolster support for the protection of human rights and further check the misuse of incentive mechanisms.
Problems and Issues
A question has been arising on whether pay-for-performance is actually worked on motivating employees to better performance on their jobs. Some research had claimed that it is limited time-span related to their motivating effect. Thus, pay-for-performance should be align with the organizational objectives in order to eliminate the consistent with a purely cost reduction strategy.
Sriyan de Silva had conducted the research on the reason for the failure of pay-for-performance as well as the issues and problems that employees face from a variety of circumstances. For example:
The limited feedback on workers or organization performance.
The objectives of performance appraisal system are inappropriate to match with the objectives of the reward system.
There are insufficient criteria to gauge the performance or the criteria are difficult to communicated, accepted or understood by people in organization.
The purpose of designing reward system does not meet the objectives that expected to accomplish.
Because of inadequate of performance criteria, it is lack of an appropriate quantum of payments for compensation.
There have a lot of arguments in favor of pay-for-performance which are theoretically attractive. But it is hard to discover the evidence that support or argue against these views. It is because of the faulty of the introduction of the scheme or the lack of empirical evidence.
Sometimes, Governments are assisting the introduction of pay-for-performance by established the tax relief for approved schemes to encourage their adoption.
There have been founded that two benefits have been claimed for performance pay which are:
If the rises of the basic pay are changing to a profit-related scheme, the employer may be more inclined to hire new employees. It is because the labor cost will be lesser than others. Thus, when the percentage of profit to be shared is remaining the same, the workforce additions will not cost the employer more because it is in terms of the profit-related pay. On the other hand, it will be a deduction of quantum that existing employees will receive if there have new recruitment unless profits of company are increased.
If basic pay is reduced as a percentage of total earnings, increased earnings will not result in inflationary tendencies as such increases is the result of increased profits/productivity.
There are several benefits that management and employees receive which included in the situation when the profit arise, the higher pay can stimulate employees whereas when profits decrease, the reduction in the pay-for-performance can cushion employee against redundancies. Moreover, it able to enhanced the identification of employee with the success of the business.
It also enables employee to be familiar with the fortune of business from the variation of pay by employers7
Sriyan de Silva has stated some nature of criticisms that have been made against pay-for-performance which include difficult to estimate the incentives paid to employees are exceed the performance gains. Other than that, employees are unwilling to accept reduction in their fix pay when the performance earnings are declined. Moreover, performance profits are not easy to link pay to the performance of employees because it is depend on a wide range of factors that beyond the control of employees.
Although it difficult to ensure that the evidence will be clear on whether the pay-for-performance plans will increase the productivity levels of employees. However, it can't be neglect that there is a positive link between the pay-for-performance is clearer enterprises with employees' participation arrangement. Besides, it is not suitable for extra payments to replace the fixed salary; it is more like to match the extra payments with the performance increase. Group incentives plans are also not appropriate use in individual performance because the poor performers which describes as free riders will be benefits from the efforts of others.
Types of Performance Pay
Merit pay or a merit raise is any salary increase the firm awards to an individual employee based on his or her individual performance. It makes sense to reward more productive employees for their increased contributions to the organization, in the interests in fairness, but also with an eye to trying to retain the best employees in a company.
Merit pay made from few basic forms. Firstly, annual salary increases can be based on some sort of assessment of the employee's productivity or performances. Those judged as "better" will receive greater salary increases which maintain over the years. The second method of rewarding "superior" employees is to use a bonus program or system, where a very productive employee will receive some sort of bonus payment, which is a onetime, non-recurring event. The third approach involves direct compensation for quantified production. In the direct compensation for quantified production, one nice thing is that the link between objectively determined production and pay or compensation is clearer, better defined and requires less judgment. Other than that, merit pay allows the employer to differentiate pay given to high performers and allows the employer to satisfactorily reward an employee for accomplishing a task.
Incentive Payment is a scheme in which rewards are offered to managers or other employees conditional on certain performance targets being met. The incentive payments are direct payments made under the National Wool Act (P.L. 83-690, Title VII) to producers of wool and mohair, which were similar to deficiency payments made to producers of grains and cotton. The incentive payment rate was the percentage needed to bring the national average return to producers (the market price plus the incentive payment) up to the annually set national support price. Producers with higher market receipts got larger support payments. This created an incentive to increase output and to improve quality.
Group Incentives and Productivity Gain-Sharing
Group incentives are groups attempt to empower people and tend to have a levelling effect on labours' performance. Rather than restrict production, the group pressures the superior producer to handle more job assignments. Group pressures may likewise have an upward levelling effect upon the operator who would be satisfied with relatively low individual earnings. Therefore, average group output often is higher than average individual output. Besides, productivity gain-sharing system is based on the premise that basic to successful productivity enhancement in the long term is sharing productivity gains with employees by linking a part of earnings to productivity to achieve such multiple goals as
increasing labour productivity
improving employees' living standards
strengthening employee commitment
improving labour-management relations
securing flexibility in labour costs
maintaining corporate viability
take a long-term view of growth
A successful gain-sharing program relies on two factors-formula and training. There is no one-size-fits-all gain-sharing plan; each program is custom made to fit an individual company's needs. Not only are productivity and quality factored into the formula, but other costs such as the cost of worker's compensation or the reduction in order-to-shipment lead times can also be added. And in order for the program to work, all levels of the workforce must be educated about their respective roles in gain-sharing through proper training methods. In general, gain-sharing systems are based on a participatory approach, and can be used to create or reinforce participatory practices. In addition to helping reduce manufacturing costs, gain-sharing can also enable a company to cut costs due to poor quality. Evidence indicates that such systems
improve coordination, term work and knowledge-sharing
focus on cost saving
facilitate changes (e.g. in technology) needed to improve performance which are seen as being directly related to higher earnings
result in expectations by employees of better management and planning
Result in contributions of ideas by employees
Profit sharing plans can be a powerful tool in promoting financial security in retirement. It is a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers. And is a way to rewards the hard work and dedication of those Distributors. This incentive is a one-off additional annual bonus where the Company puts part of the country's profit into a pot and Distributors can qualify to earn a share. Employer distributes a set percentage of the company's profits to the eligible employees. The amount distributed to each of the employee may be weighted by the employee's base salary so that employees with higher base salaries receive a slightly higher amount of the shared pool of profits. This is normally done on an annual basis. Employers may distribute the portion of its profits immediately or it may set up a series of accounts for employees and defer the profit sharing until employees retire. This saving plan offered by most of the companies to their workers in which a part of the firm's profits is funneled into a tax-deferred employee retirement account. These plans give many employees an additional incentive to be productive. The profit sharing is to give employees an incentive to work for the company's profitability.
A profit sharing plan is something that may motivate some people to work harder, but, if the company shares the profit with every employee, then there will be some people who choose not to put forth extra effort. An individual incentive program, it will motivate staff to exert more effort because extra compensation is paid only to those who perform well. A company will see a rise in personnel productivity when you use an individual incentive program. There are some advantages that can brings groups of employees to work together toward a common goal such as success of the company. Other than that it can helps employees focus on profitability and enhances commitment to organizational goals. While an incentive program should not be used as the only measuring tool for an employee's production, it should consideration when an employee regularly misses out on easily attained incentive payments
Short -Term Incentives
Managers play a crucial role in divisional and companywide profitability, and most firms therefore put considerable thought into how to reward them. Most managers get short-term and long-term incentives in addition to salary. For firms offering short-term incentive plans, most of all 96% provide those incentive by cash. For those offering long-term incentives, about 48% offer them as stock options.
As noted most firms have annual bonus plans aimed at motivating managers' and executives' short-term performance. Short-term bonuses can easily in plus or minus adjustments of 25% or more to total pay. There are three basic issue to consider when awarding short-term incentives, such as eligibility, fund size, and individual awards.
Most firms include both top and lower managers, and mainly decide who's eligible in several ways. Most base eligibility on a combination of factors, including job title, base salary, and discretionary considerations. Some simply base eligibility on job level or job title. A few base eligibility on salary level alone. Employer should also consider about how to decide the total amount of bonus money to make available - fund size. They use a straight percentage to create the short-term incentive fund .Others use a deductible formula, on the assumption that the fund should start to accumulated only after the firm has meet the specified level of earnings. The third task is to decide the actual individual award. Typically, a target bonus is set for each eligible position. The actual reward then reflects the person's performance.
Short term incentive pay is determined a variety of factors such as:
existing company practice
compensation committee discretion
competitive peer assessment in the employer's industry; previous work experience
Future growth revenue projections of the company, just to name a few
Often, the executive will receive a low base salary and a high percentage bonus that is most often tied to overall company and individual performance during each year of employment
Long -Term Incentives
Employers use long-term incentive to inject a long-term perspective into their executives' decisions. Long Term Cash Incentive Pay is a performance driven award that pays compensation based on a three to five year performance period and calculated as a multiple of base salary. Performance can be measured against an industry peer group of companies and the projected long term growth of the company. It also called as "Performance Share Plans" are the most popular form of long-term share award. It has also become increasingly common over the same period for companies to make at least part of annual bonus awards to senior executives in the form of deferred share awards. The actual number of long-term incentives that will be granted to the eligible employees depends on the performance of the individual employee. Compensation is not only a major expense; it is the companies have to focus the employee's behavior or performance. For that reason compensation strategy must be strongly and irrevocably tied to the overall business strategy's short and longer-term objectives.
Popular long-term incentives include cash, stock, stock option, and stock appreciation rights. A long-term incentive plan is necessary to maintain an appropriate mix of short and long-term incentives. Long-term incentives link financial rewards to the Company's longer-term performance. Most of the companies use the stock option as rewards that reflected long term performance. Stock option is the right to purchase a stated number of shares of a company stock at today's price at some time in the future.
The foundation to a successful long-term incentive plan is to constantly review the objectives of the organization. A diligent and consistent analysis of key tenants such as the company mission and vision statement, core values, culture and ever changing business environments will enable to be in an ideal position when implementing or revising the long-term incentive program.