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Human capital is the total value of human resources to the organization. Also sometimes referred to as intellectual capital, it is composed of the people in the organization and what capabilities they have and can utilize in their jobs.
Managing human capital or commonly known as Human Resource Management(HRM) is a formal management system concerned with staffing the organization, training and development, maintaining high performance, total rewards, employee relations, labor-management environments and so beyond to ensure the effective and efficient use of human talent to accomplish the organizational goals. In a seed wrap the key words representing HRM are:
Achieving success through people
Getting the right people with the right skills for the right job
Enhancing motivation and commitment through performance appraisal and reinforcements
Creating the perfect productive and harmonious work environment.
In order to enhance the efficiency and effectiveness of the efforts of even the most skilled and capable employees HRM must ensure proper motivation is provided. It must be made sure that desired actions are positively reinforced through rewards and wrong ones are punished. But it's hard to select the best method of reward as the employees wants and desires differ from one another. For an employer to decide on a perfect reward plan to motivate all the employees as whole is a great challenge. Performance appraisal is one of the ways to evaluate an employee's work.
Every employee expects a paycheck or compensation in return for the service or labor s/he spends. Unless the effort is rewarded through proper motivating compensation the performance tend to decrease. The most obvious reward employees receive from work is pay. Rewards may also be in the form of promotions, desirable work, assignments, and a host of other recognition.
Rewards are positive feedback and provide reinforcement, or encouragement, for the employee to work harder in the future. The three most typical dichotomies are: intrinsic versus extrinsic rewards, financial versus nonfinancial rewards, and performance-based versus membership-based rewards.
Intrinsic versus extrinsic rewards-
Intrinsic rewards are self-initiated rewards that come from personal satisfactions that one derives upon doing the job such as: pride in ones work, a sense of accomplishment, or enjoying being a part of a work team. On the other hand, extrinsic rewards refer to external money, promotions and benefits.
Financial versus nonfinancial rewards-
Not all rewards are applicable for the enhancement of the employee's financial well-being. Financial rewards may be direct- wages, bonuses or profit sharing-or indirect as retirement plans, paid vacations, paid sick leaves, and purchase discounts. Whereas nonfinancial rewards represent a portfolio of desirable extras: status, job title, business cards, office furnishing.
Performance-based versus membership-based rewards-
Rewards given on the basis of individual performance say perhaps on piecework, commissions, incentive plans, performance bonuses, merit play plans. Membership-based rewards, on the other hand, include cost-of-living increases, time-in-work increase etc.
A structure of rewards is shown in a chart to simplify and exhibit the three most typical dichotomies for a better understanding of the features and relative differences.
(A.Decenzo & P. Robbins (2008), Fundamentals of Human Resource Management, Singapore: John Wiley & sons (Asia) pte ltd.)
Performance appraisal is the single most important management tool in a sophisticated well-managed organization. No other management process has as much influence over individuals' careers and work lives. Properly utilized, performance appraisal is the most powerful instrument that organizations have to mobilize the energy of every employee of the enterprise toward the achievement of strategic goals. Used well, performance appraisal can focus every person's attention on the company's mission, vision, and values. But used poorly, the procedure quickly becomes the butt of jokes and the target of Dilbert lampoons. [Dick Grote (2002),.The Performance Appraisal Question and Answer Book: A Survival Guide for Managers, New York: AMACOM]
Performance appraisal is a formal management system that provides for the evaluation of the quality of an individual's performance in an organization. The appraisal is usually prepared by the employee's immediate supervisor. The procedure typically requires the supervisor to fill out a standardized assessment form that evaluates the individual on several different dimensions and then discusses the results of the evaluation with the employee. Performance appraisal has two ostensible goals:
to create a measure that accurately assesses the level of a person's performance in a job, a
To create an evaluation system that will advance one or more operational functions in an organization.
Performance appraisal is a systematical process revolving in a cycle. Although, there may be many individual variations on the basic theme, but most sophisticated companies generally follow a four phase process:
Phase 1: Performance Planning.
Phase 2: Performance Execution.
Phase 3: Performance Assessment
Phase 4: Performance Review.
In order to asses an employee's contributions to the organization a comparison of actual performance with expected performance can be done in various methods to conduct performance appraisal. The four prime clusters are:
Category Rating Methods
Graphic Rating Scale
Behavioral Rating Approaches
Constructing Behavioral Scales
Performance-Based Pay Systems
Once employee performance has been measured, it must be linked to compensation programs. Unlike traditional compensation programs that provide "cost-of-living" or other across-the-board pay increases, the greatest challenge is to develop and implement more performance-oriented reward programs.
The label pay for performance covers a broad spectrum of compensation systems that can be clustered under two general categories: merit pay plans and variable pay plans, which include both individual and group incentive plans.
The Law and Compensation
Over the past thirty years numerous laws and regulations have been enacted at national, state, and local levels. Every year these regulations have been expanded due to regulatory actions and judicial decisions. As a result, in case of compensating an employee there are certain legal considerations and laws that are mandated through government legislation that are to be strictly maintained
Fair Labor Standards Act of 1938 (FLSA)
Also referred to as the Wage and Hour law
Established a minimum wage for workers
Defined exempt and nonexempt jobs
Requires overtime pay for nonexempt employees
Includes child labor provisions
Equal Pay Act (EPA)
Passed in 1963, the Equal Pay Act amended the FLSA, requiring that males and females performing the same work be paid the same wages. Equal work is defined in terms of:
Differences in pay between males and females can be based on
bona fide seniority system
quantity or quality of production
any factor other than gender
Civil Rights Act of 1964
Prohibits discrimination against any individual with respect to:
privileges of employment
Because of such individual's
Employee Retirement Income Security Act (ERISA)
Provides government protection of pensions for all employees involved in a company pension plan
Sets regulations regarding vesting rights
Covers portability rights
Contains fiduciary standards designed to prevent dishonesty in the funding of pension plans
Internal Revenue Code (IRC)
Requires employer to withhold money from an employee's pay to cover federal tax obligations
Determines how benefits are treated for tax purposes
(Noe, Human Resource Management, Delhi: Darling Kindersley (india) pvt. Ltd.)
Merit pay plan
Merit pay plan is one of the performance-based reward programmes. Although often used as a substitute to cost-of-living raises still it has its own unique turfs and criticisms. It is one popular and almost universally most, widely used incentive system.
An incentive plan resulting in increase in pay annually or periodically; implemented on an institutional wide basis to give all employees an equal opportunity for consideration, regardless of funding source. The merit increase program is implemented when funds are designated for that purpose by the institution's administration, dependent upon the availability of funds and other constraints. .
Arguments In Support of Merit pay
Arguments Against Merit pay
Allows the employer to differentiate pay given to high performers
No proper way to measure merit
Allows a differentiation between individual and company performance
The pay is subjective
Allows the employer to satisfactorily reward an employee for accomplishing a task that might not be repeated (such as implementation of new systems)
Merit pay plans in practice
The most issue issue regarding merit pay is the merit pay plan for teachers initiated by Barak Obama the president of United States. More or less discussions and debate took place about how merit could be administered. A gist of all that is given here
Discussion and debate
The new emphasis on performance appraisal and merit pay calls for a thorough examination of their effectiveness. 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.
Those propositions are being put to the test at two universities, one currently in the process of modifying the way merit dollars are allocated and the other in the midst of contract negotiations with an administration proposal to do away with any salary raises that aren't based on performance.
The issues are complex. Many times, they find administrations intent on making strategic use of salary dollars fighting employees who don't necessarily agree with the administration's priorities. But these disputes can also pit staff members against each other -- higher-paid departments against those with smaller budgets, higher-achieving employees against "dead wood," rapidly expanding disciplines versus those that are stagnating.
Moreover, not everyone agrees what exactly "merit" -- or "performance," or "incentive pay" - entails
Examples of Merit Pay
At Towson University, in Maryland, all those tensions bubbled to the surface when faculty, over the past two years, hashed out an alternative plan to the current method of doling out merit raises based at the department level. But for now, at least, faculty members and the administration seem to have come to a compromise that they can more or less live with, at least for a two-year trial period.
And at Temple University, meanwhile, the administration is attempting to switch entirely to "pay per performance" raises that would not take cost-of-living increases or other factors into account -- a change the faculty union strenuously opposes.
Historically, resistance to merit pay meant that few such programs were tried. Recently, however, many states around the nation - in districts large and small; rural, urban and suburban - have begun to implement pay-for-performance systems. Although only a few rigorous studies of merit-pay programs have been conducted, research has begun to suggest that well-designed pay-for-performance plans can lead to better student achievement."
The Achievement Challenge Pilot Project, which was instituted in the Little Rock public schools from 2004-2007, was a performance-pay plan that tied bonuses for school personnel solely to students' progress on standardized tests. Teachers in the five participating elementary schools could earn bonuses of approximately $10,000 for their individual students' achievement gains, and other school personnel could earn awards of various sizes based on school wide test improvements.."
A program evaluation led by Marcus Winters and Gary Ritter of the University of Arkansas indicated that students in ACPP schools had relatively large and statistically significant gains in math and language arts compared to students in nonparticipating district schools.." Although critics of merit pay suggest teachers will begin to compete, rather than collaborate, and avoid working with traditionally low-performing students,." the ACPP evaluation found no evidence of these problems.
Other programs, such as the Teacher Advancement Program, blend performance pay with other rewards. TAP was initiated by the Milken Family Foundation, "and the program is currently being implemented in over 180 schools." in 13 states nationwide."There are four basic components to TAP: targeted professional development programs, performance-based compensation, an intensive performance evaluation system, and a "career ladder," which essentially allows high-performing teachers to earn higher pay while remaining instructors.." In some locations, TAP also provides "differential pay," which is additional compensation for teachers "who teach in 'hard-to-staff' subjects and schools."
The TAP model is employed in the Chicago Public Schools' "Recognizing Excellence in Academic Leadership" project, a pilot performance-pay plan in the district's high-need schools. Project REAL was adopted in collaboration with the Chicago Teachers Union,." and the union has equal representation on REAL's governing council." The program is financed by district revenues, by a grant from the federal Teacher Incentive Fund, and by support from the Broad Foundation, the Joyce Foundation and the Chicago Public Education Fund"Among other rewards, REAL teachers and principals can earn annual merit-pay bonuses of up to $5,000 and $4,000 respectively, based partly on statistical measurements of student achievement growth on standardized exams, both school wide and in individual teachers' classrooms.
Another prominent plan that contains elements of performance pay is "ProComp," the Denver Professional Compensation System. Like Chicago's REAL, ProComp was adopted with support from the local teachers union, the Denver Classroom Teachers Association" The plan started as a pilot project in 1999." and expanded to allow all Denver Public Schools teachers to participate in 200." Denver voters also approved a $25 million tax initiative to help finance ProComp in November 2005"
Unlike the Chicago plan, however, ProComp compensation is not simply a bonus system; it shares major elements of the single-salary schedule and is meant to replace that schedule altogether. According to Denver Public Schools documents, "The starting salary for first-time teachers is based on their education and experience."." But ProComp bases teacher compensation increases on several criteria: "completing professional development units"; "achieving a graduate degree or advanced license"; "earning a satisfactory evaluation"; and "achieving two student growth objectives per year." Meeting student achievement objectives can earn teachers a permanent increase of up to 4 percent of the basic "salary index" (the index was $35,568 in the 2007-2008 school year)"
ProComp is a step in the right direction, but has plenty of room for improvement. Relatively little of the salary enhancement is tied to improved student outcomes, while there are still significant salary bumps for additional certifications and degrees. In the end, this program focuses too much on districts' giving teachers skills and knowledge, and not enough on teachers' giving students skills and knowledge.( http://www.mackinac.org/9801)
Successes and Failures of Merit Pay Plans
As merit pay has grown in popularity, it is becoming evident that these plans have both succeeded and failed. One study of employers found that despite the fact that 61% of the companies have variable pay plans; almost half of them did not achieve their performance targets for the year. But to avoid negative employee reactions, many of those companies paid out 85% of the incentives anyway. The good news from the study is that over half of the merit pay plans achieved their performance objectives. Executive-focused merit pay plans tend to be viewed as more successful than those used with lower-level, non management employees.
The reactions of employees are crucial to how merit pay plans are accepted. It is interesting that in a study of over 2,000 workers from a variety of companies, most respondents said they want performance rewards included in their base pay, rather than as one-time payments. Also, the employees strongly preferred individual rewards over team or organization incentives. These studies and others highlight the fact that neither of the polar extremes-the view that incentives do not work versus the view that incentives are a panacea-appears to be the case. Also, the enthusiasm that many employers and managers have for merit pay plans is not matched by many workers. The key to success seems to be to combine incentives with employee participation in the process.
In summary, it appears that merit pay plans are successful under certain circumstances. A number of factors affect the success of merit pay plans. The next section discusses the guidelines for establishing successful merit pay plans.
Personal Point of View
It's hard to say the impact and the response of any part of management to award employees with merit issues. Although merit pay plan has certainly proven to be successful in many organizations but to maintain a suitable condition for merit pay plans to function orderly depends on the management itself. There is no confusion that merit pay plan was introduced to encourage employees to show best performance and merits. The one who performs or shows most merit gets an pay increase. I would it is a good idea. But before initiating such concept the employees and management should well educated about the term performance based pay and variable pay. Like everything it also has its ups and downs. Certain things are to be considered while initiating merit pay plans. One of the biggest pitfalls is that there is no standard measuring tool of merit. Usually supervisors are the ones who do the evaluation. So sometimes biasness or inappropriate evaluation may lead to employee-manager or employee-employee conflict. The evaluation done by the organization may seem unfair to the employee.
Guidelines for Merit Pay Plans
Providing merit pay through incentive systems can be complex and can take many forms. However, certain general guidelines are useful in establishing and maintaining successful merit pay systems.
Recognize organizational culture and resources
Make merit pay plans understandable
Keep incentive plans current
Link the merit pay to desired performance
Recognize individual differences
Identify merit pay separately from base pay
The evidence on the effects of pay for performance, pieced together from research, theory, clinical studies, and surveys of practice, suggests that, in certain circumstances, variable pay plans produce positive effects on individual job performance. The evidence is insufficient, however, to determine conclusively whether merit pay can enhance individual performance or to allow making comparative statements about merit and variable pay plans.
On the basis of analogy from studies and theories on variable pay plans, I would conclude that merit pay can have positive effects on individual job performance. These effects may be attenuated by the facts that, in many merit plans, increases are not always clearly linked to employee performance, agreement on the evaluation of performance does not always exist, and increases are not always viewed as meaningful. However, we believe the direction of effects is nonetheless toward enhanced performance.
A.Decenzo & P. Robbins (2008), Fundamentals of Human Resource Management, Singapore: John Wiley & sons (Asia) pte ltd.
Dick Grote (2002),.The Performance Appraisal Question and Answer Book: A Survival Guide for Managers, New York: AMACOM
John McManus, Leadership: Project and Human Capital Management, Burlington: Butterworth-Heinemann
Noe, Human Resource Management, Delhi: Darling Kindersley (india) pvt. Ltd.
Examples of Merit Pay
Pay for Performance: Evaluating Performance Appraisal and Merit Pay (1991)
Debate: Merit pay for teachers