The Links between Pay and Performance

The Links between Pay and Performance

 

Introduction

 

The effective management of employees and the organisation as whole is increasingly being recognized as a major determinant of success or failure in different business (1984).  In a business, the employees are considered as one of the important aspects which enable the company to achieve their organsiational goal. The employees are the one who are considered as the valuable asset of an organisation. In return, the management of the organisation should be able to develop a management system that would help the company retain good staff and to encourage them to give of their best while at work requires attention to the financial and psychological and even physiological rewards offered by the organization.

 

The motivation of the people regarding their work is one that is always fraught with different factors that involve their decision-making skills, their experiences, and also their views as based on these. When it comes to motivation, there are several discussions that need to be including, one of which is the needs of the people. One of the needs of the employees is to get paid for the quality works that they have done.

Basic financial rewards and conditions of service are determined by national bargaining or government minimum wage legislation such as the Employment Relations Act (2004) or by collective bargaining with labor unions. Details of conditions of service are often more important than the basics ( 2002). Hence, financial and other motivations must constantly be evaluated and improved to ensure employee satisfaction.

 

Primarily, the main goal of this paper is to analyses the links between pay and performance. Herein, the discussion will include insightful details about remuneration strategy and how an employer devise and implement it. In addition, the discussion if there is a need for different strategies for different labor forces.

 

Pay and Performance

 

As conceived by the law, the management must include all the workers and employees under an Employee’s Compensation Policy. International HRM has the responsibility for creating an Employee Compensation policy that would give the employee their right of being well compensated. Employee Compensation Policy nowadays is being created in the basis of insurance, with the premiums paid by the employees. Each, institution and organization has its own employee compensation policy and therefore has its own set of rules and regulation. Depending on the Human Resource Management, additional law must be provided to railroad workers, federal employees and others. Hence, international human resource management must make an Employee Compensation Policy which adheres to the existing law of host country. Primarily, the main purpose of the Employee Compensation Policy is to provide the employees their deserve payment to the quality service that they have rendered for the company. In a compensation policy the issue of the performance and pay is being considered.

 

Paying for performance is a big issue in contemporary human resources management. Organisations have long believed that production and productivity improve when pay is linked to performance, and have developed payment-by-results (PBR) systems and incentive schemes to support this belief. Expectancy theory tells us that, if people want more pay and believe that working harder will get it for them; they will work harder and perform better. But how to make the theory work in practice has seldom caught people’s attention as it does today. In 1951 the International Labour Office (ILO) defined PBR as wage systems that relate a worker’s earnings directly to some measurement of the work of the individual, the group or the work unit. Among benefits the ILO claimed for PBR—which at that time relied heavily on quantitative techniques like work study and industrial engineering—were increased output from improved efficiency, lower production costs, better control of labour costs, less need for direct supervision and more even production flows.

 

Expectancy theory assumes that motivation is not at all equivalent to job performance. To be more specific, expectancy theory assumes that personally, skills and abilities also add to a person’s job performance. According to  (1999), some people are better suited to perform their jobs compared to others by virtue of the unique characteristics, special skills and abilities that they bring to their respective works. As mentioned earlier, the expectancy theory realizes that job performance is influenced by an individual’s role perception — what they believe is expected from them.  (1999) adds that poor performance poor performance does not necessarily result from poor motivation, but rather from misunderstandings regarding the role that one is expected to play in the organization. 

            Furthermore, the expectancy theory also realizes the role of opportunities to perform an individual’s job.  (1999) states that there is a high possibility that even the best employees will perform at low levels if their opportunities are limited. In example, even the most highly motivated sales person will have poor performance if opportunities are restricted like when the available inventory is very low or if the customers are unable to afford the product.

The theory of expectancy basically says that people are motivated by some kind of behavior.  (2003) notes that this kind of incentive theory has been applied to the study of work to show that people are motivated by greed and money. Gorman (2003) adds that the primary problem of this theory is that it claims that the only incentive a person has to perform well is because of the want for some kind of reward. The theory works on the idea that people are motivated by extrinsic rewards (i.e. money or incentives). Some authors have argued that people can also be motivated by other intrinsic factors such as sense of accomplishment (1954).

Half a century later, performance pay is seen in less mechanistic terms and may be defined more simply as the explicit link of financial rewards to individual, group or organisational performance. According to  (1990) the single most important objective of performance pay is ‘to improve performance by converting the pay bill from an indiscriminate machine to a more finely tuned mechanism, sensitive and responsive to the needs of a company and its employees’. According to the expectancy theory, employees expect and need to be rewarded according to the work they do, and will help them to develop their capability, help them to work up to a higher level so that they can be better rewarded. It does this by:

 

·         focusing employees’ contributions where they are of most value, as set out in organisational, business unit and individual performance plans and targets;

·         supporting the development of a performance-oriented culture in which people are paid for results rather than for the time or effort they put in

·         emphasising individual performance or team work as appropriate: group-based performance pay schemes are used to foster cooperation within the group while personal schemes focus on the contributions made by individuals.

·         strengthening the performance planning process: performance targets and standards carry more significance if performance accomplishments have an influence on remuneration decisions.

·         rewarding the right people: high rewards go to high performers rather than paying everyone around the average; and

·         motivating all employees: even those who do not benefit directly see that high performance is appropriately rewarded

 

Employees expect organizations to have compensation systems that they perceive as being fair and commensurate with their skills and expectations (2002). The compensation may, in some cases, act as employee motivators. These compensations that employees receive may be value-added compensation including direct compensation, such as salary, incentives and commissions; and indirect compensation, such as insurance benefits, employee recognition programs, flexible work hours, and vacation benefits. To improve performance, the system theory assumes a synchronized work environment. To synchronize the parts of the organization, it is necessary for the productivity of the company is ensuring the effectiveness of the organization. According to, an organization needs constantly to take stock of its workforce and to assess its performance in existing jobs for three reasons:

 

•           To improve organizational performance via improving the performance of individual contributors. 

•           To identify potential, i.e. to recognize existing talent and to use that to fill vacancies higher in the organization or to transfer individuals into jobs where better use can be made of their abilities or developing skills.

•           To provide an equitable method of linking payment to performance where there are no numerical criteria.

 

The term performance pay is usually applied to arrangements where performance and financial rewards are directly linked—such as merit pay, individual incentives and group or organisational bonuses. These techniques are criticised because their focus on financial rewards is said to draw attention away from other forms of organisational rewards, some of which might be more powerful than money itself. This is why some organisations prefer schemes where rewards and individual or team performance are less directly linked—profit-sharing arrangements and employee share purchase plans, for example—but there is no real evidence that they lead employees to take a longer-term view of the organisation’s interests.

 

For the organisation, the system of rewards and remuneration should support the achievement of business and other objectives; for the individual employee, it should satisfy economic needs as well as personal needs for recognition, appreciation, influence and participation, skills development and career progress. And the system has two objectives: to provide rewards for past performance and to offer incentives for future performance.

 

Performance in this context includes behaviour; it is not limited to outputs or outcomes. Increasingly, employers are using rewards and remuneration to influence and acknowledge desirable employee behaviours such as innovation and creativity, concern for quality and excellence in customer service. Performance pay can be used to reward these behaviours but will probably be more effective if specific standards and expectations have first been set for these areas.

 

Linking Pay to Performance

 

The emphasis on pay for performance has put more focus on the link between performance reviews and remuneration decisions. Obviously, if the organisation says that pay decisions are based on performance, then the assessment of an employee’s performance must be seen to influence that person’s remuneration. An organisation that aims to pay for performance must seek to relate pay and performance systematically and reliably. Research shows that employees are more satisfied with pay decisions when they are directly linked with decisions about performance and development.

 

The challenge is to make this relationship close, in both time and causation, without employees taking an unrealistic or defensive view of their performance or development needs if they think their remuneration prospects would suffer otherwise. Again, the manager’s dual roles of judge and helper add to the difficulty. It means that performance and development issues must be addressed in such a way that employees do not focus on pay—allowing them and their managers to take an overall view of performance. It is an argument for separating pay decisions and development reviews from performance planning and review discussions.

 

It is possible that employees say they like performance pay because they expect to benefit. But those expectations might be based on misconceptions. For example,  (1980) found that three-quarters of employees in a major organisation thought they were, on average, performing better than the rest of the staff. The proportion who believed this grew at the upper levels of the organisation. Similarly,  (1991) describes a finance company where three-quarters of the employees favoured the introduction of performance pay—yet more than 70% of them were already rated as superior performers and were receiving significant bonus payments!

 

In addition, it might also speculate how high-performing employees would react if told there would be no performance-related payments because a bad year meant the organisation could not afford merit rises or bonuses. Individuals see performance pay systems in terms of their own performance and their own remuneration; they are relatively uninterested in the overall state of the organisation, if only because most of them are unable to have any significant impact on its performance.

 

Remuneration Strategy

 

It is said that having an effective organizational performance management leads to the accomplishment of missions or the achievement of goals and objectives. Whatever its mission, the effectiveness of an organization requires that it efficiently identify, assess, solve, and cope with events or problems that arise within the operational environments. These are the classical functions of all organizations, and performance of them has always been critical for organizational success. It is clear now that functional proficiency and the integration of management and control systems play important roles in the performance of all organizations.

 

To be effective in turbulent and complex conditions, every organization must possess capabilities to: Search out, identify, and interpret the properties of operational situations as they develop, solve problems as they occur within the context of rapidly changing situational demands, generate flexible decisions relevant to changing situations and cope with shifting situational demands with precise appropriateness.

 

t is apparent that the above capabilities require a highly responsive and adaptive system of decision and action. In such a system, the complex interplay between individuals, positions, and organization levels is a critical element in flexibility and responsiveness and, therefore, in organizational effectiveness. Control and guidance and management of each of these performances are an essential function to ensure improved organisational performance by having employees who will perform well for the company. And as mentioned above, one of the important factor to have highly motivated employees is to provide them with appropriate compensation and rewards for every thing that they have done best.  

            In a company, the management can choose whether they would implement different remuneration strategy for individual employee or not. Remuneration is defined in the Basic Manual as money or substitutes for money, including a long list of particular items and excluding another long list of items. Among the items included are: wages, salaries, commissions, bonuses, and overtime pay (but not shift differentials or overtime pay that is separately recorded); holiday, vacation, and sick pay; Social Security contributions that the employees would otherwise have to make themselves; the value of housing, meals, and merchandise received by employees as part of their pay; and payments for salary reduction, retirement, or cafeteria plans that are deducted from employees’ pay. Some of the excluded items are: tips and gratuities; employer payments to group insurance or group pension plans; severance pay; work uniform allowances; and the value of “perks” such as automobiles, club memberships, and tickets to entertainment events.  

 

            Since employees have different needs, most of the management opted to use individual remuneration scheme.  Individual remuneration strategy means that the company provides different strategies. Designing remuneration systems in high-velocity environments presents a major challenge to organizations. In high-velocity environments, a premium is placed on individuals who are able to operate in ambiguous circumstances and who are able to take advantage of loose job descriptions provided by their employers (1993). Organizations in high-velocity environments are willing to pay proportionally higher salaries to individuals who have such skills. It is expected therefore, that emphasis on individually equitable rewards as a means of recruiting and retaining highly capable employees would be required ( 1990; 1993).

 

      In addition, Employee Remuneration can be one of the greatest foundations of control available to a company in its quest to increase organizational performance and effectiveness, yet remain one of the most underutilized and potentially complex tools for driving organizational performance. The importance and complexity of linking reward strategies to business goals in a systematic manner has been a recurrent argument in the study in this field, as has the importance and difficulty of linking rewards to the longer-term view (Hambrick & Snow, 1989).

 

In describing the strongest level of linkage the emphasis has been placed on  (1990) description of reward processes which are capable of reinforcing the behaviors crucial to business strategy like long-term versus short-term, customer focus versus financial results. International HRM practice should create an Employee remuneration Policy in order to motivate and encourage the workers and employees to render their performances to the very best they can and to make a difference individually or by group or teams. 

 

      The policy should also be able to give recognition to those employees whose works is exemplary or that employee who has contributes to outstanding achievements and accomplishments of the mission and objectives of an organization as a whole. The incentives may be monetary or non-monetary. Rewards and recognition go a long way to keeping employees motivated, satisfied, and committed. Management should recognize employees for both their progress toward and achievement of desired performance goals. It should show appreciation for small accomplishment as well as big ones.

 

The recognition must be ongoing to reinforce employees’ need to feel that they’re doing a good job. Moreover, the best forms of recognition typically have little or no cost (1998). Human beings have needs which can be classified as physiological, safety and security, social, esteem and status, and self-actualization. Hence, the HRM must establish an Employee remuneration Policy that would be able to satisfy the demands of the employees. If any of the needs is unmet, or unsatisfied a person, the individual can be motivated if provided with an opportunity to satisfy the unmet need or needs.

 

The remuneration policy still depends on what the company is needing and what their employees are needing. It goes to show that the management of an organization can use either individual or group strategy as long as the needs of their employees are being provided.

 

Conclusion

 

            Employees are considered as an important asset of an organization, hence, the management of an organization must see to it that they provide all the needs of the employees as well as their expectations. One of the expectations is to be paid right in the services that they rendered. In this analysis, it shows that employees performed well when they know that the management will provide all their needs. It shows that pay and performance have significant connections. Analysis also shows that the company may choose either individual or group remuneration strategy.

 

            The payment given to the employees depends on the quality of their work and their position within the company. Sometimes an organization provide rewards system to boost and motivate their employees to perform well in the organization. All in all, it can be concluded that the concept of pay and performance among employees have higher connectivity and that management may have quality services from employees if they provide them effective compensation and remuneration.

 

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