Assess overall value of performance—related pay ssystems

Lin Boyu

Abstract：The main concern of human resource management is that people should work as efficiently as possible in the organization. The notorious payment by the result system which does not work very well lasted for many years. So， the organization attempts to achieve their goals by using various systems of payment to encourage and reward them. Performance related pay， as one of reward systems， has a range of advantages to motivate individuals to work harder or more productively. Nevertheless， there is also evidence of weakness and failures， which have some of the unacceptable and undesirable side effects. Sometimes the problem of performance related pay cannot produce the hoped benefits. This essay will focus on the advantages and disadvantages of performance-related pay schemes. Then， it will assess the overall value of performance-related pay systems.

Keyword：performance-related pay systems；motivation；unfair

Performance related pay （PRP）， also known as Merit pay， incentive pay， or appraisal related pay. It is a way of linking an individuals pay progression to his or her level of performance or to a rating of competence. PRP schemes provide individuals with rewards linked to an assessment of performance， usually in relation to agreed objectives， for example sales targets or customer satisfaction. PRP is often regarded as a key feature of performance management and most performance management uses it. The performance can help to create a culture in which performance is valued and recognition of good performance can be a reward in itself. According to different levels of performance or competence， it favors rewarding people and aims to motivate all employees. The aim of PRP is to identify and reward excellent performance employees and encourage everyone to work harder. Its basic characteristics are linked to the income of workers pay and individual performance.

Commonly， the employer and the employee are examples to analyse the strengths and weakness of performance related pay schemes in reality. Numerous advantages of PRP are listed as follows. At first， performance related pay system can directly link personal income with their job performance， which may increase motivation. PRP rewards the individual by linking systematic assessment of their performance to their level of pay or to a bonus. It just delivers a message that performance is important and good performance is paid more than poor performance. As a consequence， employees will make efforts to get higher rewards with higher performance. It will motivate and encourage employees to create more benefits， at the same time does not increase the fixed costs of the enterprise. Therefore， PRP may increase employees motivation and hence output. Secondly， a strict and long-term performance related pay system is an effective way to allow the company to continue to improve the staffs ability and work methods， which may create organizational culture and shape individual value and personal goals over time. It may create good culture which may be helpful to influence and change the individual values and may provide incentives to improve their skills and flexibility. High performers are attracted to performance related pay cultures in the knowledge that pay is linked to productive effort， and that poor achievement is discouraged. On the other hand， employees can receive useful feedback on their performance. With the feedback， they can correct their mistakes and be more incentives to pursue the higher performance or higher technique and improve their skills and flexibility. Moreover， good performance workers can get their rewards from this approach， at the same time the organization has an opportunity to obtain and retain the best staffs. Performance related pay can help the organization to attract and retain employees through financial rewards and competitive pay， and reduces the golden handcuff effect of poor performers who insist on staying with employers. The skilled persons would like to find a good platform to show their ability and get respect. The PRP may be a better way to retain the best employees. The outstanding employee can get their deserved reward and prove their value through PRP. Last but not least， performance related pay can ensure pay for what they get. Even when meeting the recession of economic， although there is no prize， due to the low wage cost， the company can also be less fried. It gives individuals a sense of security which can increase loyalty. When the economy recovers， the company also has sufficient talent pool.

However， many aspects of weakness of performance related pay are obvious. Firstly， in order to pursue high performance， some of the employees may damage the interests of the organization， the client and even the other workers. For instance， the salesman might make a lot of free service commitment to the customers in order to make a deal， but the company may take a higher cost to fulfill the promise. So， this method will lose its value. The individual has become so firmly fixed on hitting their measurable targets and other crucial elements of their jobs are ignored. Employees tend to concentrate on the specified objectives as a means of ensuring enhanced payment and neglect other unrewarded features of the job. Then， performance related pay can increase competition among employees. They may undermine the trust and teamwork with each other. Sometimes， there is no communication and sharing information among them. They just keep conservative experience and may even compete for customers to pursue high performance. A survey found that PRP discourages teamwork and causes jealousies while the percentage who believes these had risen from 62 to 86 percent. An increasing number of people think competition will be instead of cooperation. It is not applicable especially for some organizations which need good teamwork to achieve objectives. Besides， even though PRP schemes can save money due to not widely spread， there are significant costs. There is the actual money not only paid to the employees who are thought to deserve it， but also the cost of administration including monitoring， appraisal and performance management. The money is not only for the additional salary for good performers， but also for a variety of administrative， monitoring and appraising tasks. Moreover， many workers may not believe that pay and performance are linked. Although practically all organizations claim to reward individual performance， it is difficult for workers to determine what extent their companies really do so. Many managers use the performance appraisal process for the reasons other than accurately measuring performance and up to 80% of employees do not see a connection between personal contribution and pay rises. Lastly， the leader may abuse the system and unfairness may emerge. Pay for performance is issued by the leaders of the unit. So the greater power of the unit leadership is likely to lead to more serious acts of corruption. The workers are expected to have convincing reasons as to why some can get more than others and they will want clear guidance as to how they can earn more money. The pay should be based on the performance regularization rather than thinking of a whim to some reward. There is a lack of openness. Trying to pay inaccurate performance， it may create more problems. There may be disagreements about the performance factors to be assessed， and if great care is not taken in the choice of the factors there may be claims that they are too subjective or even of sex bias.

In brief， indeed， there are obvious advantages and disadvantages of PRP. The performance related pay systems can bring more benefits if the organization thinks it is applicable. PRP can ensure pay for what employees get and increase motivation and output. In addition， it is also a better way to retain the best employees and to improve their skills and flexibility. On the collective level， PRP can increase cooperation. Through PRP， it is easier to measure the performance of employees. It is a widespread opinion among senior managers that PRP must be a good thing， but evidence of its effectiveness is not overwhelming. PRP may lead to unfair outcomes and mean speed is given priority over quality and other objectives. Moreover， PRP may allow managers to escape their responsibilities and sometimes damage to the other interests， such as the other employees or the customer. Free-riding and lack of individualistic culture are significant challenges on the collective level of PRP scheme.