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Payment System Based on PerformanceEssay

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¶ … incentivizing or motivating employees are those that have been debated for quite some time now. All enterprises, both private and public, desire better levels of performance out of their workers, however they face the problem of determining just how they will accomplish this task. One approach taken by many companies is to implement a performance-based pay model. The notion of performance-based pay is so instinctively appealing that it looks almost ludicrous for one to disagree with it. Most individuals would agree that those who perform at better levels ought to be paid more than those who have lower levels of performance. Despite this fact, 'pay for performance' has been criticized as having quite a number of in-built problems and as not being an effective method of motivating staff. The aim of this paper is to discuss in a clear and coherent manner the performance-based systems according to Schay et al. (2013) and Lowery et al. (1995) in incentivizing employee performance in addition to achieving employee satisfaction.

As noted by Lowery, Petty and Thompson (1995), the goal of a firm's reward system ideally should be to retain its more valuable workers. So as to achieve this, rewards must then be distributed in such a manner that the firm's most valuable staff will be left feeling satisfied. The best way to accomplish this goal is to make sure that reward levels are based on performance and that they are competitive. One of the reasons for performance-based pay systems is the positive impact they will have on the worker's job satisfaction, performance, and pay satisfaction. Even though there are other reasons for basing pay on performance, such as the impact this may have on turnover and absenteeism, there are other significant reasons. In fact, the main reason for making pay contingent on performance lies in the potential for motivating superior employee performance. The study done by Lowery, Petty and Thompson (1995), reveals some interesting and somewhat mixed results and conclusions. Their paper focused on a performance-based pay system that was instituted in a large public organisation. The results from their study revealed that performance-based pay in terms of annual bonuses can bring about beneficial effects for the organization. However, the study also revealed that there is a need for caution in implementing such a system. It is imperative to make sure that all the elements that are essential for the successful implementation of the plan, such as stipulations for reward contingency, effective feedback, and sound goals, are in place (Lowery, Petty & Thompson, 1995).

Schay and Fisher (2013) also performed a related but different study of their own. They sought to determine the effectiveness criteria via comparing longitudinal survey data from the National Security Personnel System (NSPS), and demonstration projects for the following variables: (a) procedural justice, perceived pay-performance link(s), pay satisfaction, job satisfaction, trust in supervisors, overall support for performance-based pay (PBP), and teamwork. PBP for government employees shows a major culture transformation and a break from the usual practice of basing pay scales predominantly on seniority. Using Hofstede's cultural framework, it is apparent to us that the United States (U.S.) civil service culture is different from the conventional business culture with respect to aspects of individualism vs. collectivism. The civil service subculture is often more security-based than competitive, and can thus be described as collectivist rather than individualist for favouring equality against equity. Therefore, it must not be surprising that none of the PBP schemes were initially backed by the majority of the employees. There was a lot of scepticism expressed by a very high proportion of the undecided survey respondents, ranging from 33% to 45% of the total respondents. In all cases, real and/or actual opposition to a PBP system was lower than the proportion of those who were undecided. The longitudinal survey results shown in the survey illustrate how crucial it is to have a long-term perspective with performance-based pay projects; given this perspective, it is important not to anticipate immediate success. Support for PBP is often slow and takes about three to five years for the majority of the employees to support these projects. All five PBP demonstration projects achieved majority support after five years. The survey results also gave evidence that all the PBP projects demonstrated were successful based on several chosen indicators (Schay & Fisher, 2013).


According to Schay and Fisher (2013), procedural justice is a key component for the acceptance of performance-based pay systems. While the majority of the respondents in all the PBP projects were in agreement that their performance ratings were fair, the longitudinal survey results showed that there were temporary declines in some aspects evaluated following the implementation of performance-based pay systems. After a few years, some of the projects surpassed the government set benchmark and their own baselines, while others fell below. The research also cited several other positive effects of PBP in the five demonstration projects. Pay satisfaction and job satisfaction improved in all five of the demonstration projects, and declined under the NSPS. While those against merit pay often claim that it destroys teamwork, none of the five demonstration projects recorded declines in the perception of teamwork, and indeed some of them even showed increases. In the same way, the results of Lowery, Petty and Thompson (1995) demonstrated the impact of pay systems upon performance at both aggregate and levels. A majority of the staff were of the opinion that the system had a positive impact on their performance. However, there were somewhat mixed results at the individual level. Most employees thought that the system had a positive impact on their personal work habits and their performance. However when asked about their thoughts on elements of performance such as quality of work and productivity, a majority of government employees, with the single exception of those at the managerial level, did not perceive any improvements from the system.

These two studies acknowledge that success of PBP is based on the manner of its implementation. As noted by Schay and Fisher (2013), there is no easy plan for success, and no performance-based system per se can ensure success; only the people who manage the system can ensure success. If employees see a connection between their performance and the rewards they receive, if the performance evaluation is seen as being valid and the ratings as fair, and if the results of the rewards system are perceived as being fair, then there is a high likelihood of success. According to Lowery, Petty and Thompson (1995), there is need for caution in implementing the system. It is important to make sure that all the aspects that are essential for the successful implementation of the plan are in place, such as the terms of reward contingency, effective feedback, and sound goals (Lowery, Petty & Thompson, 1995).

However, these two studies differ in quite a number of areas. For instance, on the one hand, as noted by Schay and Fisher (2013) all PBP system demonstration project assessments have shown the need for performance management training, as well as for ongoing communication. Holding managers responsible for fair results is critical. Regular employee surveys, monitoring of complaint rates, and monitoring grievances can be important tools in bringing about accountability (Schay & Fisher, 2013). While on the other hand, Lowery, Petty and Thompson (1995) only address the role of management somewhat vaguely, in terms of setting up goals and objectives in performance-based pay systems.

Setting work remuneration or rewards to be based on performance is an objective that many employers are increasingly seeking to achieve. Jobs with PBP attract employees of higher quality, and incentivize workers to give greater effort (Booth and Frank (1999). Much of policy and academic literature on performance related pay (PRP) focuses on its effect as an incentive system (Marsden, 2004). In the public policy debate, individuals often link the introduction of performance related pay with the objectives of motivation and improving incentives for employees. However, managers and other experts have expressed concern over the effect(s) of fixed incremental plans or structures on organisational objectives. Their concern is particularly demonstrated in instances where pay increments are given to workers as a matter of prerogative that is unrelated to the performance ratings. In many instances, employees are given automatic promotions plus financial bonuses/increases, based upon years of service, as is the case in some U.S. civil service positions. Incremental-based systems might be of value in bringing about high levels of commitment, which may also produce results in high levels of employee retention. However, these incremental systems of pay are of little or no importance in the modern business environment, which requires the utilization of performance-based systems for one to achieve a competitive edge (Armstrong, 2005).

There are several contextual factors that seem to be linked to the success of PBP (Perry et al., 2009). These include effective performance appraisals, adequate rewards, high levels of trust, high degrees of professionalism, and close geographic proximity (Boachie-Mensah & Dogbe, 2011).


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