In order to make a rope useful for the long run, its ends need to be joined in a strong knot. Similarly, retaining employees for a long duration and their performance should be coupled with compensation.
This will certainly increase their commitments towards work and “help in improving their contribution.
Thus, in order to be compensated well, an employee needs to perform well. This practice of linking performance with compensation is popularly known as “Pay for Performance” or “Performance-Related Pay” or TRP.
Pay for Performance or Merit Pay is a method by which an individual’s pay-increment schedule is linked to his/her assessed individual performance and is evaluated as per the predefined objectives.
It provides financial rewards to every employee in the form of increments in his/her basic pay and offers compensation such as cash bonuses. Such rewards are connected to the positive assessment of an individual’s performance.
Performance-Related Pay has been quite popular among employees, as it seems to play the role of an effective motivator.
It is considered an evaluative method of payment as it encompasses the simple rule of ‘rewarding a high level of performance’.
Objectives of Pay for Performance
The main objectives of pay for performance are categorized into three main groups:
Stimulating High Level of Performance by Connecting with Performance to Pay
Performance-related pay can be an important tool for greater organisational change in cases where direct incentives are quite limited or cannot be given to all employees.
The underlying developments in performance management have a much greater impact than the associated pay improvement.
Embedding High-Performance Culture Across the Organisations
PRP establishes a culture of high performance within an organisation. Every employee is expected a certain level of performance, for which he/she will be paid.
View of Justice and Equality
With respect to justice and equality, PRP has a popular acceptance among the employees since they believe that it is the correct method of payment and individuals should be rewarded for their better performances.
Conditions for Successful Pay for Performance
Following are the conditions essential for successful pay for performance:
Interconnected with Performance Management
Performance Related Pay (PRP) should be interconnected with the performance management or with the appraisal process.
Customized to the Organisational Needs
Performance-related pay should be customised according to the current needs of an organisation.
Many consultants that specialize in pay management offer pre-planned schemes that can be bought and implemented by an organisation.
However, in most cases, these suggestions are not compatible with the organisation’s working structures.
For example, they may assume impractical pay differentials, or they may prescribe improper criteria.
Balanced Basis of PRP
PRP rewards should be offered to the employees on a balanced combination of output factors (such as work performance) and input factors (like an individual’s talent or skills that may include proof of academic qualifications).
There should be flexibility in offering rewards in various ways, e.g., the organisation may give additional rewards to their employees instead of simply increasing their overall salary.
One should be appreciated for working as a member of the team, as appreciating a single member individually may result in unhealthy competition between the team members.
Avoiding Short-Term Objectives
Since effective performance has become a criterion for PRP benefits, hence these criteria should not judge an individual’s short-term performance only, i.e., their objectives should not be narrowed as there are certain objectives which require years to be completed.
Employee’s Participation in the Design Process
The employees should be involved in the PRP design process so that their views and ideas can be considered while designing the PRP process.
Advantages of Pay for Performance
Following are the advantages of adopting pay for the performance by the organisation:
Compatible with Organisation’s Personnel Ideology
Organisation’s personnel ideology is supported by performance-based reward plans. These plans enable an organisation to effectively communicate its goals with its employees.
For example, whenever a greater emphasis has to be given to the financial goals of the company, then a scheme related to its achievement helps in strengthening the goal’s importance to employees.
Encouraging Employees for Better Performance
A specific performance level related to the goals of the organisation can be supported by performance reward plans.
A different message is delivered by an organisation, which agrees to pay for 80 percent achievement of financial goals instead of an organisation paying for 100 percent performance.
Thus, the employees whose performance standards are not upgraded will be motivated and try to improve their performance levels.
Ensures Consistency in Pay Distribution
PRP helps in ensuring the consistency of pay distribution. In a plan where the organisation will pay their employees on goal accomplishment, then pay-outs will only be done on the accomplishment of that goal.
When employees understand the performance levels, they work accordingly, and a consistent increase in pay-outs is offered to only those employees who accomplish these goals.
Increased Individual and Organisational Effectiveness
Individuals feel encouraged when they know that they will be rewarded by performance-based plans.
As far as these goals contribute to the effectiveness of an organisation, one can safely assume that PRP causes an increase in individual and overall organisational effectiveness.
Disadvantages of Pay for Performance
Following are the various disadvantages of pay for performance:
No Assured Motivation
PRP motivates employees, but there is no guarantee or surety. Also, the performance is evaluated on the basis of the rating scale, and hence, the appraisal may be unfair or inconsistent.
Moreover, whenever an individual performance is rewarded, teamwork is never appreciated by the organisation.
Reliable on Performance Management
The rate of increase in payouts is faster than the rate of increase of performance.
This reflects PRP’s cost ineffectiveness and serves as a big disadvantage. Also, the entire process is reliable in performance management that may have its own deficits.
It is essential for an organisation to adopt consistent and unbiased ways of performance appraisal for implementing PRP.
Thus, the measurement of performance should be done according to the set objectives and standards.
Need for Training
Managers should be able to make an unbiased and fair-minded evaluation of an employee’s performance, and for this purpose, there is a need for their proper training.
Implementing this method of employee compensation is the main criterion of profitability, as the system is heavily dependent on the availability of funds.
Unsatisfied Performance Evaluation
Disagreements among employees will exist regarding the evaluation of performance.
Also, various disputes about rewards and compensation may arise, leading to undesirable competition among managers and colleagues.