After studying this chapter, students should be able to understand the following:

This chapter focuses on the effective design and implementation of pay-for-performance systems. First, it

addresses the major challenges and pitfalls facing managers in their attempts to link pay and performance.

Second, the chapter offers a set of general recommendations to deal with pay-for-performance challenges.

Third, it describes and analyzes specific types of pay-for-performance programs. Finally, it discusses unique

pay-for-performance plans.

Pay for performance refers to any compensation method that ties pay to the quantity or quality of work the

person produces. Variable pay plans are pay for performance plans that put a portion of the employee’s pay

at risk, in return for the opportunity to earn additional pay. Gainsharing plans are group incentive plans

that engage many or all employees in a common effort to achieve productivity goals. Stock options are

rights to purchase company stock at a discount some time in the future.

A compensation philosophy of higher pays for higher contributions Performance will be calculated on -

corporate performance and personal performance.

This section covers the attitudes that employees have about pay, the difficulties in measuring performance,

the psychological contract, lack of flexibility, the importance of credibility, job satisfaction, stress, and the

potential reduction of intrinsic drives.

i. The “Do Only What You Get Paid For” Syndrome: The closer pay is tied to particular

performance indicators, the more employees tend to focus on those indicators and neglect

other important job components

ii. Negative Effects on the Spirit of Cooperation: Employees may withhold information

from a colleague if they believe that it will help the other person get ahead

iii. Lack of Control: Employees often cannot control all of the factors affecting their

performance

iv. Difficulties in Measuring Performance: Assessing employee performance is one of the

thorniest tasks a manager faces, particularly when the assessments are used to dispense

rewards

v. Psychological Contracts: Once implemented, a pay-for-performance system creates a

psychological contract between the employee and firm, and it is very resistant to change

vi. The Credibility Gap: Employees often do not believe that pay-for-performance programs

are fair or that they truly reward performance

vii. Job Dissatisfaction and Stress: Pay-for-performance systems may lead to greater

productivity but lower job satisfaction

viii. Potential Reduction of Intrinsic Drives: Pay-for-performance systems may push

employees to the point of doing whatever it takes to get the promised monetary reward

and in the process stifle their talents and creativity

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Appropriately designed pay-for-performance systems offer managers an excellent opportunity to align

employees' interests with the organizations. Pay for performance programs are not likely to achieve the

desired results unless complementary HRM programs are implemented at the same time.

b) Link Pay and Performance Appropriately: There are few cases in which managers can justify

paying workers according to a pre-established formula or measure.

c) Use Pay for Performance as Part of a Broader HRM System: Pay-for-performance programs

are not likely to achieve the desired results unless complementary HRM programs accompany

them.

d) Build Employee Trust: Even the best conceived pay-for-performance program can fail if

managers have a poor history of labor relations or if the organization has a cutthroat culture

e) Promote the Belief that Performance Makes a Difference: Unless an organization creates an

atmosphere in which performance makes a difference, it may end up with a low-achievement

organizational culture

f) Use Multiple Layers of Rewards: Because all pay-for-performance systems have positive and

negative features, providing different types of pay incentives for different work situations is likely to

produce better results than relying on a single type of pay incentive

g) Increase Employee Involvement: When employees do not view a compensation program as

legitimate, they will usually do whatever they can to subvert the system

h) Use Motivation and Non-financial Incentives: Some people are more interested in the nonfinancial

aspects of their work

When a pay-for-performance system has multiple layers, it can increase the motivation of individual

employees and simultaneously improve cooperation. For example, bonuses given to teams or work units

promote cooperation. Bonuses given to individual employees, however, are more motivating because they

allow employees to see how their personal contributions lead to direct rewards. Since all

pay-for-performance systems have positive and negative features, providing different types of pay incentives

for different work situations is likely to produce better results than relying on a single type of pay incentive.

With a multiple-layers-of-rewards system, the organization can realize the benefits of each incentive plan

while minimizing its negative side effects.

Types of pay-for-performance plans vary in design. Some are designed to reward individuals, teams,

business units, the entire organization, or any combination of these.

a. Individual-Based Plans

Individual-based plans are the most widely used pay-for-performance plans in industry. There are several

plans that can be used: merit pay, bonus programs, and awards. Advantages of individual-based payfor-

performance plans include rewarded performance is likely to be repeated, financial incentives can shape

an individual's goals, they help the firm achieve individual equity, and they fit in with an individualistic

culture. Disadvantages include they may promote single-mindedness; employees do not believe pay and

performance are linked, they may work against achieving quality goals, and they may promote inflexibility.

b. Team-Based Plans

Team-based plans attempt to support other efforts to increase the flexibility of the work force within a firm.

These plans normally reward all team members equally based on group outcomes. The advantages of teambased

pay-for-performance plans include they foster group cohesiveness and they facilitate performance

measurement. Disadvantages include possible lack of fit with individualistic cultural values, the free-riding

effect, social pressures to limit performance, difficulties in identifying meaningful groups, and intergroup

competition leading to a decline in overall performance.

c. Plant wide Plans

These plans reward all workers in a plant or business unit based on the performance of the entire plant or

unit. Plant wide plans are generally referred to as gain sharing programs because they return a portion of

the company's cost savings to the workers, usually in the form of a lump-sum bonus. There are three major

types of gain sharing programs: Scanlon Plan, Rucker Plan, and the Improshare. Advantages include

eliciting active employee input, increasing the level of cooperation, fewer measurement difficulties, and

improving quality. Disadvantages include protection of low performers, problems with the criteria used to

trigger rewards, and management-labor conflict.

d. Corporate wide Plans

This is the most macro type of incentive program and is based on the entire corporation's performance.

The most widely used program of this kind is profit sharing which differs from gain sharing in several

important ways: no attempt is made to reward workers for productivity improvements, they are very

mechanistic, and typically they are used to fund retirement programs. Employee stock ownership plans

are another type of corporate wide plan. Advantages of corporate wide plans are financial flexibility for the

firm, increased employee commitment, and tax advantages. Disadvantages include risk for employees,

limited effect on productivity, and long-run financial difficulties.

Executives and sales personnel are usually treated very differently than other types of workers in

pay-for-performance plans. A number of plans are used to link executives' pay to a firm's performance, but

there is little agreement on which is best. Sales professionals may be paid in the form of straight salary,

straight commission, or a combination plan. The relative proportion of salary versus incentives varies

widely across firms.

Following factors are commonly blamed for the failure of individual-based pay-for-performance systems.

• Performance appraisal is inherently subjective, with supervisor’s evaluating subordinates according

to their own preconceived biases.

• Regardless of the appraisal form used, rating errors are rampant.

• Merit systems emphasize individuals rather than group goals and this may lead to dysfunctional

conflict in the organization.

• The use of a specified time period (normally one year) for the performance evaluation encourages a

short-term orientation at the expense of long-term goals.

• Supervisors and employees seldom agree on the evaluation, leading to interpersonal confrontations.

• Increments in financial rewards are spaced in such a way that their reinforcement value for work

behavior is questionable for example becoming twice as productive now has little perceived effect

on pay when the employee must rat a whole year for a performance review.

• Individual merit pay systems are not appropriate for the service sector.

• Supervisors typically control a rather limited amount of compensation, so merit pay differentials are

normally quite small and therefore of questionable value.

• A number of bureaucratic factors hat influence the size and frequency of merit pay have little to do

with employee performance.

• Performance appraisals are designed for multiple purposes (training and development, selection,

work planning, compensation, and so forth.) When a system is used to accomplish so many

objectives, it is questionable whether it can accomplish any of them well. It is difficult for the

supervisor to play the role of counselor or advisor and evaluator at the same time.

Money can be used as a motivational tool in the organization because it is used as a source to fulfil different

needs. It affects several needs, not just existence needs. Money is used to prove and enhance the identity id

people it influences the self-perceptions.

Effectiveness of the rewards can be improved by considering the following factors.

• Link rewards to performance

• Ensure rewards are relevant

• Use team rewards for interdependent jobs

• Ensure rewards are valued

• Beware of unintended consequences

According to Maslow and Alderfer, pay should prove especially motivational to people who have strong

lower-level needs. If pay has this capacity to fulfill a variety of needs, then it should have good potential as a

motivator.

Mostly people leave the organizations or organizations have to face high turnover rate due to different

reasons like employees are not satisfied with benefits provided or the recognition is not provided for

extraordinary perfumers these causes should be overcome so that employee loyalty can be increased.

Following ways can be used to avoid the high turnover of employees.

• Use Recognition

Some employees highly value day-to-day recognition from their supervisors, peers and team members

because it is important for their work to be appreciated by others. Recognition helps satisfy the need people

have to achieve and be recognized for their achievement.

• Use Positive Reinforcement

Positive reinforcement programs rely on operant conditioning principles to supply positive reinforcement

and change behavior. Experts claim it is better to focus on improving desirable behaviors rather than on

decreasing undesirable ones. There are a variety of consequences including social consequences (e.g., peer

approval or praise from the boss), intrinsic consequences (e.g., the enjoyment the person gets from

accomplishing challenging tasks), or tangible consequences (e.g., bonuses or merit raises).

• Empower Employees

Empowerment means giving employees the authority, tools, and information they need to do their jobs

with greater autonomy, as well as the self-confidence to perform new jobs effectively. Empowerment

boosts employees’ feelings of self-efficacy and enables them to use their potential more fully.

Rewards can be used to modify the

behaviors of the employees if people in the

organization are not satisfied with the

reward system or if they think that the

reward system of the organization is not

fair, than the organizations will be facing

problems of low productivity, high

absenteeism and high turnover and vice

versa. When ever some one performs up to

specific standards and some times beyond

that , there us always exists demand and

expectations of rewards and recognitions

that will lead to continuous improvement

but in the absence of recognition

performance instead of improvement will

be facing down fall trends which are

definitely harmful for the organizations. Positive consequences (rewards) of actions (performance) are

always tending actions to be repeated but in case any action (performance) is followed with the negative

consequences (no rewards) than the behavior will jot be repeated as shown in fig.