The Strategy “Pay for Performance” in the Business World

Abstract

The ability of an entity to realize its potential and earn a competitive advantage in its respective markets is highly dependent on the workforce. Employees who get rewards for good performance tend to increase their productivity by up to three times. Due to the competitive nature of the contemporary global business environment, businesses have to invest adequately in their workforce in terms of the degree of diversity, levels of motivation, and job satisfaction.

In pay for performance incentive plan, it is crucial to reward results that matter to a business. Workers have numerous developmental needs that are easily overshadowed by the high financial reward that one gets for achieving certain levels of productivity. High levels of motivation within a workforce tend to improve the level of productivity and employee retention rate. Lack of teamwork within the workplace often leads to conflicts necessitated by low cooperation.

Introduction

One of the characteristic elements of the contemporary business world is the high degree of diversity and competitiveness within the workplace. These elements have in turn influenced an increase in the quality of goods and services available in the market. According to human resource management experts, the ability of an entity to realize its potential and earn a competitive advantage in its respective markets is highly dependent on the workforce (Langelett, 2014).

Over the years, numerous studies have been conducted to establish the most effective strategies that organizations can apply to maintain a cohesive, satisfied, and highly motivated workforce. One of the numerous approaches that many organizations have applied to achieve this feat is to pay for performance. This strategy focuses on the need for organizational leaders to engage workers who give maximum output by offering them rewards for meeting performance milestones.

The main advantage of the pay for performance model is the fact that it plays pivotal roles in motivating employees, aligning them with organizational goals, as well as attracting and retaining top talent within the workforce (Lauby, 2015). Workers who get rewards for their performance tend to increase their productivity by up to three times. Pay for performance is a human resource management strategy applied widely in the business world to great effect. However, it can be costly to an organization if not implemented correctly.

Discussion

Critics of pay for performance argue that this strategy is not good for entities because it unnecessarily increases the cost of operations. This phenomenon is necessitated by two major factors, namely the use of wrong tools during implementation and inadequate tracking (Kreps, 2018). Organizations that successfully implement this strategy are often equipped with tools for assessing the performance levels within the workplace.

However, for businesses with limited resources, pay for performance can be very challenging due to the inability to determine the performance of every individual. Additionally, the success of pay for performance strategy is highly dependent on the ability of an organization to keep track of its corporate goals (Zenger, 2016). Studies have shown that many organizations set goals that are often not seen through to fruition because of poor tracking necessitated by lack of accountability by organizational leaders and the employees (Langelett, 2014).

Normally, the organizational leaders take up the role of a goal setter while the worker assumes the mandate of achieving the goal. Unsuccessful pay for performance plans can easily harm employees because they tend to develop a negative perception of workplace incentives (Lauby, 2015).

Both the employer and the employee have different perceptions concerning the need and importance of tying pay to performance. Numerous studies conducted to establish the correlation between the two elements established that just like any other incentive plan, adequate employee engagement is necessary (Lauby, 2015). The main reason for this is the fact that if they do not buy into it, it will not work. Therefore, it is wrong to assume that tying pay to performance is fair to workers because measuring the latter is often a difficult task.

In principle, letting a worker who provides the greatest value to an organization reap the greater reward sounds like an easy application but not so in practice. In most cases, the performance of an employee is often measured in terms of quality, an element that is highly subjective concerning its definition and assesses methodologies. This often compromises the correlation between incentives and an employee’s work, thus leading one to lose faith in the reward system (Langelett, 2014).

Measuring the Effectiveness of Pay for Performance Plans

One of the most important things that every organization ought to focus on is ensuring that its preferred incentive plan is effective and successful. The main reason for this is the fact that incentive plans are a direct reflection of an organization’s values and corporate goals. Due to the competitive nature of the contemporary global business environment, businesses have to invest adequately in their workforce about the degree of diversity, as well as levels of motivation and job satisfaction (Doerr, 2018).

For an incentive plan to be effective, organizational leaders should ensure that all workers are fully engaged in making decisions regarding any proposed or preferred approach. Over the years, organizations have applied numerous tests in measuring the effectiveness of their pay for performance plans. A common one is the relevance test (Doerr, 2018). This test entails the employer assessing the best and worst-case scenarios for the pay for performance plan.

An organization should ensure that the plan is relevant to its corporate values to ensure that if the right implementation tools are applied, results will start showing as soon as possible. On the other side, a business should be in a position to deal with any possible negative effects in case the plan fails to succeed by ensuring that it will not leave unmanageable damage.

Some of the performance measures that organizations use to establish the relevance of an incentive plan to corporate goals include profit percentage, net income, consumer calls, as well as the frequency and number of new customers (Doerr, 2018).

For example, individuals working in the sales department of an organization are often assessed on the number of customer calls made and their ability to attract new ones. Therefore, an organization can establish the effectiveness of pay for performance plan by assessing the value the rewards given to employees have added to its portfolio. It is crucial to pay for results that matter to a business about improving sales, net income, profit margins, and gaining a competitive advantage in its respective markets (Zenger, 2016).

Another test that can be applied is the ease of control. Businesses that have incentive plans often worry about the possibility of workers having a degree of control that can easily influence results in their favor. However, human resource management experts argue that an effective incentive plan is characterized by the ability of a worker to influence the results either positively or negatively because this is often the biggest source of motivation.

They also argue that organizations can measure the effectiveness of their pay for performance plans through adequate tracking (Doerr, 2018). Tracking involves the process of measuring the performance elements that are relevant to business and paying for them depending on their value. Organizations should not offer incentives for performance elements that are immeasurable because tracking them is impossible. Besides, the employer should consider the cost of paying for a specific performance element versus the potential reward (Doerr, 2018).

Objectivity is another test that organizations can apply in measuring the effectiveness of pay for performance plans. Human resource management experts argue that the objective of an employer when introducing an incentive plan for the employees often determines its success rate (Kreps, 2018). If an incentive is purposed to increase the motivation and productivity within the workplace, then the performance elements used in measuring performance should be objective enough.

Subjective evaluation of performance compromises the value of an incentive plan because assessment can be biased depending on the observations made by organizational leaders. A successful incentive plan should help an organization to improve its capacity for risk management, as well as enhancing a sense of purpose (Zenger, 2016).

Disadvantages of Pay for Performance Plan on Employees

Over the years, organizations have tried numerous strategies in a bid to motivate their workforce and increase productivity. Pay for performance is a popular incentive plan within the workplace. In the contemporary world, such plans can be offered to employees in numerous forms that include profit sharing and cash bonuses among others (Zenger, 2016). One of the major disadvantages suffered by workers for being part of such plans is the fact that all the focus is directed to the financial reward leading to other essential aspects of their work being neglected (Kreps, 2018).

They have numerous developmental needs that are easily overshadowed by the high financial reward that one gets for achieving certain levels of productivity. For example, the need for promotion, as well as the advancement of skills and expertise are crucial needs that every employee seeks to meet within the workplace. However, with the monetary rewards that come with incentive plans, employees find it an easier decision to postpone such goals at their own expense (Kreps, 2018).

Unfair and unregulated evaluations of performance elements within the workplace are also a major challenge that workers enrolled in incentive plans often face (Doerr, 2018). As earlier mentioned, an effective pay for performance plan should be objective rather than subjective. However, most evaluation processes within the workplace are highly biased depending on the quality a supervisor attaches to individual performances. This often creates opportunities for vices such as favoritism and discrimination within the workplace, as some workers tend to develop a hunger for the highest reward regardless of the criteria used to determine the final pay (Gooday, 2015).

From an employees’ perspective, pay for performance plans are highly disadvantageous because their expectations for bigger payouts keep growing as time goes by. According to human resource management experts, such behavior can easily harm the levels of productivity and job satisfaction among workers, especially in situations where a company is not in a position to review the payout regularly. Research has shown that they tend to be disgruntled when their expectations for increased payout are not met by the employer (Kreps, 2018).

This often leads to a number of them leaving their jobs or drastically underperforming once they lose their motivation. Workers need to find their motivation for work through other avenues that do not involve the incentive plans.

Studies have shown that workers whose drive for work comes from a desire to experience career and personal growth are rarely affected even when an employer chooses to end an incentive program or put it on hold (Zenger, 2016). However, those who rely on incentive plans for motivation are prone to inconsistent performances. This observable fact is necessitated by situations where their source of motivation is withdrawn or negatively compromised. Human resource management experts also believe that such individuals experience little or no personal growth during their careers because their priorities are often compromised (Gooday, 2015).

Disadvantages of Pay for Performance Plan for the Employer

Every employer dreams and desires to have a workforce that delivers to the best of its ability. To achieve this feat, they engage in various strategies that will guarantee a highly motivated workforce. Research has shown that the higher the level of motivation within a workforce the higher the level of productivity and employee retention rate (Harrison, 2016). Incentives such as pay for performance plans are effective strategies that employers tend to engage in. However, human resource management experts argue that this strategy has several pitfalls that an organization has to deal with amidst high levels of productivity.

One of the major disadvantages is a steady decrease in quality, as workers tend to focus more on quantity (Harrison, 2016). For example, an individual working in the sales department of an organization will care more about the number of units he or she sells because that will be the determining factor in the payout one will get. This often leads such a worker to overlook other essential elements of a transaction such as proper paperwork, which has a direct impact on the quality levels.

Besides, some even accept orders for items without caring to check whether they are in stock. Studies have shown that such a degree of negligence on the part of the workers often has a long-term effect on the success of a business (Gooday, 2015). The reason for this is the fact that the customers will start losing faith in a company whenever they keep getting the wrong orders or having to deal with delayed deliveries.

Another major disadvantage is the lack of or poor teamwork. Research has shown that when workers are enrolled in any incentive program within the workplace, most of their focus is directed towards achieving personal goals at the expense of those set by the employer (Zenger, 2016). This leads to an unpleasant scenario of a total lack of teamwork characterized by employees being hesitant to assist their colleagues. This phenomenon is necessitated by the perception that assisting a co-worker who is struggling with something is a waste of time that could be directed towards improving one’s productivity for a better reward (Kreps, 2018).

Human resource management experts argue that lack of teamwork within the workplace leads to conflicts necessitated by lack of cooperation, goodwill, and the notion of colleagues hindering each other from achieving individual goals (Doerr, 2018). This is a major challenge for any employer because the corporate values and goals do not have any meaning within the workplace. An organization’s identity is determined by the values it promotes through its corporate culture.

A workplace environment that is characterized by incentive programs for employees is a liability to an organization because a lack of teamwork often gives a market advantage to competitors who build a strong brand that is supported by a cohesive workforce (Harrison, 2016).

Pay for a performance plan can lead to a workforce lacking enough motivation if workers consider the incentives being offered to be insufficient. This creates a huge dilemma for the employer because any form of laxity can lead to a mass exodus from the workplace (Doerr, 2018). Research has shown that employees have a strong influence on how the employer makes decisions within the workplace, thus the need to ensure that the incentive plan offers the right motivation for achieving the desired levels of productivity (Zenger, 2016). It is the responsibility of the employer to ensure that the incentives offered to employees are meaningful about their personal goals.

This can be a challenging task for the employer because the workplace needs have to be met individually rather than collectively. Research has shown that this increases the cost of production and can lead to massive losses in situations where pay for performance plan fails to succeed (Doerr, 2018).

Human resource management experts believe that the inability of an employer to work with a cohesive workforce is often a recipe for failure (Kreps, 2018). The main reason for this is the fact that trying to meet the personal needs of every employee does not make economic sense, especially in programs where the rewards in a pay for performance plan are too high (Gooday, 2015). Besides, the employer can easily suffer more losses if the performance measurements are done in a biased manner, and money is paid for performances that do not add any value to an existing brand.

Conclusion

Keeping employees happy and motivated plays a pivotal role in achieving the desired levels of productivity within the workplace. Over the years, both the employer and the employee have familiarized themselves with the dynamics of incentive programs such as pay for performance. It is mainly used in rewarding employees whenever they reach a certain set level of productivity within the workplace.

However, critics of this incentive strategy argue that it has adverse negative effects on both the employer and the employee. The former has to deal with a disjointed workforce characterized by a lack of personal and career growth necessitated by the trappings of lucrative incentives. The employee often deals with challenges relating to overreliance on payouts to give maximum output. Besides, employees also have to deal with a lack of teamwork and good communication, which are crucial elements for career growth.

References

Doerr, J. (2018). Measure what matters: How Google, Bono, and the Gates foundation rock the world with OKRs. New York, NY: Penguin Publishing Group.

Gooday, A. (2015). Love work: Creative ideas for motivating employees, improving retention and attracting the best candidates. New York, NY: Fresh Future Ltd.

Harrison, C. (2016). The CEO secret guide to managing and motivating employees. New York, NY: Book Baby.

Kreps, D.M. (2018). The motivation toolkit: How to align your employee’s interests with your own. Los Angeles, CA: W.W. Norton.

Langelett, G. (2014). How do I keep my employees motivated? The practice of empathy-based management. New York, NY: River Grove Books.

Lauby, S.J. (2015). Motivating your employees in a digital age. New York, NY: Association for Talent Development.

Zenger, T. (2016). Beyond competitive advantage: How to solve the puzzle of sustaining growth while creating value. New York, NY: Harvard Business Review Press.