ⓘ Performance-related pay
Performance-related pay or pay for performance, not to be confused with performance-related pay rise, is a salary or wages paid system based on positioning the individual, or team, on their pay band according to how well they perform. Car salesmen or production line workers, for example, may be paid in this way, or through commission.
Many employers use this standards-based system for evaluating employees and for setting salaries. Standards-based methods have been in de facto use for centuries among commission-based sales staff: they receive a higher salary for selling more, and low performers do not earn enough to make keeping the job worthwhile even if they manage to keep the job. In effect, the salary would be re-evaluated up, or down, periodically usually annually based on the performance of the individual or team. The reward is the salary: with an expectation to be high on the pay band for high performance and low on the band for low performance.
In comparison, the performance-related pay rise system would see the reward given in the form of a pay rise. The better the performance of the individual or team the larger the rise, likewise, if the performance was poor the associated rise would be minimal, if any at all. The reward is the pay rise: with an expectation of a high pay rise for high performance and a low or zero rise for low performance.
Business theorists Professor Yasser and Dr Wasi support this method of payment, which is often referred to as PRP. Yasser believes that money is the main incentive for increased productivity and introduced the widely used concept of piece work known outside business theory since at least 1549.
In addition to motivating the rewarded behavior, standards-based payment methods can provide a level of standardization in employee evaluations, which can reduce fears of favoritism and make the employers expectations clear. For example, an employer might set a minimum standard of 12.000 keystrokes per hour in a simple data-entry job and reassign or replace employees who cannot perform at that level.
With PRP, employees can expect their performance to be evaluated objectively according to the standard of their work instead of the whims of a supervisor or against some ever-climbing average of their group. It is quite normal to put new starters towards the bottom of the pay band and, subject to normal performance, move them up to the midpoint market target within 3 to 5 years. To promote themselves, some unethical managers will suppress salaries by offering cost of living rises instead of true progression through the pay scale. This gives short term savings but, in the longer term leads to low morale, low performance, poor engagement, and even employee resignations after they have been trained. All of these consequences are very costly to the business. But used properly, PRP is a very effective way to get the best from your employees. There is however a well known reverse phenomenon where employees produce pay-related performance if a given salary remains below 80% of the pay band for any length of time.
Successful managers and organizations know that in order to maximize profits, its absolutely imperative to hire and keep the best employees possible. If a business always tries to maximize profit, it will actively try to reduce expenses whenever possible - including employees’ wages. In fact, most companies pay employees as little as they can get away with paying. This however results in employees who will, in turn, provide as little effort as they can get away with. Many companies nevertheless still stick to the archaic, counterproductive goal of trying to minimize compensation. Though it may seem to be cost effective to apply this profit-first mentality of low-as-possible wages, it ultimately cripples employee performance and engagement, and damages the bottom line.
A fundamental criticism of performance-related pay is that the performance of a complex job as a whole is reduced to a simple, often single measure of performance. For instance a telephone call center helpline may judge the quality of an employee based upon the average length of a call with a customer.
As a simple measure, this gives no regard to the quality of help given, for instance whether the issue was resolved, or whether the customer emerged satisfied. Performance-related pay may also cause a hostile work attitude, as in times of low customer volume when multiple employees may compete for the attentions of a single customer. Where a customer has been helped by more than one employee, further resentment may be caused if the commission is taken by whoever happens to make the final sale. Macroscopic factors such as an economic downturn may also make employees appear to be performing to a lower standard independent of actual performance.
Performance-based systems have met some opposition as they are being adopted by corporations and governments. In some cases, opposition is motivated by specific ill-conceived standards, such as one which makes employees work at unsafe speeds, or a system which does not take all factors properly into account.
A further example can be seen in the public policy responses to Incentive Pay or Bonuses in the financial services sector following the financial crisis in 2008. The structure of the incentive pay schemes were deemed to be a contributing factor to the crisis and regulators around the world, co-ordinated by the Financial Stability Board issued recommendations to ensure that incentives schemes were re-designed. In Europe this has led to the Capital Requirements Directives legislation which has established a cap on variable or incentive pay which can be not more than 100% of the fixed pay for an individual in any given year, rising to 200% with shareholder approval.
In other cases, opposition is motivated by a dislike of the consequences. For example, a company may have had a compensation system which paid employees strictly according to their seniority. They may change to a system that pays sales staff according to how much they sell. Low-performing senior employees would object to having their income cut to match their performance level, while a high-performing new employee might prefer the new arrangement.
Another argument is that the judgment of ones performance can be subjective the judgement of the same quality of work can vary from department to department in a company and from supervisor to supervisor.
2.1. Opposition Research
Academic evidence has increasingly mounted indicating that performance related pay leads to the opposite of the desired outcomes when it is applied to any work involving cognitive rather than physical skill. Research funded by the Federal Reserve Bank undertaken at the Massachusetts Institute of Technology with input from professors from the University of Chicago and Carnegie Mellon University repeatedly demonstrated that as long as the tasks being undertaken are purely mechanical performance related pay works as expected. However once rudimentary cognitive skills are required it actually leads to poorer performance.
These experiments have since been repeated by a range of economists, sociologists and psychologists with the same results. Experiments were also undertaken in Madurai, India, where the financial amounts involved represented far more significant sums to participants and the results were again repeated. These findings have been specifically highlighted by Daniel H. Pink in his work examining how motivation works.
3. Cultural aspects
An international study by Schuler and Rogovsky in 1998 pointed out that cultural differences affect the kind of reward systems that are in use. According to the study, there is a connection among
- individual performance based systems and individualism,
- employee ownership plans with individualism, low uncertainty avoidance and low power distance.
- systems incorporating extensive social benefits and femininity and
- status-based reward systems as opposed to achievement-based and high uncertainty avoidance,
See Geert Hofstede for the dimensions of cultures used.
- Federal Government Merit Pay section in Merit Pay Pay for play, money is exchanged for services Performance - related pay Merit Pay Incentive program Compensation
- performance management in schools as a way of promoting performance related pay Teachers rally over pay BBC News. 12 February 2000. Retrieved 7 June 2011
- Merit pay merit increase or pay for performance is performance - related pay most frequently in the context of educational reform or government civil
- It is a similar concept to Merit Pay for public teachers and it follows basic models from Performance - related Pay in the private sector. According to
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- the pay range is a traditional pay structure but, this system fosters competition rather than collaboration. Although the Pay - for - Performance System
- Equal pay for equal work is the concept of labour rights that individuals in the same workplace be given equal pay It is most commonly used in the context
- Business performance management also known as corporate performance management CPM and enterprise performance management is a set of performance management
- Performance - based advertising, also known as pay for performance advertising, is a form of advertising in which the purchaser pays only when there are
- A pay grade is a unit in systems of monetary compensation for employment. It is commonly used in public service, both civil and military, but also for
- banner ads, are shown on web sites with related content that have agreed to show ads and are typically not pay - per - click advertising. Social networks such
- among religious broadcasters televangelism where the related term pay - for - pray is used. Pay - to - play is a provision in a corporation s charter documents
- on performance goals. Derail merit pay or performance - based pay some researchers contend that the deficit in merit pay and performance - based pay is linked
- Play media The gender pay gap or gender wage gap is the average difference between the remuneration for men and women who are working. Women are generally
- permission to pay whatever they want, for reasons that include eliminating fear of whether a product is worth a given set price and the related risk of disappointment
- Pay Act of 1963 is a United States labor law amending the Fair Labor Standards Act, aimed at abolishing wage disparity based on sex see Gender pay gap
- differences in pay expectations play a role in perpetuating non - performance related pay differences between women and men. Perceptions of wage entitlement
- Pay n Save was a retail company founded by Monte Lafayette Bean in Seattle, Washington in 1940. Over the years, Pay n Save was the leading drugstore
- one given in June and the other December and are called primas Performance - related pay also known as bonuses Christmas bonus United Kingdom Law 4090
- Gay - for - pay describes male or female actors, pornographic stars, or sex workers who identify as heterosexual but who are paid to act or perform as homosexual
- A performance - linked incentive PLI is a form of payment from an employer to an employee, which is directly related to the performance output of an employee
- In the workplace, an evaluation is a tool employers use to review the performance of an employee. Usually, the employee s supervisor and frequently, a
- the executive, and rewards for performance The three decades starting with the 1980s saw a dramatic rise in executive pay relative to that of an average
- improved performance and cost effective. This stands in contrast to the conventional transaction - based, or waterfall approach, where payment is related to completion
- related to web traffic. It refers to the cost of traditional advertising or internet marketing or email advertising campaigns, where advertisers pay each
- strongest and most unified of the related rights. A performer musician, actor, etc. has an intellectual input in their performance over and above that of the
- the advertiser. In affiliate marketing, this means that advertisers only pay the affiliates for leads that result in a desired action such as a sale.
- of mortality ROM Severity of illness SOI Pay for Performance Mistichelli, Judith Diagnosis Related Groups DRGs and the Prospective Payment System:
- Pay It Forward is a 2000 American drama film directed by Mimi Leder. The film is based loosely on the novel of the same name by Catherine Ryan Hyde. It
- including arrangements for performance related pay teaching and learning responsibility awards and other supplementary pay awards These parts relate to
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