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Pay-for-performance system links employees’ salary or pay to some specified individual or organizational performance measures (U.S. Merit Systems Protection Board, 2006). This is usually done by appraising employees’ performance using laid down standards and measures. It is always done successfully when the standards and measures are relevant, understood by all employees and the process is free and fair. Moreover the employees’ participation in the evaluation process brings confidence and trust in an organization. Organizations wishing to implement the pay-for-performance system must therefore stress on evaluating performance of their employees.
Measuring the Effectiveness of a Pay-for-Performance Plan
To ensure that a pay-for-performance system runs effectively, organizations should evaluate it through an ongoing data analysis. The analysis should give a comprehensive view of the effects of the system from its inception to when it becomes organizations’ culture.
Organizations should ensure that the system is working efficiently, effectively, and fairly by analyzing their human resource management data. This can be done by comparing attributes such as employees’ salary levels and pay increases by various attributes ensuring that other factors such as education and length of service are not compromised. Moreover, the rate of salary increment and bonus awards should also be taken into consideration and ensuring they are in line with organizations’ objectives. Systems that measure the impact of pay-for-performance system on the output of organization should also be put in place.
Organizations can formulate a review process that would rate employees. This can be done by examining the demographic data. Managers could, thereafter, justify the ratings with various employees’ past accomplishments.
Effectiveness of an organization’s pay-for-performance cannot be successfully measured without input from employees. Organizations may, therefore, develop an appeal process where employees can challenge any pay decisions they feel unfair. This can be done by forming a dispute panel that listens to employees’ disputes and comes out with balanced thoughtful decisions.
Finally, the effectiveness of a pay-for-performance system can be measured by estimating employees’ output. The output of employees should be proportional to the intended output. Generally, high employees’ output indicates successful implementation of the system.
Disadvantages of a Pay-for-Performance System to Employees
Since pay-for-performance system pays employees only for what they do, employees are likely to neglect other work that are important to an organization and concentrate on those that they are likely to get paid for. If the performance system focuses on individual performances, employees are likely not to cooperate with others as they will not be paid for work done collectively. In addition, employees may withhold crucial information that could drive an organization forward in case they believe it would promote another person.
Most of performance indicators are developed by human resource and senior management. This derives employees an opportunity to participate in the pay-for-performance development process. Moreover, employees may not be able to control every factor that influences their performances.
A pay-for-performance system, when successfully implemented, psychologically glues employees to an organization (Larkin, Pierce, & Gino, 2011). A change of such a system receives a lot of resistance that would take much time and effort to effect. Even if the system is successfully implemented, there is always disbelief on its fairness among the employees. There might be many loopholes that may make employees wonder if it really rewards performance.
Although, there may be a high output, employees may be experiencing stress and job dissatisfaction. Most of the employees’ efforts may be geared towards delivery of the required output to get the promised reward. This also lowers their creativity levels and suppresses their talents.
Pay-for-performance system may create contention among the employees. Workers may sometimes feel that their bosses favor fellow workers and assist them get rewards and bonuses. This creates jealousy among employees, which results to poor working environments. This eventually lowers the overall output of an organization.
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Disadvantages of a Pay-for-Performance System to Employers
Most performance evaluation of employees is done by senior management with the help of supervisors. It is the same management which awards employees. Employees who are hard-working and feel shortchanged in the evaluation process may have poor relationships with their supervisors. This can create unnecessary tension thereby lowering production.
At times employers may not be very accurate in calculating the pay-for-performance parameters to be in line with an organization’s objectives. Some employees may not fully reveal their full potential at the stipulated time. In this regard, employers may resort to using previous standards which may demoralize employees and make them quit their jobs. Loss of employees is a big blow to the employers as getting others with similar potentials is very difficult. Moreover the cost of orienting and training new employees is high.
The improvement of information technology has made pay-for-performance policies be implemented using technology (Camhi, 2011). The cost of implementation of the underlying technology involves purchasing of hardware, software, and that of maintenance. In addition, there is a cost associated with collecting and analyzing organization’s data to come up with an appropriate pay-for-performance policy. Performing all the above mentioned requires a lot of finances and must be performed lest organizations come up with wrong policies which might increase their wage bills while employees do not meet the set profit targets.
Pay-for-performance policy makes employees fear providing their input to organizations because of fear of their pay reduction. They tend to hold back their ideas even if they can be beneficial to organizations. Since many organizations depend on the input from the employees, the employers’ using pay for service policy will lose benefits derived from such inputs.
Of course every employee, regardless of his position, fear changes and normally resists it. This is due to the fear of decreased output. Pay-for-performance policy is not an exception. When introducing it in an organization, employees normally resist it and it requires provision of adequate training, which also requires resources, by explaining its benefits to the employees.
For an organization to succeed and reap the benefits of pay-for-performance policy, it has to choose an appropriate type. Employees should also be adequately prepared for the change to avoid unnecessary resistance.