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The Pros and Cons of Pay-for-Performance
from: Nick Roy
What is Pay-for-Performance?
In times of economic downtown, sales are down, profits shrivel up, and unemployment is on the rise. Companies, in order to survive, are turning to forms of pay that are not seen as an entitlement. Traditionally, base pay is seen as an entitlement. You go to work and put in your time, and you are entitled to get paid for that time. Success must be measured before it can be rewarded. Companies are now finding pay-for-performance plans increasingly enticing.
So, what is a pay-for-perfomance plan? According to Wiscombe (2001), pay-for-performance is a variable pay approach that is anchored to a measurement of performance, and must be re-earned each time and doesn’t permanently increase base salary. A measurement of performance could be the number of units produced, customer satisfaction scores, absenteeism, or profitability of your unit. In order for a pay-for-performance plan to work effectively, the measurement should be:
related to the employee’s job, and
aligned with the company’s objectives.
There two types of incentive plans: short-term and long-term. There are also incentive plans designed for individuals and for groups. The most common type of individual incentive plan is merit pay. A merit pay plan links increases in base pay to how highly employees are rated on a subjective performance evaluation.
The pros and cons of incentive plans
Rewards are seen as short-term and are seen as eliciting temporary compliance. Reward programs are often designed to focus on the accomplishment of a task.
The problem with most incentive plans is that they are focused on only one measure, such as increased output or profits. For example, the plans focus only on increasing production or efficiency, while neglecting other aspects of the business, such as customer service.
Incentive plans can lead to unexpected and undesired behaviors. If a pay-for-performance plan is not designed effectively, employees can manipulate the system to work in their favor. For example, Sear’s mechanics did this by selling unnecessary repairs to its customers because they were on straight commission.
Alfie Kohn, a world renowned compensation guru, states that very convincing arguments against pay-for-performance programs, and why pay-for-performance plans cannot succeed. The first reason is that rewards punish. Rewards are seen as a means of controlling an individual’s behavior. Some people who deserve rewards don’t get them, which can mean that they are being punished.
The second problem that Kohn sees is that it has the possibility to ruin relationships. He states that excellence depends on effective teamwork because of the exchange of ideas that take place. Everyone is learning from one another. However, since rewards are distributed on an individual basis, it creates competition and destroys cooperation.
The third reason is that rewards discourage risk taking. Since incentive plans are seen as being manipulative and steering them to a desired behavior, leaving employees reluctant to experiment with creative new ways to achieve a goal. There is still a sense of paranoia that organizations want their employees to do things their way, thus treating them likes cogs in a machine.
This article laid out some of the reasons why organizations should design a pay-for-performance plans, as well as the risks involved. In my next article, I will talk about how to design an effective pay-for-performance plan.
You can also see this article at: http://nickroy.com/hrblog/?p=52
About the author:
About the Author
Nick Roy is the Owner and Editor of The HR Blog (http://www.nickroy.com/hrblog). He currently holds a Master of Business Administration and Master of Arts in Human Resources Management from Hawaii Pacific University, and a Bachelor of Science in Hospitality Management from Florida Metropolitan University, Fort Lauderdale. His current research interest is in “Applicant Reactions to Technology Use in Personnel Screening and Selection,” and “E-commuting as an alternative work arrangement.” He can be reached at nick@nickroy.com
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