Rewarding Performance, week 12

Pay-for-performance systems, also called incentive systems reward employees on the basis of three assumptions:

1. Individual employees and work teams differ in how much they contribute to the firm
2. The firm’s overall performance depends to a large degree on the performance of individuals and groups within the firm
3. To attract, retain, and motivate high performers and to be fair to all employees, the firm needs to reward employees on the basis of their relative performance (Gómez-Mejía, Balkin & Cardy 2012, 386.)

These programs can improve productivity, but employees may be tempted to do only what they get paid for. They might ignore those parts of the job that are not rewarded. Teamwork may be damaged if individual merit pay is underlined. Merit pay can cause stress to employees and lead to job dissatisfaction, and finally decrease motivation (Gómez-Mejía & al. 2012, 386-390.)

To avoid these problems, managers should:

1. Link Pay and Performance Appropriately
2. Use Pay for Performance as Part of a Broader HRM System
3. Build Employee Trust
4. Promote the Belief That Performance Makes a Difference
5. Use Multiple Layers of Rewards
6. Increase Employee Involvement
7. Stress the Importance of Acting Ethically
8. Use Motivation and Nonfinancial Incentives (Gómez-Mejía & al. 2012, 391-394.)

There are four types of incentive programs:

• Individual-Based Plans: most widely used plans. Merit pay is the most popular.
• Team-Based Plans: reward the performance of group usually with bonuses and noncash awards
• Plantwide Plans: reward all workers in a business unit based on the performance of the entire unit
• Corporatewide Plans: reward employees based on the entire corporation’s performance, e.g. profit sharing (Gómez-Mejía & al. 2012, 394-402.)

Top executives and sales personnel are treated very differently in pay-for-performance plans. Many plans are used to link executives’ pay to firm performance. Sales professionals may be paid in the form of straight salary, straight commission or a combination plan (Gómez-Mejía & al. 2012, 404-410.)

Small firms are less likely to have the necessary support to develop and administer these plans, so they face some challenges.  Pay-for-performance plans in these firms are more likely to be successful if there is active employee participation in the development of the plan, incentives are linked to the achievement of goals, and frequent feedback is provided (Gómez-Mejía & al. 2012, 411-412.)

Employee engagement is the emotional commitment the employee has to the organization and its goals. It means that they really care about their work. It’s not only that an employee is happy, but they work overtime without asking. This leads to better business (Kruse 2012.)

To have engaged employees you need to:

• Arrange onboarding and training
• Set company goals
• Acknowledge employees
• Focus on employee development
• Give freedom to employees in how to do their job (Kappel 2018.)

Employee engagement is changing. The megatrends that affect to this are: Globalization 2.0, Environmental crisis, Demographic change, Individualism, Digitization and Technological convergence. Companies should assess which of these will have the greatest impact on their organization, and what changes should be done. Make clear how employee value proposition needs to change and gather views throughout the employee lifecycle (Hay Group 2014.)

CEO pay is today so much more than average wages that the negative side effects are beginning to outweigh the of-stated reasons for paying top dollar for executives. Management guru Peter Drucker believed the proper ratio between executive’s pay and of the average worker should be around 20-to-1 (Karabell 2018.)

A study revealed that workers who receive performance-based pay, work harder, but they also end up with higher stress levels and lower levels of job satisfaction. More employers think performance-based pay structures are important for motivating employees, but this study finds that these pay schemes are associated with the feeling that work is too demanding. If a company wants performance-based pay to motivate employees it should make sure that team members understand that their success and paycheck are in their own hands (Business News Daily 2020.)

References

Business News Daily. 2020. Performance-Based Pay Won’t Motivate Employees as Much as You Think. URL: https://www.businessnewsdaily.com/9712-performance-based-pay.html Accessed: 16 March 2020

Gómez-Mejía, R. L., Balkin, B. D., Cardy L. R. 2012. Managing Human Resources. Seventh Edition. Pearson Education. Upper Saddle River, New Jersey.

Hay Group. 2014. The New Rules of Employee Engagement. URL: http://f.datasrvr.com/fr1/414/25154/Hay_Group_New_Rules_of_Engagement_Report.pdf Accessed: 16 March 2020

Kappel, M. 2018. How To Establish A Culture Of Employee Engagement. Forbes. URL: https://www.forbes.com/sites/mikekappel/2018/01/04/how-to-establish-a-culture-of-employee-engagement/#6aafe59d8dc4 Accessed: 16 March 2020

Karabell, S. 2018. Executive Compensation Is Out Of Control. What Now? Forbes. URL: https://www.forbes.com/sites/shelliekarabell/2018/02/14/executive-compensation-is-out-of-control-what-now/#345ca72c431f Accessed: 16 March 2020

Kruse, K. 2012. What Is Employee Engagement. Forbes. URL: https://www.forbes.com/sites/kevinkruse/2012/06/22/employee-engagement-what-and-why/#323b626d7f37 Accessed: 16 March 2020