Measuring pay for performance

1. Measuring pay for performance Jayendra Rimal

2. Introduction • Although increasing productivity is the aim, managers also know that simply paying employees more will not result in increased output or improved quality. • Previously workers were of the opinion that they had ownership rights to their jobs and were entitled to the pay. • Due to the changing landscape of employment, organizations are looking for ways to reduce the fixed part and increase the variable part of the compensation package. • The variable part comprises of the short-term and long-term incentives and awards linked directly to employee behavior, contributions or results achieved – these are regarded as pay-for-performance (PFP) programmes.

3. PFP in the knowledge oriented service sector • History shows employment has moved from the agrarian to the manufacturing to the service sector. • In many developed countries the service sector is responsible for a major portion of all jobs while the manufacturing sector holds most in the developing areas. • The gold collar worker is used to describe the modern day knowledge worker who make much use of their intellectual faculties within a problem solving, decision making work environment. • Due to the nature of these jobs it is difficult to identify, recognize or quantify the quality of contributions/outputs. • But there are barriers that block the design of incentives for these kinds of jobs.

4. Application of motivation theories It is important that those involved in designing reward systems or PFP programmes understand the human behavior. The goal being to design programmes that direct the behavior of employees that benefits both the worker and the organization. Hence the motivation theories: • Content theories of motivation: This focuses on the needs of the individuals attempts to satisfy through various kinds of behavior or actions. The primary contributors are Henry A. Murray, Maslow, Herzberg, DeCharms, Deci etc. These theories sought to understand intrinsic and extrinsic motivators. DeCharms and Leci stated that if the pay does not have a strong relationship to the work performed, behaviors demonstrated and results achieved, the compensation can act as a demotivator that reduces motivation and blocks improved performance.

5. Application of motivation theories • Process theories of motivation: These expand on the content theories by describing how the motivation theory works. This has been more useful in designing rewards. Expectancy theory has been more popular as this represents ideas or thoughts an individual develops about the consequences that may result from a certain action. It provides these guidelines for designing incentives: • The need to identify certain desired actions • The need to relate outcomes to the demonstration of certain actions • The need to provide the consequences within an established schedule Other theories are Operant Conditioning by B.F. Skinner and Reinforcement Theory. These theories state that a reward will have motivation when employees recognize link between activities performed, results achieved and rewards gained.

6. Using Incentives • Pay for performance have little positive effect when: • There is less trust in the program and how it operates • Lack of communication about the procedure to be followed • No link is seen in the specific pay increases with particular levels of performance • Although there are unlimited number of factors available to motivate employees, no one is sure how motivation works, how much motivator is required, and when it works. • Incentives ought to be designed to relate to a different set of behavior than do wages or salaries. The major reason for the relationship between incentives and improved performance is ownership. • Another reason for the success of incentives may be the human desire for recognition.

7. Performance appraisal: issues and opportunities • Performance appraisal is the formal process, normally conducted by means of completing an instrument that identifies and documents a jobholder’s contributions and workplace behaviors. Rewarding employees for effort reinforces their behavior in a manner that increases the likelihood that they will also achieve their own goals. Some compensation decisions based on performance appraisals are: • Is the employee eligible for a pay increase? • Is the employee eligible for a grade/step increase in the pay grade? • Is s/he eligible for a superior performance increase? • Is s/he eligible for a bonus? • Are employee pay increase determined by some merit chart? • Must the employee achieve specific goals to gain bonus? • Are profit sharing distributions tied to performance ratings?

8. Designing a job content based PA program • Performance Dimensions: These are those qualities or features of a job or the activities that take place at work that are conducive to measurement. These dimensions integrate the requirements of the job with knowledge, skills, efforts and desires including demands on the job and resources available. • Rating Scale Design: It should be easy to administer, translate to quantitative terms, permit standardization and relate to various kinds of qualities or rating items. • Performance standards: It is a criterion used to measure an employee’s performance of a job.

9. Any questions?