December 14, 2011

Pay for Performance

Human Resource Management Revision Article Series
Pay for Performance existed from the piece rate systems and it exists now also in various forms as incentive pay, merit pay and bonuses.

Does PFP Work?

Bernardin concludes the discussion with the statement that PFP systems can be effective if they are tailored to particular work situations and strategies and contribute to high-probability estimates by employees concerning their effort and their performance and their performance and desired outcomes. Vroom's model of motivation and goal setting theories have a great deal of predictive power in the area of PFP systems

A well designed PFP system should lead to a higher degree of individual or group motivation and result in productivity improvement and lower costs.

But the increased production can come with certain disutilities. The quality may come down and it may increase costs of inspection. It could lead to unsafe and unhealthy behaviors.

The pay differences may not be accepted as fair and may lead to some conflict.

PFP Systems are effective when;

1. Employees value tangible outcomes like money and prizes.
2. The reward or outcome is preferred to other possible rewards.
3. The performane of the employees measurable.
4. Employee is capable of controlling the rate of output and has the capability of increasing the absolute output.
5. Employee is also aware that he can increase the output through his actions.
6. Employee is also aware that he will get increased reward by increasing output.
7. The performance rewarded is compatible with the goals of the organization

PFP Systems and Plans

Individual Plans

Merit pay

Incentive pay

Sales incentive plans

Performance Bonuses

performance bonuses are one-time payments based on performance. The bonus does not add to the base pay and as it is paid at one time, it would give the feeling of a large sum and may have different motivation effect than merit pay plans that pay periodically.

Group Incentive Plans

Profit sharing

Gain sharing

- Scanlon plan
- Rucker plan
- Winsharing

Employee Stock Option Plans

Managerial and Executive Incentive Pay

Payments for Entrepreneurial Talent

There is good amount of promotional activity for entrepeneurship and some employees may be interested in taking up their own ventures. Companies are coming out with innovative schemes to support such aspirations of employees. At IBM, employees can submit business plans for IBM risk capital. Employees can negotiate a share of the profits.

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