See also
- Merit Pay
- Incentive program
- Compensation of employees
- Seasonal bonuses (Japan)
- Pay for performance (healthcare)
- Pay-for-Performance (U.S. Federal Government)
- Pay for play
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Performance-related pay or pay for performance, not to be confused with performance-related pay rise, is a salary or wages paid system based on positioning the individual, or team, on their pay band according to how well they perform. Car salesmen or production line workers, for example, may be paid in this way, or through commission.
Many employers use this standards-based system for evaluating employees and for setting salaries. Standards-based methods have been in de facto use for centuries among commission-based sales staff: they receive a higher salary for selling more, and low performers do not earn enough to make keeping the job worthwhile even if they manage to keep the job. In effect, the salary would be re-evaluated up, or down, periodically (usually annually) based on the performance of the individual or team. The reward is the salary: with an expectation to be high on the pay band for high performance and low on the band for low performance.
In comparison, the performance-related pay rise system would see the reward given in the form of a pay rise. The better the performance of the individual or team the larger the rise, likewise, if the performance was poor the associated rise would be minimal, if any at all. The reward is the pay rise: with an expectation of a high pay rise for high performance and a low or zero rise for low performance.
What fraction of pay depends on performance, and what is meant by performance, can vary widely. [1]
Research on extreme high-stakes incentives [2] funded by the Federal Reserve Bank undertaken at the Massachusetts Institute of Technology with input from professors from the University of Chicago and Carnegie Mellon University repeatedly demonstrated that as long as the tasks being undertaken are purely mechanical, very large performance related pay incentives work as expected. However once rudimentary cognitive skills are required, very high-stakes incentives actually lead to poorer performance.
These experiments have since been repeated by a range of economists, [3] [4] sociologists and psychologists with the same results. [5] Experiments were also undertaken in Madurai, India, where the financial amounts involved represented far more significant sums to participants and the results were again repeated. These findings have been specifically highlighted by Daniel H. Pink in his work examining how motivation works. [6]
An international study by Schuler and Rogovsky in 1998 pointed out that cultural differences affect the kind of reward systems that are in use. According to the study, there is a connection among
(See Geert Hofstede for the dimensions of cultures used.)
Business theorists Professor Yasser and Dr Wasi support this method of payment,[ citation needed ] which is often referred to as PRP. Yasser believes that money is the main incentive for increased productivity and introduced the widely used concept of piece work (known outside business theory since at least 1549. [8] )
In addition to motivating the rewarded behavior, standards-based payment methods can provide a level of standardization in employee evaluations, which can reduce fears of favoritism and make the employer's expectations clear. For example, an employer might set a minimum standard of 12,000 keystrokes per hour in a simple data-entry job and reassign or replace employees who cannot perform at that level.
With PRP, employees can expect their performance to be evaluated objectively according to the standard of their work instead of the whims of a supervisor or against some ever-climbing average of their group. It is quite normal to put new starters towards the bottom of the pay band and, subject to normal performance, to move them up to the midpoint (market target) within 3 to 5 years. [9] To promote themselves, some unethical managers will suppress salaries by offering cost of living rises instead of true progression through the pay scale. That allows short-term savings but, in the longer term leads to low morale, low performance, poor engagement, and even employee resignations after they have been trained. All of those consequences are very costly to the business. However, used properly, PRP is a very effective way to get the best from employees. [10] There is, however, a well known reverse phenomenon in which employees produce pay-related performance if a given salary remains below 80% of the pay band for any length of time.
Successful managers and organizations know that to maximize profits, it is imperative to hire and to keep the best employees possible If a business always tries to maximize profit, it will actively try to reduce expenses whenever possible, including employees’ wages. In fact, most companies pay employees as little as they can get away with, but that results in employees who will, in turn, provide as little effort as they can get away with. Many companies, nevertheless ,still stick to the archaic, counterproductive goal of trying to minimize compensation. Though it may seem to be cost effective to apply the profit-first mentality of low-as-possible wages, it ultimately impedes employee performance and engagement and damages the bottom line. [11]
A fundamental criticism of performance-related pay is that the performance of a complex job as a whole is reduced to a simple, often single measure of performance. For instance a telephone call center helpline may judge the quality of an employee based upon the average length of a call with a customer.
As a simple measure, this gives no regard to the quality of help given, for instance whether the issue was resolved, or whether the customer emerged satisfied. Performance-related pay may also cause a hostile work attitude, as in times of low customer volume when multiple employees may compete for the attentions of a single customer. Where a customer has been helped by more than one employee, further resentment may be caused if the commission is taken by whoever happens to make the final sale. Macroscopic factors such as an economic downturn may also make employees appear to be performing to a lower standard independent of actual performance.
Performance-based systems have met some opposition as they are being adopted by corporations and governments. In some cases, opposition is motivated by specific ill-conceived standards, such as one which makes employees work at unsafe speeds, or a system which does not take all factors properly into account.
Employers can use these compensation schemes to extract as much labor from their employees as possible, effectively working them to exhaustion and into an inevitable injury in order to maximize productivity. Even worse for employees, baseline productivity rates and other variables in these particular performance pay structures are set, altered, and ultimately controlled, often subjectively, by the employer.[ neutrality is disputed ] By setting unrealistic performance expectations, employers can effectively raise productivity and lower wages simultaneously by shifting the blame of an unfair system with impossible incentive milestones onto their employees, claiming employees are simply not meeting the minimum performance thresholds to earn the additional compensation that makes the substantial effort required under these schemes worth it in the first place. Under other, more company-specific pay schemes, the employer defines a particular workload to an employee, forcing X amount of hours of work for them to complete for that shift. But the employer sets the projected time it should take unreasonably lower than X, effectively lowering that employee's hourly rate for the entire shift. This can even be used to avoid paying overtime in some circumstances, and is a common tactic used in various US based warehousing operations and short-haul/LTL delivery companies, notably in wholesale food and restaurant service companies, especially where employees lack the union representation that's usually required to bargain for fair rates under pay schemes like these, as well as safe, tolerable working conditions.
In other cases, opposition is motivated by a dislike of the consequences. For example, a company may have had a compensation system which paid employees strictly according to their seniority. They may change to a system that pays sales staff according to how much they sell. Low-performing senior employees would object to having their income cut to match their performance level, while a high-performing new employee might prefer the new arrangement.
Another argument is that the judgment of one's performance can be subjective (the judgement of the same quality of work can vary from department to department in a company and from supervisor to supervisor).
A further example can be seen in the public policy responses to Incentive Pay or Bonuses in the financial services sector following the financial crisis in 2008. The structure of the incentive pay schemes were deemed to be a contributing factor to the crisis and regulators around the world, co-ordinated by the Financial Stability Board issued recommendations [12] to ensure that incentives schemes were re-designed. In Europe this has led to the Capital Requirements Directives legislation which has established a cap on variable or incentive pay which can be not more than 100% of the fixed pay for an individual in any given year, rising to 200% with shareholder approval.
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Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any other entity, pays the other, the employee, in return for carrying out assigned work. Employees work in return for wages, which can be paid on the basis of an hourly rate, by piecework or an annual salary, depending on the type of work an employee does, the prevailing conditions of the sector and the bargaining power between the parties. Employees in some sectors may receive gratuities, bonus payments or stock options. In some types of employment, employees may receive benefits in addition to payment. Benefits may include health insurance, housing, disability insurance. Employment is typically governed by employment laws, organisation or legal contracts.
In general, incentives are anything that persuade a person to alter their behaviour. It is emphasised that incentives matter by the basic law of economists and the laws of behaviour, which state that higher incentives amount to greater levels of effort and therefore, higher levels of performance.
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. From the point of view of running a business, salary can also be viewed as the cost of acquiring and retaining human resources for running operations, and is then termed personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts.
The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity takes actions on behalf of another person or entity. The problem worsens when there is a greater discrepancy of interests and information between the principal and agent, as well as when the principal lacks the means to punish the agent. The deviation from the principal's interest by the agent is called "agency costs".
The term efficiency wages was introduced by Alfred Marshall to denote the wage per efficiency unit of labor. Marshallian efficiency wages would make employers pay different wages to workers who are of different efficiencies such that the employer would be indifferent between more-efficient workers and less-efficient workers. The modern use of the term is quite different and refers to the idea that higher wages may increase the efficiency of the workers by various channels, making it worthwhile for the employers to offer wages that exceed a market-clearing level. Optimal efficiency wage is achieved when the marginal cost of an increase in wages is equal to the marginal benefit of improved productivity to an employer.
Employee benefits and benefits in kind include various types of non-wage compensation provided to employees in addition to their normal wages or salaries. Instances where an employee exchanges (cash) wages for some other form of benefit is generally referred to as a "salary packaging" or "salary exchange" arrangement. In most countries, most kinds of employee benefits are taxable to at least some degree. Examples of these benefits include: housing furnished or not, with or without free utilities; group insurance ; disability income protection; retirement benefits; daycare; tuition reimbursement; sick leave; vacation ; social security; profit sharing; employer student loan contributions; conveyancing; long service leave; domestic help (servants); and other specialized benefits.
Personnel economics has been defined as "the application of economic and mathematical approaches and econometric and statistical methods to traditional questions in human resources management". It is an area of applied micro labor economics, but there are a few key distinctions. One distinction, not always clearcut, is that studies in personnel economics deal with the personnel management within firms, and thus internal labor markets, while those in labor economics deal with labor markets as such, whether external or internal. In addition, personnel economics deals with issues related to both managerial-supervisory and non-supervisory workers.
Piece work is any type of employment in which a worker is paid a fixed piece rate for each unit produced or action performed, regardless of time.
Compensation of employees (CE) is a statistical term used in national accounts, balance of payments statistics and sometimes in corporate accounts as well. It refers basically to the total gross (pre-tax) wages paid by employers to employees for work done in an accounting period, such as a quarter or a year.
Merit pay, merit increase or pay for performance, is performance-related pay, most frequently in the context of educational reform or government civil service reform. It provides bonuses for workers who perform their jobs effectively, according to easily measurable criteria. In the United States, policy makers are divided on whether merit pay should be offered to public school teachers, and other public employees, as is commonly the case in the United Kingdom.
Commissions are a form of variable-pay remuneration for services rendered or products sold. Commissions are a common way to motivate and reward salespeople. Commissions can also be designed to encourage specific sales behaviors. For example, commissions may be reduced when granting large discounts. Or commissions may be increased when selling certain products the organization wants to promote. Commissions are usually implemented within the framework on a sales incentive program, which can include one or multiple commission plans.
A pay band is sometimes used to define the range (band) of compensation given for certain roles. The range is based on factors like location, experience, or seniority.
An incentive program is a formal scheme used to promote or encourage specific actions or behavior by a specific group of people during a defined period of time. Incentive programs are particularly used in business management to motivate employees and in sales to attract and retain customers. Scientific literature also refers to this concept as pay for performance.
The Fair Labor Standards Act of 1938 29 U.S.C. § 203 (FLSA) is a United States labor law that creates the right to a minimum wage, and "time-and-a-half" overtime pay when people work over forty hours a week. It also prohibits employment of minors in "oppressive child labor". It applies to employees engaged in interstate commerce or employed by an enterprise engaged in commerce or in the production of goods for commerce, unless the employer can claim an exemption from coverage. The Act was enacted by the 75th Congress and signed into law by President Franklin D. Roosevelt in 1938.
Executive compensation is composed of both the financial compensation and other non-financial benefits received by an executive from their employing firm in return for their service. It is typically a mixture of fixed salary, variable performance-based bonuses and benefits and other perquisites all ideally configured to take into account government regulations, tax law, the desires of the organization and the executive.
Employee retention is the ability of an organization to retain its employees and make sure the sustainability of employees. Employee retention can be represented by a simple statistic. Employee retention is also the strategies employers use to try to retain the employees in their workforce.
Pensions in Norway fall into three major divisions; State Pensions, Occupational Pensions and Individual or personal Pensions.
Compensation and benefits (C&B) is a sub-discipline of human resources, focused on employee compensation and benefits policy-making. While compensation and benefits are tangible, there are intangible rewards such as recognition, work-life and development. Combined, these are referred to as total rewards. The term "compensation and benefits" refers to the discipline as well as the rewards themselves.
Employer compensation in the United States refers to the cash compensation and benefits that an employee receives in exchange for the service they perform for their employer. Approximately 93% of the working population in the United States are employees earning a salary or wage.
Reward management is concerned with the formulation and implementation of strategies and policies that aim to reward people fairly, equitably and consistently in accordance with their value to the organization.
