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Pay for performance plans

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Pay for performance plans



Pay for performance plans can either have positive effect on the outcome of the work done or may have no impact on the result. It is worth analyzing the effectiveness of pay for performance plans. On the other hand, one has to pay close attention to different types of pay for performance plans as well as their influence on both employers and employees. Among different types of pay for performance plans it is possible to consider merit pay, individual-based annual bonuses and long-term incentive plans, etc. (Park, 3) According to S. Park, “the effects of pay-for-performance plans on employee future performance can be explained by the strength of the link between pay and performance for each plan and the financial nature of the awards from each plan.” (Park, 5) It is a well known fact that in order to increase employees’ performance, there is a need to increase their motivation. So, it means that there should be a strong connection between the pay and performance. However, there are numerous opinions related to the types of aspects that motivate people to be successful at work. Once everyone is motivated only by the increase in salary or by the additional benefits, his or her performance may not be the best and such person may not be interested in bringing something new to the company by means of innovative and creative thinking. That is the reason why pay for performance plans are to be studied carefully in order to evaluate their effectiveness carefully. In order to do this study various types of industries will be considered.

                                              Advantages of pay for performance plans      

            A lot of employers may consider implementing a special pay for performance plan, i.e. individual incentive plan or team plan, etc.. According to this plan employees would be rewarded not according to the time they worked for the company, but according to their individual performance which may be higher or lower to the other member of the team. Accroding Irwin McGraw-Hill, “Less direct supervision is required to maintain reasonable levels of output than under payment by time. Systems of payment by results (if accompanied by improved organizational and work measurement) enable labour costs to be estimated more accurately than under payment by time. This helps costing and budgetary control.” (McGraw-Hill, 11)

            Paul Suff claims that positive facts for using pay for performance plans may be the following: “Some of the potential advantages of PRP are that it can provide a direct incentive, is a tangible means of recognising individuals’ achievements, and provides the flexibility to retain key staff.” (Suff, 3) In most cases this opinion turns out to be true, while remuneration helps to identify the best performing employees and it helps them to be successful in the future. What is more, once other members’ achievements are clearly noticed by those with the lower performance level, they might be willing to reach the result of the best performing ones.

            Even though there are a lot of claims against pay for performance initiatives, majority of companies worldwide tend to use pay for performance plans in order to increase performance of the workers and to increase the company’s budget in the end. According to Cathy C Durham and Kathryn M Bartol, “well designed pay for performance systems make major contributions to performance through two main mechanisms. First, they positively influence the motivation to perform. Second, they impact the attraction and retention patterns of organizations (i.e. who joins and who remains) thereby affecting the calibre of individuals available to perform.” (Durham, Bartol, 217) According to the authors, motivation comes from the knowledge and acceptance that once someone performs really well, someone gets paid really well. Moreover, with the help of remunerations the management team is able to recognize those who perform better than their colleagues do, while additional payments give people the desire for the higher achievement. It is also worth mentioning that Cathy C Durham and Kathryn M Bartol made a research of the impact of pay for performance on different levels: individual, team level and organizational. The individual level of performance evaluation is one of the most widespread type. The easiest way to analyze employees’ performance is the individual level: “At the individual level there are three major types of pay for performance systems: traditional incentive systems, variable pay configurations, and merit pay plans. Traditional incentive plans include piece-rate plans and sales commissions. (…) Variable pay is performance-related compensation that does not permanently increase base pay and that must be a re-earned to be received again. (…) Merit pay rewards employees for past work behaviours and outcomes by adding dollar amounts to their base pay.” (Durham, Bartol, 218) These types of pay for performance are nowadays being implemented by a lot of companies depending on company’s policy. All these remunerations have impact on the increase of motivation among workers. However, there is also a need to consider negative aspects of pay for performance plans.

            To summarize, it is possible to claim that pay for performance plans undoubtedly have a very important impact on the increase in motivation among the team members. But there is a need to research whether the pay for performance measures are based on some psychological backgrounds carefully learned by managers willing to increase the revenue of their company.


                     Disadvantages of pay for performance plans for employers and employees

            Even though there should be a strong link between the salary and performance of employees, it may not always be the case that performance will be increased. There might be other external factors influencing the outcome of the work being done. Other factors depend on the field of work, the amount of tasks per one person, the level of difficulties of the tasks, etc. In some cases the team and the way all the work process is being organized is more important for employees than the salary they get. Coming back to the ideas of P. Suff, it is worth mentioning that the author identified not only positive aspects of pay for performance plans. He claimed that incorrect application of pay for performance plans may deteriorate the whole working process. It may be due to the fact that once employers who are considered as the best performers might create the so-called team division, i.e. the low performers might feel not successful and may consider leaving the company in the long run.

            Studies by P. Suff also show that remunerations may be far from the real reason why people get motivated at work. According to the most of researches, the main driving factors motivating people to achieve higher results are responsibility, achievement and recognition. So, it is possible to come to a conclusion that perks and remunerations help people not to get motivated to achieve higher results, but not to consider a job change. 

            Another disadvantage of the pay for performance plan may be the fact that it might involve competition within the team, which does not always have a very positive environment in the team. Irwin McGraw-Hill also considers that there may be some disadvantages in pay for performance plans. One of the disadvantages is “greater conflict between employees seeking to maximise output and managers concerned about deteriorating quality levels, reduced willingness of employees to suggest new production methods for fear of subsequent increases in production standards.” (McGraw-Hill, 11) So, the negative impact of remuneration may be the fact that employees tend to do everything in order to prove they deserve bonuses and managers constantly proving that employees are not performing well and could have higher results. It is possible to come to a conclusion than in case there is such a policy at the company not allowing the development for workers in any sense of the world, the implementation of pay for performance plans may be completely useless.

            Speaking about different types of pay for performance plans, not only the amount of reward may be helpful to increase the employees’ motivation, but the nature of the reward, i.e. giving employees things they would need at a current period of time, not necessarily money: “the strength of the PFP link and the value of a reward work together to influence the motivation of employees. In all cases, the degree of PFP should be positively related to future employee performance; but the strength of this effect will depend on the nature of the reward.” (Park, 8)

            There is a need to compare different types of remunerations for employees in order to understand the benefit for employers. Taking into consideration long-term incentives and bonuses, the later ones usually have better effect on performance comparing to long-term incentives. The reason for that may be the fact that most employees would prefer to be paid right away rather than wait till the end of the year or the end of the quarter. Once at the end of the year the level of performance is not satisfying both for the employer and the employee, this situation may get employees unmotivated to precede with the current company or the products it sells or manufactures. In the same way the employer may not wish to precede with the employee who does not do well with his responsibilities. One of the possible solutions in order to solve this problem and make the pay for performance plan easier for the employer is engaging frequent assessments of performance in terms of workers. One aspect employers are to be careful about is not making their team overloaded with the tasks and in addition to that making them evaluate their performance by themselves. The examples of that can be different performance evaluation forms with the necessity to characterise good and bad traits of employers. These types of questionnaires are usually very time-consuming and they do not have the direct impact on the changes in performance.

            It is also worth mentioning that some managers claim that employers do not pay much attention to the amount they earn, but to whether it was a fair payment or not. However, it is completely different. Most employees would be glad to get paid more even if their work colleagues were paid less and it might lead to some sort of competition: “Expectancy theory suggests that a compensation plan with a greater link between employee performance and rewards should motivate employees to perform better. This confirms conventional wisdom that, in general, how you pay matters. But how you pay is not the complete story. Managers should not deceive themselves into thinking that employees don’t really care about how much they get, and instead simply only want a fair pay system.” (Park, 9) So, it is possible to argue that benefits play a very important role in employees’ performance. The most important aspect is to consider the timing, the type of awards as well as correct distribution of benefits in the team. Otherwise, the information concerning bonuses has to be confidential in order not to ruin the team spirit, which sometimes may have much more positive influence on performance than the salary.

            One more aspect studied by S. Park is difference in the impact of stable salary and the constant increase in the salary depending on performance and the period of time employee is with the company. Namely, employees would more prefer constant increase in the salary. It would motivate them at least not to consider a job change.

            Another problem that has to be highlighted is the lack of organization in PFP in companies. Its importance lies in the fact that once the remuneration is used in the wrong direction, i.e. given to the wrong group of employees or not the right time was considered or inappropriate type of remuneration is given, the most valuable employees may decide to leave the company.  

            Coming back to the research done by P. Suff, it is possible to argue that pay for performance cannot have any impact at all on the whole working process, either positive or negative, but it is still being applied by most of the companies with the aim to increase motivation and performance: “performance-related pay is neither dead nor dying; the spread in incidence has undoubtedly slowed, but it is continuing to be applied and grow. Furthermore, the practical problems in implementation and operation are increasingly well recognised and documented.” (Suff, 5) It is also very important to note that the ideas of pay for performance plans are derived form the psychological principles. In terms of psychology, it is very easy to recognize that additional payment for performance cannot be the only reason for the increase of employees’ motivation: “The underlying rationale for performance-related pay is based on theories of motivation and the degree to which financial reward can influence an individual’s performance. The view that the right behaviour can be encouraged through reward and discouraged through punishments derives from many years of psychological thinking.” (Suff, 5) One may conclude that the reason why some employees feel more motivated and have higher results in work is the desire to be successful in the field of work being performed, the wish to perform in a way so that not to have any punishment, etc. What is more, according to numerous researchers, the cognition thought process is one of the most valuable factors for the increase of employees’ performance. There are numerous theories depending on the types of the theorists who were the authors of them. Most of the theorists make their decisions on the internal factors which make people behave in some particular way at the workplace.

            As discussed before, pay for performance plans are based on the psychological aspects the managers carefully analyzed when designing the best pay for performance plan: “Most firms that use pay for performance systems do not introduce them by themselves but rather as part of changes in work organisation such as team work, employee involvement committees, or total quality management that offer employees a greater role in decision-making. (…) Available studies suggest that when firms have good performance measures, performance related pay is associated with improved employee productivity and better quality of the worker-firm match.” (Bryson, 3) So, one may come to a conclusion that one of the major factors for motivation at work is the so-called match between the firm and the worker. Moreover, according to A. Bryson, managers are to introduce pay for performance plans in a way so that these plans would not be perceived by employees as a direct way to increase company’s performance, but as a way to express gratitude to the best performance. This type of relation will always be highly appreciated. 

            To conclude it is worth mentioning that pay for performance plans may have numerous disadvantages for employers, such as shortening of the company’s budget in order to make the most valuable employees motivated.  The pay for performance plans also have negative impact on employees in a way of creating difficult environment between the team members. Except for that, in case pay for performance plans are not analyzed well before putting them in action, they may have influence on the lack of performance in the end. The most important issue for considering some types of rewards or remunerations for employees are PFP plans which should be well designed and careful research has to be made before implementing them. 

            Works cited


            Bryson, A. Paying for performance. 1st 2011. Print.

            Durham, C., Bartol, K. Pay for performance. 1st 2011. Print.

            McGraw-Hill, I. Pay-for-Performance Plans. 1st 2002. Print.

            Park, S. How and What You Pay Matters: The Relative Effectiveness of Merit Pay, Bonus, and Long-Term Incentives on Future Job Performance. 1st 2012. Print.

            Suff, P. Paying for Performance. New trends in performance-related pay. 1st 2010. Print.

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