Last Updated 21 Apr 2020

Pay for Performance

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Pay for Performance Park University Overview Incentive pay, also known as "pay for performance" is generally given for specific performance results rather than simply for time worked. While incentives are not the answer to all personnel challenges, they can do much to increase worker performance. (Billikopf) Performance pay has various names: merit pay, pay for performance, knowledge-and-skill- based pay, or individual or group incentive pay. Delisio) Pay for performance systems have further been proven to have two advantages for organizations: attracting more high-quality employees and motivating employees to exert more effort at their jobs. (Gordon, Kaswin) This paper will show the positive benefits of performance pay as well as some steps to implement the pay for performance program. Productivity Implications Companies that have switched from salaries to individual incentives have increased productivity dramatically—some by as much as 44 percent.

Linking pay to performance not only motivates but also helps to recruit and retain the most talented employees. New graduates seek to join organizations that make use of performance-related rewards, and they have long-term loyalty to these organizations. The use of performance pay has also grown in popularity, as 67 percent of companies offer some form of performance pay to employees below the executive level. Likewise, the practice of compensating managers below the senior executive level with stock options and other forms of long-term incentives has risen dramatically.

This is because performance-sensitive pay aligns the interest of all levels of employees with the interests of shareholders. (Gordon, Kaswin) Implementing a pay for performance system has been shown to resolve organizational problems because it aligns the preferences of firms and employees. In addition, creating a pay for performance system serves as a sorting mechanism to identify and attract the most capable employees. Gordon, Kaswin) The economic downturn has accentuated the need to contain compensation costs by holding down fixed-based salary expenses. To maintain competitive pay plans, an increasing number of companies are giving more employees across different job functions the opportunity to earn variable, performance-driven incentives for achieving individual and organizational goals. (Gordon, Kaswin) Pay for Performance Objectives Developing a pay for performance philosophy and strategy is easier when we understand what such an approach is intended to achieve.

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If effectively constructed, pay for performance compensation plans should help a company fulfill the following objectives: * Recruit and retain the highest quality employees * Communicate and reinforce the values, goals and objectives of the company * Engage employees in the organization's success * Reward contributors for successful achievements (The VisionLink Advisory Group) Line of Sight Ultimately, the combination of rewards strategies that a company institutes should help to raw a correlation in the mind of the employees between interdependent elements: * Vision - where is this company going? * Strategy - how is it going to get there? * Roles and Expectations - what role does each key person have in that strategy and what is expected of him or her in that role? * Rewards - how will each employee be financially rewarded for the achievement of the expectations associated with his or her role   Pay for performance is the mechanism that is used to create this "line of sight" between related elements of company culture and purpose.

In the final analysis, compensation needs to reinforce the behaviors that are desired within the strategy framework of the company in a way that is compelling enough to produce the desired performance. (The VisionLink Advisory Group) In adopting a rewards philosophy for how people will be remunerated for their contributions within an organization, a company has to determine what the right balance should be between short and long-term compensation and guaranteed versus performance compensation.

Pivotal in that philosophy development is how and to what extent pay will be tied to specific types of performance. This issue will not be treated the same in every organization. However, every business should be able to identify certain performance objectives it wants its workforce to fulfill and the financial outcome that will be achieved if that result is attained. Such a projection can be translated into an increased shareholder value figure. (The VisionLink Advisory Group)

Features of Effective Plans Top Management Support Supervisors must understand the incentive pay process in order to support and administer it. Oftentimes, a lack of understanding causes managers to ignore or adapt the process as they see fit. Moreover, if supervisors are not trained on how to measure performance, the process will not be standardized across the company. (Gordon, Kaswin) Having buy-in from key stakeholders is crucial for the success of an incentive pay system.

For example, if top management does not support such a program, lower-level managers will place little importance on effectively administering the program. Hence, a lack of top management support often leads to a lack of accountability. (Gordon, Kaswin) Communication Consistent and methodical communication is necessary when implementing an incentive pay plan. It will ensure employees understand what is expected of them while decreasing the likelihood of morale problems that result from misinterpretations of how incentives are awarded. Gordon, Kaswin) Performance Management Oftentimes, a flawed performance management system is the main reason an incentive pay system in not successful. When designing a performance management process that will be linked with pay, it is imperative that both employees and managers know what the individual goals are, how they will be measured, and how they will be compensated when achieved. Managers must also be careful to ensure that there is adequate differentiation between high and low performers. If mediocre employees are given an average merit increase, hey will perceive that their performance is adequate. Conversely, if excellent performers only receive a little more in incentive pay than average performers, they will perceive that the company does not value their performance. (Gordon, Kaswin) Appropriate Rewards The amount of incentive a company should offer to an individual depends on current income, amount of effort needed to invest, likelihood of obtaining the reward, acceptance of risk, equity of reward and contribution, and industry standards.

A minimum for incentive pay is considered to be 5 to 15 percent of an individual’s base pay. (Gordon, Kaswin) Considerations before Implementing a Plan The best compensation plans take into account several key considerations. Before instituting a pay for performance system, companies should define which employees should be eligible for the program. Furthermore, it is important for companies to determine the role of equity in a total rewards framework from the perspectives of the employee and employer, as well as in terms of cost.

Steps should be taken to (1) review the current objectives and purpose of the equity plan; (2) identify alternative rewards; (3) develop a communication plan for how the effectiveness of the program will be measured; (4) gather employees’ perspectives via surveys, focus groups, or internal research; (5) gather external market information; (6) determine the costs; (7) develop recommendations for design change; and (8) create the communication plan. The communication strategy for the program should encompass the value employees place on various rewards and how the changes will be perceived by employees.

It should then monitor and manage employees’ reactions to the changes in their compensation structure. (Gordon, Kaswin) Objectives of a Broad-Based Incentive Plan When creating an incentive plan, the organization has to determine and clearly define the goals for the program. The objectives should be aligned with the business strategy. These goals should be utilized to shape the incentive plan as well as the expectations and objectives of individual employees. A main reason why incentive plans fail is because they are introduced as an inflexible process.

The incentive plan should be first implemented on a small group of employees in order to determine the flaws and rectify them before implementing them across the enterprise. Once the plan is implemented, it should be regularly adapted. (Gordon, Kaswin) If companies want a pay for performance system, the firm should define the desired performance and establish methods of measuring it first. Then, connect goals for individuals, for business units, and for the company. Meanwhile, track everyone’s progress and periodically give back the data to raise everyone’s awareness of the program.

Sixty-two percent of compensation professionals report that their organizations did not attempt to measure the return on investment of their compensation program. (Gordon, Kaswin) Conclusion Research indicates that broad-based incentive plans can be utilized as a means to encourage both employee performance and productivity. When implementing an incentive plan, several considerations are needed to ensure the plan is successful. However, it is important to note that incentive plans cannot ensure employee productivity by themselves. They must be coupled with effective human resources practices in order to ensure a successful work environment.

These include determining the appropriate rewards, instituting comprehensive performance management systems, widespread and effective communication, as well as buy-in from top management to support the compensation plan. Over the past decade and increasingly in the past year, performance pay has become the standard as companies reward strong performance and lower overhead costs. This trend is expected to continue in the coming years. (Gordon, Kaswin) Like most things in business, compensation is something that requires evaluation, study, assessment, strategy, modeling and integration.

Achieving a pay for performance culture does not happen without paying attention to the behaviors, activities, rewards and motivations that have to be linked and reinforced through a well-engineered and effectively executed process. And if that process does not tie rewards to shareholder financial objectives, employ the proper mix of compensation elements, result in meaningful dollars, embrace performance that employees can impact and are effectively communicated and reinforced, then the results it produces will likely fall short. (The VisionLink Advisory Group) Pay for performance systems need ngoing attention to keep them functioning properly. Organizational goals will change; performance goals and measures will become obsolete; performance may improve or decline; managers may make errors in evaluating performance or allocating rewards. For all these reasons and more, agencies need to monitor the operation and effectiveness of their pay for performance systems and modify them accordingly. Only by giving the pay systems and related organizational requirements the ongoing attention that they warrant will agencies be able to obtain optimal results from their pay for performance systems. U. S. Merit Systems Protection Board) Works Cited Billikopf, Gregoria. (2001) Incentive Pay (Pay for Performance). The Regents of the University of California, retrieved from http://www. cnr. berkeley. edu/ucce50/ag-labor/7labor/08. htm The VisionLink Advisory Group, The Five Essentials of Pay for Performance, retrieved from http://www. vladvisors. com/images/PDF/VisionLink_Five-Essentials-Pay-For-Performance. pdf Gordon, A. A. , Kaswin, J. L. , Effective Employee Incentive Plans: Features and Implementation Processes, Cornell HR Review, 2010, retrieved from http://cornellhrreview. rg/2010/05/31/effective-employee-incentive-plans-features-and-implementation-processes/ U. S. Merit Systems Protection Board, (2006) Designing an Effective Pay for Performance Compensation System. Retrieved from http://www. mspb. gov/netsearch/viewdocs. aspx? docnumber=224104;version=224323;application=ACROBAT Delisio, E. R. , Pay for Performance: What Are the Issues? , retrieved from http://www. educationworld. com/a_issues/issues/issues374a. shtml

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