Paying for Performance

Editor's Notes

• #2: In this presentation, I intend to define and discuss what paying for performance means to the business community, and why the rewards assigned for performance must be delivered appropriately to avoid increasing undesirable behavior.
• #3: One of the guiding ideologies behind merit pay systems and performance-based pay systems is that improved performance should be rewarded. Thus, employees who work harder should receive associated increases in benefits or bonuses. In an ideal environment, a performance-based pay system would serve to boost the motivation of the employees to apply all feedback and improve their skills so that they receive subsequent rewards. Performance-based approaches are important in linking an employee’s individual behaviors and goals with monetary pay. These rewards must be strategically given however, so that company objectives are being met simultaneously.
• #4: The expectancy theory most closely aligns with the motivation associated in pay-for-performance ideologies. In his 2004 paper on motivation theories, Ramlall describes the motivation within the expectancy theory to be a product people’s expectations that certain behaviors will produce certain outcomes. Thus, performance-based pay systems should solely reward behaviors that will produce desired outcomes, and then adhere firmly to those declarations. Otherwise, motivation to perform towards those outcomes may be lost. The equity theory of motivation also plays a role in understanding performance-based pay systems. In order for such pay systems to be effective, fairness and objectiveness in ratings must be upheld. Under the equity theory, Ramlall suggests that part of the motivation an employee has to perform will be affected by that employee’s perceptions of the rewards others receive for their performance.
• #5: According to behavioral theories of reinforcement, all behavior is a function of environmental consequences. In layman's terms, behavior is affected by all environmental events occurring before and after a person engages in a behavior. Therefore, according to behaviorists, behaviors associated with increases in performance should specifically reinforced rather than providing rewards based solely on outcomes (Luthans & Stajkovic, 1999).
• #6: In order for measures of performance to be considered effective, there are five criteria that the measurement system should meet (Wright et al. 2012): All measures should be acceptable and fair with regards to employees’ perceptions of them Measures should be valid such that they solely measure relevant aspects of performance within a particular job. Measures should have strategic congruence such that the performance to be measured aligns with organizational goals and strategy. All measures should specifically target and define performance expectations for all dimensions of a job Measures should be reliable such that they are consistent and replicable across different measures of the same performance
• #7: On a very basic level, a performance appraisal system is necessary for an employee to have feedback on how their current work habits are affecting their performance. Poor work habits must be addressed and properly explained by the supervisors, and the only way a supervisor can objectively understand an employee’s present work habits is through an appraisal system. Likewise, an employee should be made aware of how their habits may hinder performance so that they have the opportunity to seek additional training or self-manage their own behavior. (Boice & Kleiner, 1997) According to Dipboye and Pontbriand, a positive attitude towards appraisal systems is generated when the employees are involved in the appraisals and the appraisals are goal-oriented. In addition to understanding possible reactions to feedback, the system designers should attempt to plan for any biases that may be encouraged through the design of the system. Keeping the questions and ratings as objective and clear as possible should eliminate biases. The Behaviorally Anchored Rating Scale provides examples of effective and ineffective performance within particular dimensions of a given job (Wright et al. 2012). Such scales allow for increased reliability of agreement, however can also result in bias information recall (Wright et al. 2012). The balanced scorecard method measures performance based on four key areas: financial, customer, operations, and learning or growth (Wright et al. 2012). These scorecards allow employees to translate company business strategy into personal objectives so that rewards can be linked with performance effectively (Wright et al. 2012).
• #8: As cited in Luthans and Stajkovic, the American Compensation Association explored a comprehensive study of the positive effects of performance pay systems. A net return of 134% was realized for performance pay systems (Luthans & Stajkovic, 1999) .Therefore, the study suggests that there is a strong positive correlation between performance increases and the implementation of performance-based pay systems. In addition, performance-based pay should also result in greater productivity and improved sales and profits. Such systems also allow for supervisors and decision makers to pinpoint where deficiencies may lie within their training protocol for a particular job. Pinpointing these deficiencies will allow employers to provide better training, implement more efficient procedures, and accurately define jobs in terms of outcomes and responsibilities. Additional training opportunities can be provided to employees who are under-performing to reduce the risk of turnover or ineffective performance. Not only will clear objectives and feedback allow an employee to self-monitor his or her own behavior, but an effective performance-based pay system should also ideally serve to boost employee motivation to improve performance. According to the previously mentioned motivation theories, as long as the pay-for-performance system is equitable and delivers promised rewards for targeted behaviors, then employee motivation should remain relatively consistent. Overall, an effective pay-for-performance system will make the workplace “happier” because productivity will be high, employees will be motivated, and companies will be willing to provide all of the necessary opportunities for employees to proceed.
• #9: One important con of performance-based pay is that there is a significant lack of empirical evidence and instead, effectiveness is based primarily on testimonials or anecdotal evidence (Luthans & Stajkovic, 1999). In addition to the lack of casual evidence, performance-based pay systems run the risk of inaccurately rewarding target behaviors. There has been many examples that have exemplified how behaviors that are often rewarded are actually behaviors attempting to be discouraged (Kerr, 1995).
• #10: In order to address some of the cons of performance-based pay, companies should attempt to do the following: Firstly, companies should invest in the research and development of effective performance-based pay systems. The investment may require time and resources, but the best system can be produced as a result and allow the company to gain a competitive advantage in employee retention and overall business performance. Secondly, companies should evaluate if their reward system is outcome-based or behaviorally-based or both. If a company gives rewards solely based on behavioral expectations, then they run the risk of rewarding behavior that is not necessarily the most productive or efficient. If a company gives rewards only for outcomes, then there is an even more dangerous risk of inefficient or unethical behaviors being utilized to gain those outcomes. Therefore, companies must identify what outcomes are sought and the required behaviors necessary to achieve those results in order to provide rewards for performance.
• #11: In order to have a successful performance-based pay system, an effective performance appraisal system is required to measure and analyze employee performance. Boice and Kleiner offer some guidelines: The first step is to determine the organization’s goals and then translate those goals into departmental and individual objectives. Within this step the job roles should be specifically stated in terms of responsibilities and how the performance of the department and employee will contribute to broader, organizational goals. The next guideline is to provide extensive training for the performance raters. The training should begin with the upper management who are involved with the design of the system, and trickle downwards to all those in supervisory positions. Boice and Kleiner suggest bi-monthly or quarterly appraisals rather than semi-annual or annual ones. The authors assert that frequent appraisals will reduce situations arising from the supervisor or employee having to recall past information, or presenting surprises at the annual review. Frequent reviews also allow for objectives to be clarified and revised as needed. Records should of course be properly maintained and organized so that accessing critical information is easy. A measurement system should be determined to accurately rate or quantify performance. Boice and Kleiner suggest avoiding averages as ratings and to clearly define the various levels of performance. Finally, the last guideline on developing an effective performance appraisal system is to use various information sources and multiple raters to collect the data. Although this last step may be the most effortful, it is no doubt the most important. Multiple raters will drastically reduce the bias problem, provide a comprehensive look at an individual within the workplace, and provide a solid foundation on which the company may make merit pay decisions. Boice and Kleiner also suggest that the adjustment to pay schedule should come very shortly after a performance review has been conducted. The immediacy of the performance-based effect on pay should serve to motivate and commit an employee to understanding his or her own performance appraisal so that he or she can understand how to reach objectives most effectively (Boice & Kleiner, 1997).
• #12: Some possible future directions for effective performance-based pay systems that I would like to suggest are as follows: I would place a greater emphasis on training the raters in the performance appraisal process. This training should include elements of modeling, in-situ role playing, and practicing until reaching a mastery criteria. I think if greater focus is placed in the training process, the raters will be less likely to have widely varying interpretations of observations, and they will also be able to pinpoint inefficiencies in the implementation of the appraisal. I also think that something to consider is what other outcomes might be associated with performance improvement. I think an effective performance-based pay system should also take into account how the culture of the business will be shaped through performance improvement. What social factors should be encouraged for improved employee productivity? Can there be some programmable career advancement opportunities for those employees who exceed performance objectives? Leaders should try to be flexible to the changing business environment so that they can drive performance towards a positive business culture. Finally, I think that performance-based systems should not just end with the individual’s behavior. They should also be used as vertical assessment tools to see how the company as a whole is doing over time. This will not only reinforce the direct link between employee behavior an company objectives, but will assist decision-makers in determining what future actions need to be taken in order to maintain or improve company health. In order to conduct these systems-level analyses, I think that the collection and retention of data should be as efficient as possible; thus, companies should digitize data sets, prepare graphs that will automatically update when new data is uploaded, and have archives categorized so that access of dated information is simplified.