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Linking Pay and Performance Essay

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Updated: Jun 9th, 2020

The relationship between pay and performance is one of the most contentious considerations that contemporary HR managers and company CEOs have to deal address. Some schools of thought claim that employees should be compensated depending on an organization’s present form, while others think the expected performance should be the basis for compensation. On one hand, it is argued that paying employees based on the current condition may demotivate them since if the pay is mediocre they might end up performing poorly resulting in organisational underperformance. However, the other side argues that projected performance may not be a very realistic basis for compensating staff since the firm would essentially be “paying above its means”. While both sides posit tenable arguments, it is ultimately more practical to establish a middle ground in which the employees’ salaries reflect the expectations of the firm, but not so much as to cause it to borrow so it can afford to pay.

Adjusting pay during transformation

In the process of implementing organisational changes in a firm, especially when responding to new strategies and transformation, it is normal for pressure on employees to mount. In most cases, they are taken out of their comfort zones and compelled to work under new conditions, which they may not be psychologically prepared for (Rynes, Gerhart & Parks, 2005). For this reason, it is critical that when implementing transformation, the organisation adapts a flexible and accommodating strategy concerning employee motivation. One of the main ways this can be achieved is by increasing their pay, which should be structured as part of the transformation budget. For example, in their endeavor to transform the Al Hammadi Hospitals into a hub of medical technology, the directors invested over 90 million dollars. Given the size of the budget, it is only natural that the employees who will be required to adapt to the new systems get some form of incentive or they may end up feeling exploited by the company.

Monitoring the impact of pay on performance

Ultimately, the onus of determining if the compensation is having a positive or negative impact on performance falls upon the department of Human resource management. HR managers should liaise with representatives of the employees and use various organisational performance metrics to determine the connection between performance and compensation (Rynes, Gerhart & Parks, 2005). Given that this is the same department that is charged with motivating employees through variety methods, not limited to financial incentive, they should advice the company on how the compensation policy is affecting motivation.

Impacts of linking pay to performance

In the Al Hammadi hospitals, compensation is based on a variety of factors among which performance prominently features. Aside from their educational qualifications and work experience, employees are compensated for their efforts and this is based on the results of their work rather than the number of hours worked (Alomari, 2015). The system has been very successful since most of the staff at the hospital go out of their way to do, not only extra, but also high quality work. Since the hospital rewards qualitatively, rather than quantitatively, employees are motivated to work harder. Therefore, Al Hammadi hospitals can be considered an example of an organisation where payment based on performance has been successful (Alomari, 2015). Another example is Netflix, which has successfully applied a performance based pay model that allows them to compensate their staff according to the amount of effort the put in (McCord, 2014).

Nevertheless, although this has been hugely successful in some organisations, the practice is often opposed on the basis that it pits employees against each other and increases the competition to unhealthy levels. Furthermore, pay based performance also creates situations where new employees are paid the same as those who have been on the job for years and this can demotivate the latter. Therefore, even as a company implements performance based pay, they should be careful to avoid antagonizing their staff. In my current organisation, the managers tried to set up such a system 2 years ago, however, after a few months, it failed because of employee apathy.

The main reason the move was opposed was that the basic pay was significantly reduced so the employees could “determine” how much they wanted to make according to their efforts. However, there were numerous challenges including the fact that people were not getting paid for sick days or even when on vacation and as a result, they petitioned to the HR department to terminate the practice.

Ultimately, even though this did not work out very well, if it had been strategically implemented there is a chance it would have resulted in increased employee motivation and by extension performance. Admittedly, many employees find the system oppressive, but this is only because of poor implementation by organisations. As demonstrated in the case of Al Hammadi hospitals, performance based pay should not be used to undercut employees by paying them below the market rates. Employers should use it to supplement their staff’s fixed earnings and reward exceptional performance as opposed to “punishing” employees who do not hit certain targets since it may end up demotivating them.


Alomari, R. (2015). . Web.

McCord, P. (2014). How netflix reinvented HR. Harvard Business Review, 92, 70-76. Web.

Rynes, S. L., Gerhart, B., & Parks, L. (2005). Personnel psychology: Performance evaluation and pay for performance. Annu. Rev. Psychol., 56, 571-600. Web.

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