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Pay represents a continuous element of the employment relationship which is of equal interest to the employee and the employer. Traditionally, salaries were determined by a contract of employment or labor courts. They were also dictated by union deliberations, minimum wages, and government policies. In addition, features which determine increase of wages include skills and the negotiation powers of the parties. Other factors are comprised of labor availability, cost of living, seniority, and job assessment.
Other factors of measurement such as profits associated with performance and productivity are not significant in the estimation of wages. Despite the fact that skills are incorporated in payment structures, these systems do not enhance the use and acquisition of skills. Therefore, systems of payment have become a function of human resource departments to achieve organizational strategies and objectives (Pettersen, 2011). However, whether these schemes motivate individuals is a controversial issue. This essay compares performance-based pay with knowledge-based pay systems.
The performance-based pay is a good system for both employees and employers. Most scholars argue that it rewards the best performer, which motivates the employees. There is a positive relation between performance and efforts. Therefore, retention of employees will be encouraged because those who perform well are rewarded for their work, and hence are likely to stay. For instance, organizations use performance-based pay systems to reward their best performers and weed out weak employees. Although this system enhances the company’s performance, it discourages those who are weak. In contrast, knowledge-based pay systems act as a basis of motivating the employees. However, it may undermine the productivity of the company because it rewards employees based on their level of knowledge and skills. In addition, knowledge-based schemes are significant for organizational development.
For instance, organizations use knowledge-based schemes to train and educate their employees to perform well. Therefore, even though performance-based schemes encourage performance, they discourage organizational development. On the other hand, though knowledge-based schemes enhance organizational development, they discourage productivity. In addition, knowledge-based pay may demotivate good performers, because they will be discouraged by a system which does not reward their good performance (Pettersen, 2011).
Secondly, various scholars argue that performance-based pay motivates employees (Dohmen & Falk, 2011). For instance, companies that reward their employees based on commission, accrue a lot of profits, because workers derive their motivation from their needs of getting more pay. Therefore, the employees feel a sense of achievement because the amount paid is commensurate to work accomplished. In this case, income is not limited by time, but by the amount of work done. However, this strategy may reduce productivity, especially where quality matters, because workers will be determined to increase the amount of work completed while neglecting issues of quality.
As a result, the productivity of the organization depreciates to an extent that can lead to a collapse of the company. In this case, knowledge-based pay is vital, because it enhances quality rather than quantity. All payments based on skills encourage people to produce quality work. In addition, this strategy encourages creativity. Knowledge-based pay schemes encourage employees to explore their intellectual ability and develop good results to get the best rewards compared to fellow colleagues. Therefore, this means that performance-based pay schemes encourage competition in reference to quantity while skill-based pay schemes encourage competition in regard to quality.
Finally, skill-based schemes involve paying workers with regard to the variety of abilities they apply in their duties. Organizations that embrace this system also offer training so as to enable them acquire other skills. Therefore, employees are paid based on their ability to apply these techniques. However, this system may be expensive for an organization, especially when it engages in training its employees. A lot of resources will be required to meet the required skills. In addition, this knowledge-based scheme may serve to demotivate employees who have served the company for a long time.
When the young generation is compared to the elderly generation, the former has the desire to learn new skills, which place them in a higher position in this scheme. Therefore, performance-based pay schemes may be required to enhance employee motivation. However, they suppress creativity because individuals with unique ideas perceive it as a lack of appreciation. In addition, performance-based pay systems promote profit sharing. However, this applies to companies which generalize performance. Therefore, it also benefits those individuals who fail to attain their targets. However, it may discourage the best performers, because the organization fails to recognize their unique performance. This is contrary to knowledge-based schemes, which do not generalize organizational ability. However, skill-based pay schemes target individual employees. Therefore, it recognizes and appreciates each employee based on his or her technical contribution to the organization (Shijun, Yuhui &Yueming, 2011).
Performance and knowledge-based pay schemes are common methods of payment. However, each one of them has its advantages and shortcomings. There are a lot of controversial debates about these systems; the gist of the matter includes motivation, creativity, and organizational development. Even though it is applauded, performance-based pay systems have a lot of shortcomings. As a result, most organizations prefer knowledge-based pay schemes. It motivates and stimulates organizational development as well as enhancing creativity. Knowledge-based payments are better than performance-based schemes.
Dohmen, T., & Falk, A. (2011). Performance pay and multidimensional sorting: Productivity, preferences, and gender. The American Economic Review, 101(2), 556-590. Web.
Pettersen, I. J. (2011). Trust‐based or performance‐based management—a study of employment contracting in hospitals. The International Journal of Health Planning and Management, 26(1), 18-38. Web.
Shijun, Z., Yuhui, G., & Yueming, C. (2011). Research on the Relationship Model of Top Management Team and Team Performance Based on Hidden Human Capital Value Factors. Science & Technology Progress and Policy, 16, 032. Web.