Performance pay schemes, also known as incentive schemes are plans formulated to reward employees on preceding performance. These schemes are a common practice in various organizations. They are often used to boost employees’ performance.
Some incidence that would cause the introduction of an incentive scheme is low performance of employees in the organization. For instance, in marketing, if one employee makes twice as much as his/her colleagues, the manager may use incentive schemes. The highly performing worker may earn twice as much as the low performing one.
There are various reasons for introduction of the performance pay schemes. These include; traditional reasons and newer reasons. Traditional reasons consist of recruitment – use of the schemes may attract new skilled employees into the organization; retention- employees are not willing to leave the organization as they feel they have something to work hard for in the organization; motivation- rewarding the hard working employees drives them to attain even better results for the organization. According to Vroom’s expectancy theory, rewards will motivate behaviour if employee effort determines performance gauge and change in performance gauge leads straight to a raise in reward.
Culture is one new reason for introduction of incentive schemes. People believe in rewarding hard work. People have been brought up in a culture whereby their actions are driven by incentives. This culture has spread to the working place, and managers have no choice but to incorporate it into the organization. Considering that we inhabit a culture that is individualistic has also led to introduction of incentive schemes. Control is also a new reason for introduction of incentive schemes. It is easy to control employees using rewards. According to the principal agent theory, ‑ employees may avoid work that requires effort. Therefore, the use of incentives ensures control since workers can pick complicated tasks.
Types of incentive schemes vary along three dimensions. Of these dimensions, individual performance -related pay is crucial. Units of performance, measures of performance and performance payments are used in gauging the type of incentive to be applied. Output schemes are often measured through a worker’s sales, productivity or profit. Input schemes are those that are measured through factors such as the number of hours worked. An example is in Anglia Housing Association Group where employees are rated against the competence listed on a job profile. The competency score attained determines the employees pay.
There are various problems associated with the performance pay scheme. The problems include perversity and degeneration. Foremost, perversity refers to the lack of discipline. Perversity is evident through inflexible work behaviour where workers only perform part of the work. This is caused by the focus on measurable outputs. In this case, the design of the incentive scheme does not include the whole task.
Perversity is also caused by use of wrong methods of gauging performance. This can be seen through troubled work relations. Workers do not cooperate. Other causes of perversity include; lack of proper negotiations before the introduction of the incentive scheme, introduction of the scheme where employees do not trust each other and the existence of vocal trade unions. Symptoms include pay grievances.
Degeneration means disintegration. Degeneration can be caused by two main factors namely; management objective and scheme design. Management objectives entail the use of incentive schemes to recruit and retain employees. However, this may not work as incentives may fail to raise the performance. Colleagues at the work place have been seen to look down upon each other on the basis of the salaries earned. This results to lack of cooperation.
In scheme design, the use of good incentive schemes over short cycle performance cause rise in performance. This will eventually cause high inducement pay which is not good for the organisation.
According to the research conducted by Heery; Kessler; Marsden and Thompson on UK individual performance-related pay schemes, there are problems that arise from the use of these schemes. Cooperation at the workplace was found to reduce where these schemes are applied. The study also shows that cases of inaccurate assessment do occur. As a result, workers are not at peace with each other as they feel that they are not treated fairly.
In conclusion, it is clear that use of performance pay scheme actually does more harm than good to an organization. This occurs because these schemes do not match other factors of employee relationship. Inmost cases the measures of performance are not accurate and maybe unattainable. It is the duty of the implementers of these schemes to ensure that all these factors are congruent if these schemes are to be useful.