In this short paper I will explain why the statement “The introduction of individual pay for performance contributes to an improvement in a company's (financial) performance” is to my opinion not valid. Before we can jump into a reflection on the statement, two questions arise that will be discussed as an introduction “What is pay for performance?” and “Why is pay for performance considered as a system that might contribute to a company’s performance?”
What is pay for performance?
Pay for performance is a motivation concept in human resources, in which employees receive compensation for their work based on the level of reaching certain targets (individually or with their team, department or company). The term is often referred to when one is addressing the topic of variable pay based on performances. Although not generally recognised, the term pay for performance should, to my opinion, include as well, aside of variable pay, fixed pay and intrinsic rewards. According to Dreher and Dougherty most current pay systems are not related to performance but only to circumstances and skills and competencies: ‘Most pay structures can be labelled job based pay (…). Some firms introduced a new pay system toward a skill- or competency based pay. In these systems employees are given pay increases as they acquire additional skills or competencies, not as they move to a job in a higher pay range’ . Ideally we should include intrinsic rewards in the discussion as well. 'Employees receive both intrinsic and extrinsic rewards for performance. Intrinsic rewards are self-granted and consist of intangibles such as a sense of accomplishment and achievement. Extrinsic rewards are tangible outcomes such as pay and public recognition’ . The value of intrinsic rewards is often neglected, without reason as according to some research: “extrinsic rewards can lose their motivating properties over time and may undermine intrinsic motivation” . And “some research shows that workers value interesting work and recognition more than money” .
Why is pay for performance considered as a system that might contribute to a company’s performance? One of the objectives of Human Resource management in general is to align the human resources of the company with its strategy and with specific circumstances. “What better way to drive people to work harder and more efficiently, you may ask, than to offer them a special carrot: more money for hitting specific company targets? ” Pay for performance is a performance appraisal system that motivates employees to perform activities in line with the company targets, and rewards employees that meet the specific targets. On the one hand the system stimulates performance in line with company strategy, but on the other hand when targets are not met, the company saves money. The system ‘puts some of the risk of doing business from the firms to the employees ’.
Several underlying unspoken assumptions are behind the pay for performance concept, which derive from the very nature of the society that we live in and are not necessarily accurate. -Money motivates people to work harder.
-Increased motivation will increase performance.
-Fair measurement of work performance is possible.
Let’s take a closer look at these assumptions.
Money as a motivator: There is no doubt that money can be a powerful motivator. Dreher and Dougherty state that ‘effective merit pay creates a strong connection (instrumentality) between the employees’ level of performance and the subsequent size of their salary increase’ . From the Vroom expectancy Theory we learn: “The strength of a tendency to act in a certain way depends on the strength of expectancy that the act will be followed by a given consequence (or outcome) and on the value or attractiveness of that consequence (or outcome) to the actor ”. Within a pay for performance system the described relation can be considered among...