Pay-for-Performance Plans and Rewards Classification

The compensation plan usually depends on many factors that determine the type of organization, such as service or manufacturing, and the type of work of the employees. The goal of performance rewards is to increase productivity, retain employees, and increase motivation and engagement. The remuneration system must be fair and commensurate with the value of the work. Rewards can include verbal rewards, desired work assignments, promotions, pay, and bonuses and rewards. It is also important when drawing up the plan that the remuneration is aligned with the goals and needs of the employee.

Pay-for-Performance Plans and Rewards Classification

Rewards and compensation are an important part of production management planning, as the size, fairness, and correct application of a type of award directly affects performance. It is important to understand that awards are not wages, but additional bonuses that can be awarded for productivity or other positive characteristics of the work performed. This paper aims to discuss the classification of rewards, competency-based compensation programs, and relative standards in the performance management system, ethical issues in HRM, as well as advantages and disadvantages of using a pay-for-performance plan, and how organizations measure its effectiveness.

Classification of Awards

According to the classification of awards, there are internal and external awards. Intrinsic reward may include nonmonetary bonuses like job satisfaction, pride, a sense of accomplishment, a sense of participation and involvement, shorter work weeks, or rotation. Extrinsic rewards are usually monetary bonuses, promotions, fringes, or image recognition (“Rewards: classification, characteristics,” 2021). Rewards are also classified as financial and non-financial; financial rewards include salaries, profit sharing, benefits, bonuses, and retirement schemes, paid or cashed vacations.

Non-financial incentives should make life at work more enjoyable, such as company-sponsored lunches or snacks, cozy lounges or conference rooms. Another way to classify rewards is features performance based rewards and membership based rewards. Performance based rewards are performance based rewards like piece rate pay plans or commissions recognition (“Rewards: classification, characteristics,” 2021). Membership-based rewards may include profit sharing, increase in dearness allowances, seniority based or time bound promotions.

Rewards and rewards plans should have particular characteristics to be effective. In particular, the reward should be important to the person receiving it, should be distributed fairly, should be visible, and vary with changes in performance. Even more important, the remuneration should be low, since it is not the main source of income for the employee, but is intended to emotionally emphasize the importance of his work. With a promotion or salary revision, an actual significant increase can be realized, but such an increase in monetary recognition of merit accompanies the awards, and is not a substitute for them. Rewards can be based on performance, effort, seniority, skill, and job complexity.

Competency Based Compensation Programs

Competency-based compensation is a type of payment that takes into account behavior, productivity, achievement of a work goal. Compensation is a type of reward, and is an additional risk payment, as opposed to a guaranteed base salary. Compensation can also be a one-off payment as future payments are not guaranteed (“Competency based pay,” 2021). Performance-based pay planning involves analyzing the components of the measurement of labor and converting that estimate into cash payments.

The planning of a competency-based compensation includes four stages, such as the implementation phase, design phase, formula phase, and implementation phase. During the implementation phase, the HR manager plans to move from the old compensation plan to the new one. At the design stage, the basic project for calculating compensation is determined, including legal nuances. At the stage of the formula, the HR manager determines the main indicators and formulas according to which performance will be assessed and converted into money (“Competency based pay,” 2021). Finally, during the implementation phase, the HR department introduces the plan to employees and listens to their comments. In compensation programs, the guaranteed monthly salary is called the base pay, and the variable pay is offered in addition to the base.

Reward systems that use pay for performance imply that variable rewards are awarded based on behavior or performance, in relation to groups or individuals. Experts believe that this approach allows for the retention of highly effective employees, while salary plans based on skills or competencies are suitable for qualified personnel. Finally, compensation based on competence is compensation in terms of skill set, knowledge and experience, not depending on the position. Compensation like this motivates employees to work more efficiently, improving skills and performance, and taking on more responsibility. In other words, in competency-based compensation evaluates the potential of employees, whereas with traditional methods of payment, salaries may be limited by the ability to advance in the service.

Relative Standards in the Performance Management System

The other name for the relative standards is compulsory distribution. When using this performance appraisal method, employees are assessed according to a predetermined distribution. For example, there may be a bell curve that suggests that some of the employees must have extremely high scores, and a small percentage must necessarily have low scores. Such predetermination may not correspond to the real state of affairs, since the majority of employees may have, for example, above average performance. In this case, the need to assign low scores to a certain number of employees can lead to a decrease in motivation, engagement, productivity, or even leaving.

Ethical Issues in HRM

In production, HR management can deal with ethical issues such as privacy, compensation plan, employment, safety, race, disability, or employee performance appraisals. Organizations tend to value their employees because their level of motivation affects the performance of the company (“Ethical issues in human resource,” 2021). Discrimination in the workplace is unacceptable in accordance with each of the listed aspects. Employees should receive fair remuneration in accordance with the quality of their work. An effective compensation plan takes into account the ethical issues that arise in human resource management.

Advantages and Disadvantages of Using a Pay-for-Performance Plan

When developing of the pay-for-performance plan, you need to understand that such a reward system has its drawbacks and advantages. Pros include the ability to stimulate individual self-motivation for those employees who are willing to pursue higher goals. Also, this system promotes self-improvement of employees who improve their skills in order to contribute more to the business of the company, which contributes to success. Pay-for-performance contributes to greater transparency as employees gain a better understanding of their potential and which skills will help raise pay.

The pay-for-performance type of the compensation also reduces employee turnover as employees feel that their skills and knowledge are important to the company. Cons may include increased pay subjectivity, as the pay-for-performance type of the compensation creates an opportunity for variability in the interpretation of merit. Therefore, the second minus is the vulnerability of the system to favoritism; the third disadvantage is inaccurate measurement of the company’s needs, as it is difficult to determine exactly which skills are prioritized for improving productivity and quality of work.

Scientists note that the schemes of compensation plans may differ, and these differences affect the results of using this type of compensation (Kovacs et al., 2020). Scientists also emphasize heterogeneity in the design of incentives, since the design can change depending on the outgoing conditions (Kovacs et al., 2020). Other experts point out that using only financial element, without considering psychological and economic theories, can reduce the effectiveness of plans (Harrington et al., 2021). The scholars emphasize that using theories of psychology and economics in developing plans will improve the bottom line.

There is also a negative effect of the pay-for-performance type of compensation. This effect is related to the controlling reward effect that reduces intrinsic motivation (Kuvaas et al., 2018). Therefore, Mulvaney (2019) proposes to involve employees in the development, implementation, and administration of a performance appraisal system. Interestingly, scientists are studying how managers evaluate the application of this method. According to Idowu (2017), using more than one performance appraisal technique to motivate employees’ results in better impact. Performance appraisals can be used to motivate, job satisfaction, by linking performance to rewards, setting goals and targets, and identifying employee strengths and weaknesses.

Thus, the classification of rewards, competency-based compensation programs, relative standards in the performance management system, and ethical issues in HRM were discussed. Reward classification distinguishes monetary incentives from non-monetary incentives, and draws a line between guaranteed benefits such as salaries and non-guaranteed benefits. Advantages and disadvantages of using a pay-for-performance plan include increasing employee motivation and engagement and increasing transparency about employers’ expectations for priority skills.


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