INTRODUCTION – PLAN OF THE REPORT
I have organized my investigation in the following way. In the first issue I introduce the historical background of short history of pay-for-performance system. The second issue handles with particular types of individual pay techniques including ranges, merit pay and incentives. There are given only the main characteristics of each type. The third issue tries to give clear answers on simple questions about pay – for - performance system’s reliability and accuracy. The fourth issue named Negative evidence creates an opposition to pay – for – performance advocates. The last issue as the topic says gives few pros and cons of establishing link between pay and performance.
Traditional approach to compensation, which was focused on financial compensation, is characteristic for 60’s and 70’s of previous century. The stress was on right classifying of employees into pay ranges. They pay grades were precious created. This system was building bureaucracy, sharp hierarchy and vertical communication. Fringe benefits served just like a tool for tax evasion.
In late 80’s was new way of compensation presented. In private sector pay-for-performance started to be applied. Traditional system was being criticized by Lawler as unsuitable for new flexible organizations with not so many levels.
Also the times of stagflation motivated managers to find new ways to the gain competitive advantage. This approach focused more on employees as main source of competitive advantage.
INDIVIDUAL PAY TECHNIQUES
We can divide the pay techniques into several groups depending on the point of view. Here is tabular overview of the main types.
Table 1Pay-for-performance plan classes.
LEVEL OF PERFORMANCE
CONTRIBUTIONTO BASESALARYAdded to baseMerit plansRangesSmall group incentives
Not added to baseMerit awardsLump-sum paymentsPiece ratesCommissionsBonusesProfit sharingGainsharingBonuses
This technique is not literally pay – for - performance reward. Jobs are classified into some grades according to their heaviness. Pay range is assorted to every grade. Maximum and minimum pay is so defined that it creates a range for pay increasing. The less the number of ranges the wider each range is. It is prevalent that outstanding performer, say, in grade II. can have higher pay than unsatisfactory or even satisfactory employees in grade III. It is easy enough to create ranges therefore is this approach worldwide spread.
When establishing pay ranges organizations usually associate them with job descriptions in the organization. The ranges include the minimum and the maximum amount of money that can be earned per year in that role.
Once ranges are established, the next thing is to decide how employees will move through the range. Seniority pay increases recognize the value of experience, appreciate stable workers. On the other hand, when work force grows older, it happens more expensive without significant growth of productivity. Merit pay increases link pay to job performance. Promotion rewards outstanding performers. This approach helps to keep costs stable.
In comparison with general increase, cost – of – living adjustments (COLA) and seniority increase is merit pay by far the most common for almost 90% employees in USA. It rewards past work behaviors and accomplishments. It is often given as lump-sum or as increments to the base pay. The design of merit programs allows the manager to pay higher amounts (also more often) to the best performers. In addition, unsatisfactory employees can obtain no pay increase. Variation to the merit pay could be merit awards or lump - sum payments.
Merit awards in spite of merit pay do not become a part of the base pay. This gives managers more flexibility and reflects performance more accurately.
Lump – Sum Increase Program (LSIP) is a payment option offering you the flexibility to tailor part of your total compensation to your specific needs. Under this program you can elect to receive all or part of any salary increase – whether merit, promotional, or a special adjustment – in the form of the lump – sum payment.
They present the core of pay – for – performance system. In other words, the more you produce, the more you get paid the next month. This system directly links the performance to the compensation.
In this plan the employee is directly paid for the quality and/or quantity of goods produced. According to Milkovich and Boudreau it takes several forms:
Piecework – an employee is guaranteed an hourly rate (collective bargained sum) for producing the minimum hourly output. For production over this standard, the employer pays so much per piece produced. A variation is differential piece rate, when employer pays a smaller piece rate up to standard and higher piece rate above the standard.
Commissions – are commonly used in sales jobs. It is typically a percentage of the price of the item. A variation is to pay the salesperson a small salary and commission when standard sale is exceeded.
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Should pay be driven by performance? When and why?
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Zdroje: Bajzíková, Ľ. – Luptáková, S. – Rudy, J. – Vargic, B. – Weidlich, R.: Manažment ľudských zdrojov, 1st edition. Univerzita Komenského, Bratislava, 2004, Milkovich, G. T. – Boudreau, J. W.: Human Resource Management, 6th edition. Irwin, 1991, Milkovich, G. T. – Newman, J.M.: Compensation, 2nd edition. Business Publications, Inc., Plano, 1987, Lawler, E. E.: Strategic Pay. Jossey–Bass, San Francisco, 1990