Pay for performance- Motivating or

Demotivating? Fair or Unfair?

Report by

Prachi Gupta

Shiv Jumani

Gaurav

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Introduction 3

Types of Pay for Performance 4

There are sub-types in the team-based pay they are as follows;- 5

Pay for performance: Advantages and Disadvantages 6

Piece rate system 8

Time rate system 8

Conclusion 10

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Introduction
Pay for Quality is not just a pure definition of compensation and benefits. The pay for success is
an appropriate combination of HR systems, which encourages the organization's optimal
performance and rewards the most productive workers significantly differently, incorporates
special incentive arrangements for specific categories of staff and offers career opportunities for
the best talents in the company.

Pay for performance is a fair deal as performance differs from every other individual. It is not
just resulting but the quality and efforts behind the work. No longer can an employee relax on his
chair with the conviction of getting good pay without delivering results.

Indian companies have been linking performances to reward as a standard, wherein packages are
changeable or variable that is directly linked to the employees as well as the company’s
performance. Nowadays, such a payment method is also used for senior management levels like
CFOs and CEOs.

As mentioned above, pay for performance is a fair deal where it has the power to motivate the
employees to perform their best in the organization. The reward motivation works really well not
only in the sales but also in the information technology and Human Resources. Companies that
use pay for performance are Ikea & Pepsico.

For example, if we talk about Ikea. The motivation of employees at IKEA is considered
important whenever an organization constructs relationships for effective communication with its
employees. IKEA once created a special bonus for its employees by proposing its employees the
full day's sales revenue. The revenues were increased that day each employee received $2400
each. This reward was seen as an inevitable incentive and all IKEA workers wished to be praised
for doing an excellent job in this scenario.

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Types of Pay for Performance
1. Shop-Floor Incentive:- Shop-floor incentive plans are based on the Pay-by-performance
(PBR) principle. F. W. Taylor(1911) explained that the objective of the shop-floor incentive
scheme was just to motivate labor input within tightly defined activities, thus encouraging
employees to work harder and also to increase their production. A perception that employees will
further work harder if they have more money often controls thoughts regarding compensation
schemes in the shop floor, though the development of high-tech innovation in the form of
computer-integrated manufacturing has meant and what used to be skilled crafts workers have
now become technicians.

2. Salesforce incentive:- Just about every company that has a consumer-facing (or indeed a
business-to-business) element will regularly seek to expand its sales figures. Targets are
established for salespeople but often there is little incentive to go beyond these targets once a
paycheck is received by an employee. The important element for running a successful consumer-
facing business is the development of effective incentive schemes to encourage the salespeople
to perform to the best of their potential. The key benefits here are two-fold; first, your turnover
vastly increases as your sales spike. Second, a good sales incentive scheme that goes beyond the
normal bonus structure becomes a crucial tool for keeping the extremely skilled salespeople in
demand.

3. Executive Pay:- Executive pay is a financial reward enjoyed by a firm's director as a variation
of company stock salary bonuses, equity and/or call option, etc. Executive salaries have risen
significantly above the rising levels of an average worker's wage over the past three decades.
Executive pay is a critical part of corporate governance, and it is often decided by the board
members of a company.

4. Team-based pay:- This is one of the incentive programs that have a ton of attributes to
become a failure document in several companies. First, teams come in several variants, like full-
time teams (a working group organized as a team), part-time teams (that slice across functional
departments) and temporary full-time teams. With all this variety. A reliable form of the
compensation plan is challenging to have. A second problem is called the "level problem" with
rewarding teams. The third problem is the sophistication of a strategy that differs from one
organization to another.

There are sub-types in the team-based pay they are

as follows;-
a). Profit-sharing plan:- If used as a particular word, profit sharing leads to various incentive
programs implemented by companies that provide direct or indirect payments to employees that,
as an addition to the regular salaries and bonuses to employees, depend on the profitability of the

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organization. The profit-sharing agreements are based on established principles for economic
sharing, which specify the profits shared between the corporation as a principal and the
employee as an agent. Suppose, for instance, the profits are x and that could be a random
variable. The principal and agent may agree on a sharing rule s(x) before both know the profits.
Here - the agent receives s(x), and the principal accepts the remaining x-s(x) gain.

b). Gain-sharing plan:- Gain-sharing is best defined as a management system in which a

company seeks higher levels of performance by engaging and involving its people. With
performance continuing to improve, employees share financially in the gain. With performance
continuing to improve, employees share in the gain financially. It is a team approach; this
typically includes each of the staff at a location or project. Measures for gain-sharing are
typically based on operational measures such as productivity, expenditure, quality, customer
service. Gain-sharing refers to all types of companies that involve employee engagement and are
found in manufacturing, health care, distribution, and support, as well as in the public sector and
non-profit organizations.

c). Employee Stock Ownership Plan (ESOP):- Many organizations claim that through ESOP,
employees can be linked to company outcomes. Companies such as PepsiCo, Lincoln Electric,
Coca-Cola and others are striving to improve employee engagement in the organization which
can also boost performance. As an opportunity, ESOPs would not make any sense, since the
benefits are generally long-term.

Every coin has 2 sides. The same way we feel that pay for performance is motivating but it has
some advantages as well as disadvantages.

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Pay for performance: Advantages and
Disadvantages
Advantages
1. Pay for performance is paid on the basis of, for instance, the volume of sales, so a
salaried salesperson will earn less than who is paid on the basis of work of sales. It leads to
an unlimited compensation structure. The amount of endeavor to put forth, the result could be
a six-figure income.

2. Since employees are recompense based on performance, employees tend to work harder
and sometimes longer in order to reach their goals. Thus, this opportunity leads to increased
motivation.

3. The pay for performance or performance-related pay even increases productivity and in-
return it helps companies to achieve targets. This can even reduce employer’s recurring cost
as eight employees are working as ten.

4. Flexible working hours for employees as they will be evaluated according to their
performance, so long working hours or leave won’t be a problem for the employee.

5. Creates as depending on performance if the employee feels that they are being rewarded
for refining the wealth of the company, this feels more connected to the soul of the company.

6. Employee loyalty is essential for the company’s growth. Getting paid or being rewarded
for the targets achieved definitely counts but a personal positive word of mouth goes a very
long way.

7. Paying your employees fairly for their performance makes the employee feel satisfied
with his work which also gives the company the opportunity to retain their employees in the
future.

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Disadvantages
1. There is no productivity in teamwork because an individual employee focuses on his own
productivity so much that he/she doesn’t take any interest in the teamwork. They feel that
they are wasting their valuable time. In all this its better they should focus on themselves.
The conflict between 2 employees arises because of a lack of cooperation.

2. The low incentive is a demotivating factor for the employee working in the organization.
It doesn't help him working for the desired goals. This might create a grudge in the
employee’s mind towards the employer for not offering a meaningful program that will
affect his standard of living.

3. The performance measurement of the work of employees can be quantified and

measured. But, for the administrative department or accounts department, who perform
various functions, but their work isn’t defined by achieving the targeted goals. For this
kind of department of employees, pay for performance plan could prove to thwart, as
their valuation is subjective. A dispute with the supervisor, can be in some cases, result in
lower pay or appreciation.

4. When performance standards are completely impartial, like awarding a bonus to a sales
representative to obtain a defined level of sales, it could be difficult to ascertain whether
the performance is worth paying the reward bonus. It puts a lot of pressure on managers
to accurately determine every other employee's performance during performance
appraisals. Managers tend to offer excessive appraisal to ensure that employees meet
their bonuses.

At the end of the week or month when companies need to pay, fair doesn’t necessarily mean
“equal”. Research shows that companies that use performance-focused payment practice for
better returns than those who hold on to equal pay at every turn. The performance plans help
assist or increment individuals or groups or whole performance. It helps organizations and
human resources personnel to motivate, perform the best for the company and see it to the
extent that they are retained in the company.

There are different payment methods while in the manufacturing plants labors are
given wage rates in but two signs that are:-

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 1.Piece rate system
2.Time rate system
They are both very simple, yet a good payment system for the employees or blue-collar people.

So how does this two rate system work?

The piece-rate system of remittance is based on the output and not on working hours. Yes, some
companies indulge in different variations of wage or salary, such as fixed plus variable plus over
target achieved bonus. Payment is linked to work, which is higher output- higher wages. The
piece-rate system also raises the production as workers are motivated in their pay. This also takes
better advantage of equipment and machines.

In such pay of system quality of a particular product [handmade items] gets spoiled as
employees may hurry in making or producing more items. Not suitable for freshers, as they are
less experienced, their hands-on work is less efficient. It may worsen the health of workers as
they may probably overwork, which will affect their health, mentally and even physically.
Different piece rates should be regulated for separate jobs. Conditions under which the needs to
be carried out, has risk, their efforts, etc. Thus, this system should be changed or evaluated from
time to time.

The time wage system is one oldest method, it determines the wages of workers. They are fixed
for an hour, a day, a week, a month. The flat rate is usually fixed, taking into account the rate
prevailing in related trades in the same locality for the same grade and skill. The earnings of
employees depend on the time allocated to them.

This method of payment of wages is most suitable for highly skilled and unskilled workers,
including apprentices. For example, two workers Ram and Shyam attend work for 28 and 16
days respectively. So, according to the time the payment would be given that would be 1960 and
1120 for Shyam. Strict monitoring is required in order to get the work done by the staff. In the
time rate system, better quality products are produced. Employees will slowly and steadily polish
the work nicely. This type of system is beneficial for beginners, as they work slow and steady
and particularly entering employment.

There can be a chance of low production as the time rate system allows one to receive payment
according to time and not performance.

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Conclusion
In such a cut-throat competition and sudden waves of political doubt, companies must secure an
unusual talent pond, while also safeguarding themselves from unseen future problems.
Therefore, a balanced approach towards pay for performance needs to be practiced.

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Reference
1. https://businessays.net/successful-examples-of-companies-that-use-pay-for-
performance/
2. https://hbr.org/2016/03/when-unequal-pay-is-actually-fair
3. https://www.easymetrics.com/benefits-of-pay-for-performance/
4. https://bizfluent.com/list-5921014-advantages-pay-performance-plans.html
5. https://blog.clearcompany.com/why-the-pay-for-performance-compensation-strategy-
fails-may-7-7am
6. https://www.salary.com/blog/what-is-pay-for-performance-compensation/
7. https://www.perkbox.com/uk/resources/blog/a-controversial-guide-to-performance-
related-pay

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