FACULTY OF BUSINESS MANAGEMENT

BACHELOR OF BUSINESS ADMINISTRATION (HONS.) HUMAN RESOURCE

MANAGEMENT (BA243)

COMPENSATION AND BENEFITS (HRM648)

INDIVIDUAL ASSIGNMENT: CURRENT ISSUE IN COMPENSATION AND BENEFITS

(PAY-FOR-PERFORMANCE : ISSUES, CLAIM, EVIDENCE AND THE ROLE OF

SORTING EFFECTS)

PREPARED BY:
NAME NO. MATRICS CLASS
SHARIFAH NADIAH MUNIRAH BINTI WAN 2021190057 BA243 4B
SAIFUL BAHARI

PREPARED FOR:
NOOR AZURA BINTI DAHALAN

SUBMITTED ON:
1st DECEMBER 2022

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 FACULTY OF BUSINESS AND MANAGEMENT
ASSIGNMENT/ PROJECT DECLARATION FORM

Student’s Name : SHARIFAH NADIAH MUNIRAH BINTI WAN SAIFUL BAHARI

: 2021190057 001219130286
Student’s ID Student’s I/C No. :

Program Code : BA243 Part : 4 Course Code : HRM648

Course : Compensation And Benefits

Name
Assignment/ Due Submission
Project No. : 1 Date : 28/11/2022 Date : 28/11/2022

Assignment/ : Individual Assignment: Current Issue In Compensation And Benefits

Project Title

Lecturer’s Name : NOOR AZURA BINTI DAHALAN

I hereby declare that the work in this assignment/ project was carried out in accordance with
the regulations of Universiti Teknologi MARA. It is original and is the results of my own work,
unless otherwise indicated or acknowledged as referenced work. This assignment/ project has
not been submitted to any other academic institution or non-academic institution for any degree
or qualification.

I acknowledge that I have been supplied with the Academic Rules and Regulations for
Universiti Teknologi MARA’s Diploma/ Bachelor Degree/ Master’s Degree students,
regulating the conduct of my study and exams.

I hereby declare that this assignment/ project is written by me and:

i.is a result of my own work;
ii. has not been used for another assessment at another department/ university/
university college in Malaysia or another country;
iii. does not refer to/quote works of others or own previous writings without stating it
both in the text and in the reference list;
iv. mentions explicitly all sources of information in the reference list; and
v. will go through similarity check (Turnitin).

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I am aware that disciplinary action (which may include the deduction of marks in the
assignment/ project) will be taken against me if I am found to be an offender.

26/11/2022 SHARIFAHNADIAH

Date Student’s Signature

/ SAT FBM Sep 2020

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TABLE OF CONTENT
1.0 INTRODUCTION ............................................................................................................... 5

2.0 PAY-FOR-PERFORMANCE: ISSUES, CLAIM, EVIDENCE AND THE ROLE OF

SORTING EFFECTS................................................................................................................. 6

2.1 Increase in mental health problem due to pay-for-performance ...................................... 6

2.2 Incorporation within team members in the Organization ................................................ 7

2.3 The pay-for-performance does not motivate employees in working. .............................. 9

3.0 RECOMMENDATION ..................................................................................................... 10

4.0 CONCLUSION .................................................................................................................. 12

5.0 REFERENCES .................................................................................................................. 13

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1.0 INTRODUCTION
In the current business environment, performance-based salaries have become more
prevalent among employers and are widely used by companies in order to motivate their
employees and attract the best talent in order to gain the company's success. (Business news
daily) and in this pay-for-performance plan, the most commonly implemented program is a
merit pay increase which solely focuses on the individual levels of performance measurement
while a bonus plan is used for an individual or a group, particularly those typical for managerial
and professional employees as an example. This pay-for-performance is implemented
depending on the industry and company the employee is working in (Pay-for-performance
compensation: What is it and how it works, 2021), In the health industry due to the recent focus
changes within health management, pay-for-performance has been surpassed by shared savings
(Suzanne F. Delbanco, 2018).
However, according to our recent Pay Practices and Compensation Strategy survey
stated that 75% of organizations currently leverage pay-for-performance compensation as part
of their overall compensation (Harrison, 2019). This clearly shows that many businesses
believe that performance pay enables employees to become more productive when their
compensation is tied directly to their success. This is because, within performance-based pay
compensation, the company typically provides guidelines about the attitudes or performance
evaluation results that will lead to increased pay which are based on the expectation of the
employers (Pros and Cons of the Pay-For-Performance Model, 2020). For instance, an
employee must achieve a 100-product manufacture to be able to receive an additional payment.
By rewarding your employees financially for their contributions to the organization and
acknowledging their efforts. It will improve organizational performance and enable the
organization to achieve its goals. Implementing a pay-for-performance system offer an
organization a number of benefits that increase the employee’s overall productivity. Although
the pay-for-performance system offers a significant amount of benefits to employers and
employees, it will eventually affect employees' overall productivity, performance, and
behaviour toward the company, which can cause company goals to be unachievable because
providing a challenging environment means everyone is energized and ready to work (Mosca,
2021). On the other hand, providing an unfair challenge will cause an employee to end up with
mental health problems. Researchers found that workers who receive performance-based pay,
such as those whose salary is based on individual or companywide performance, work harder,
but end up with higher stress levels (Peek, 2022).

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 In addition to the statement above, there are other issues that if not addressed will affect
the organization's social environment and teamwork between employees due to multiple
variables within pay-for-performance (Daniels, 2020). There have been instances in which
employees have refused to cooperate with each other by withholding certain helpful
information from them if they believe it may be helpful to other employees in the future
(Daniels, 2020). Also, employees tend to value quantity over quality when it comes to
achieving the goals set by the company rather than focusing on the quality of their performance.

2.0 PAY-FOR-PERFORMANCE: ISSUES, CLAIM, EVIDENCE AND THE ROLE OF

SORTING EFFECTS

2.1 Increase in mental health problem due to pay-for-performance

The issue of pay-for-performance can be said to become quite controversial since it will
an issue of gender and mental health. Within society in Malaysia especially, the stigma that is
wrap-around mental health problems has become the major challenge for having access to
treatment (Gu Zhenjing, 2022). It can be shown in Mental Disorder in Malaysia data, published
in 2021 Among the leading causes of disability and health loss in Malaysia are mental illnesses,
which account for 8.6% of all disability-adjusted life years (Gu Zhenjing, 2022). This clearly
indicates the increase in mental health disorders among Malaysian citizens and mental illness
can vary from acute depression to anxiety, and other mental illnesses. However, depression
and anxiety are usually steamed from being overly stressed on a long-term basis when the stress
does not decrease or lessen. Adding to the situation where within the workforce when a
situation of an employee informs their employer on this matter, they believe the mental disorder
is due to their incompetence and further worsens when the employee is more prone to seeking
alternative care like shamans rather than seeking the needed healthcare (Gu Zhenjing, 2022).
This situation is further proven when a statement made in the International Journal of
Law, government, and communication, In Malaysia, health issues, including mental health
issues, are prevalent due to increased workloads, unpleasant tasks, and work demands (Ruzita
Azmi, 2021). There is strong evidence that pay-for-performance is indeed associated with
mental health problems as seen by a study conducted on 318,717 full-time employees, based
on an article that discusses employee mental health. In addition, the increase in the use of pay-
for-performance has motivated employees to change jobs. (MIichael S. Dahl, 2020). The
majority of employee that has suffered from mental illness was left untreated due to the stigma
that is wrapped around mental health.
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 The reasons behind this mental health also come from an unstable home environment
but the workforce environment also attribute to it, for example, the increase in stress due to
changes in their wages. Having to maintain their salary is a constant struggle because wages
decrease and increase solely based on their performance will be the source of their concern,
especially those who, prior to the implementation of the pay-for-performance system, was
earning a high income. However, after the implementation of pay-for-performance, their
incomes decreased in comparison to what they had before. This situation contradicts below-
median wages for employees because it increases their wages, however, the cause of the mental
health within these workers is due to social comparison, envy, and the belief that pay-for-
performance is unfair.
Furthermore, pay-for-performance for example commissions type for pay-for-
performance is focused on the ability of an employee to sell the company product and will
either obtain a 10% or 5% commission depending on the amount of product or price of the
product being sold. The employer will set the percentage of commission themselves depending
on the price of the product. Consequently, when an employee is unable to sell due to their
inability to gain a customer due to their mental health, and they are unable to earn any
commission, this will eventually lead to an employee changing jobs when the base pay is low
and causing a mental health problem. Thus, it is likely that a low-performing employee with a
mental health problem will eventually lead to wage loss because of poor performance.
In certain circumstances, the sorting effect of understanding employee reactions
towards their motivation can help increase their performance. For instance, it can be said that
in some cases where a company with a stronger pay-for-performance system and an employee
with that had motivation-related traits that have a high work focus of control in the company
will thrive more in the company—but not all employees may thrive within this situation.

2.2 Incorporation within team members in the Organization

As a result of the pay-for-performance system, the workplace environment and the
relationship between employees are likely to be negatively impacted, because an unfair
evaluation can occur as a result of the bias of management or the manager itself, which can
influence the process of compensation (Adibah Abdul Kadir, 2019). This will surely
demotivate an employee not only to perform in the organization but also create a toxic
environment among employee which eventually cause the quality and production of their
company’s. An employer must properly comprehend that an employee’s determination to
create a better performance is determined based on not only their ability but their desire and
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what working environment has been created within the organization for instance if the
environment toxic and given unfairness towards their employee then surely their performance
will decline. This can be shown in the survey made of 82 respondents in Indonesia, who
conclude that employee performance is closely related to their motivation (Tangem, 2018).
A better work environment will lead to better efficiency in employee performance and
their quality work can be further proven according to Gu Zhenjing’s statement, factors such as
the willingness of an employee to remain motivated, creative, engaged with colleagues, and
loyal to the job are all influenced by an employer's workplace environment (Gu Zhenjing,
2022). Although monetary benefits do help in motivating an employee to work hard, however,
it is not enough to guarantee that an employee is able to provide higher performance. For
example, when an employee received a team-incentive bonus, however, during the project the
environment is unwelcome although they receive the bonus.
Over time the loyalty of the employee will slowly diminish along with their motivation
to work within the company itself. Therefore, monetary benefits are not the only thing that
pushes the employee to work hard and create the highest level of performance but also a great
environment will also aid an employee’s performance. Employers also must consider the
physical environment around the employee is also something that needs to be considered. A
conducive environment for an employee can be categorized based on the office layout,
adequate equipment provided and even facilities provided to an employee will also greatly
affect their performance level (Tangem, 2018).
On the other hand, employers believed that improving the employees’ physical
environment is only going to waste money rather than attribute to the employee’s performance.
This perception within employers needs to be changed since focusing only on the monetary
benefits will not improve or increase employee performance but slowly lessen their
performance. In a study conducted by researchers, researchers found that if a workplace is
conducive to the well-being of employees, then that can result in the employees committing
themselves to their work more (Adeoye K. Funminiyi, 2018). This clearly shows that monetary
benefits are not the only things that contribute to an employee’s performance and motivation.
Thus, when an employer blindly focuses on the usage of pay-for-performance and does not put
into perspective the employee environment then over time it will cause a lack of productivity
within the company.
When a company has a strong pay-for-performance strategy and highly motivated
employees, it is believed that the company can withstand the work given by its employer.
However, from the perspective of team, although the company itself has low pay dispersion
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and each member of the group does not suffer from low motivation due to low pay dispersion,
it still brings about a negative sorting effect towards the company since low pay dispersion may
still contribute to lowering team performance by affecting who joins and stays in the team. The
reason behind this is that pay for performance is unable to work with a low pay dispersion.

2.3 The pay-for-performance does not motivate employees in working.

Quality is an act of ensuring that each activity and task is done within the company
either the product or service being provided is consistent. While on the aspect of productivity
it is the amount of output and input being produced within the company. Quality is closely
interrelated with productivity since quality affects productivity, and both will affect the
company’s overall profitability (Productivity and Quality, n.d.). So, when both quality and
productivity affect each other and ultimately affect the company’s profitability if the
performance of the employee solely focuses on the productivity of the product while quality is
not focused on as well it will surely affect the profitability of the company (Pillutla, 2021). A
product or service that lacks quality although having a high amount of output and input does
not mean the profitability of the company will rise. The issue with pay-for-performance is that
employees are solely focused on their productivity and the quality of their work has become a
second thought as long as they do it.
This thought process of an employee will surely affect the company’s profit. Another
thing to keep in mind when considering pay-for-performance is that when an employer ties
employees’ performance to financial incentives, it gives the signal to their employees that they
will receive more for their extra work. Employers often think that they are motivating their
employees, but the fact is that employees believe they must work extra hard in order to receive
higher pay. Furthermore, employers often give their employees the wrong incentives, resulting
in less productive workers. The following points will help employers better understand how to
motivate their employees. First, employers should give their employees the opportunity to work
on projects that interest them.
If an employee is interested in a project, he or she will be more likely to work hard and
produce high-quality. They also think that their managers are not always forthcoming about
what is happening within the company. Glassdoor's research shows that employees place a
higher value on appreciation, trust, and career growth opportunities than on monetary
compensation. In order to attract and retain the best talent, employers should focus on creating
an environment where employees feel appreciated, can trust their managers, and have
opportunities to grow their careers.
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3.0 RECOMMENDATION
As we know Pay for performance has caused an increase in mental health problems
among employees. This statement is proven by Existing theory and evidence suggesting that
when an employer adopts pay-for-performance, the employee may be affected in several ways.
These include increased anxiety and depression. Furthermore, uncertainty breeds anxiety, and
during this time when uncertainty is the main focus of people will increase employee anxiety.
So what can managers or employers do to lessen the mental health problem within their
employees due to pay for performance implemented by the company? A few strategies
employers can use to reduce this effect are providing clear guidance on expectations for
performance and emphasizing the importance of work-life balance between employees.
Additionally, employers should ensure that employees are aware of the resources available to
them when they are struggling with mental health issues. At the same time, meeting the needs
of employees on what they wanted from their pay for performance as well as how that could
increase employee productivity without causing undue pressure on them.
The aspect of incorporation between team members within an organization which is
caused by jealousy, unfair treatment between team members, and a toxic environment is the
reason behind pay-for-performance in the company’s dysfunctional. In order to counterpart this
situation, the organization should focus on building open and honest communication with their
employees, thus creating a strong team environment and a higher level of trust within each
team. The pay-for-performance system should also be assessed by the organization to ensure
that its employees are rewarded appropriately for their efforts. Furthermore, the organization
should prioritize its employees’ mental health by offering them stress-management workshops
and other resources that can help them manage their workload and find a balance between work
and life. Additionally, the company can create a mentorship program that can help new
employees adjust to the company culture and feel like they belong to a team. By taking these
steps, the organization will create a more positive work environment and help its employees
feel more valued.
During this research, there is evidence that shows pay-for-performance affects
employee motivation that slowly demotivates them to work in the company, and the reasons
behind it as stated in 2.3 discussions about demotivation in an employee causes by pay-for-
performance. In order to help improve employee motivation and increase their desire to work
in the company as well as their morale and productivity are by change the way the pay-for-
performance system works. The key is to ensure that the system remains fair and transparent,
and that rewards are given out based on performance, rather than any other kind of criteria. In
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addition to this, feedback should be given to employees in order to help them understand how
they can improve their performance in order to get better rewards and recognition. This will
ensure that they remain motivated to strive for higher performance goals and be willing to put
in the effort needed to achieve them. For example, companies can review their pay-for-
performance system and measure the impact it is having on employees' motivation and morale.
Additionally, companies can offer more bonuses to reward employees for their good
performance or offer more incentives for employees to stay motivated and productive. These
changes can help to create a better environment for employees to work in as well as improve
their overall motivation and morale.

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4.0 CONCLUSION
Note that a pay-for-performance can bring disadvantages and advantages to a
company’s overall performance. The need for an employer to implement their pay-for-
performance system needs to be carefully considered before any new system is put into place.
As employers need to provide rewards to employees in order to reinforce desired behaviours,
the pay-for-performance system is a type of reward system that is often used in business. The
pay-for-performance system is a way for employers to motivate employees by linking their
compensation to their individual and/or team performance. The pay-for-performance system is
also often used as a way to attract and retain employees, for example, bonuses, gifts, and merit
pay. The disadvantages would be that, first of all, there is the potential for a decrease in
productivity if some employees feel that their efforts are not being appreciated. Secondly, pay-
for-performance can lead to a feeling of competition and animosity among employees, rather
than cooperation.
In addition, the increase in animosity between employees will surely deteriorate the
company's working environment. This can be seen when pay-for-performance was wrongly
implemented and caused envy and feelings of unfairness in compensation. These problems
ultimately lead to mental health problems among employees. Consequently, the company may
have to face a high staff turnover rate, which will result in an increase in recruitment and
training costs. The company may also see a decline in morale, as employees feel undervalued
and unappreciated which is caused by inadequate pay-for-performance systems and when
unfairness happens during the performance appraisal of the employee. When implementing a
pay-for-performance program it is important to carefully consider how the program will be
designed and prepared their employees for the performances standard that need for they to
achieve. By doing so, these companies can avoid the pitfalls of the program and ensure that
their pay-for-performance system will be successful.

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5.0 REFERENCES
Adeoye K. Funminiyi. (2018, July 21). Impact of Workplace Environmental Factors on
Employee Commitment: Evidence from North East Nigeria. Economics and
Management, 575-585. Retrieved from
https://www.ijsrm.in/index.php/ijsrm/article/view/1683
Adibah Abdul Kadir, A. H. (2019). The Effect of Compensation and Benefits Towards
Employee Performance. Proceedings of the 1st Asian Conference on Humanities,
Industry, and Technology for Society,. Surabaya: ACHITS.
Daniels, R. ( 2020, August 12). What is the Pay for Performance System Challenges and Their
Solution? Retrieved from Business Study Notes:
https://www.businessstudynotes.com/hrm/human-resource-management/pay-for-
performance-system-challenges-and-their-solution/
Gu Zhenjing, S. C. (2022, May 13). Impact of Employees' Workplace Environment on
Employees' Performance: A Multi-Mediation Model. Retrieved from PubMed Central:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9136218/
Harrison, C. (2019, April 29). What is Pay-for-Performance Compensation? Retrieved from
Salary.com: https://www.salary.com/blog/what-is-pay-for-performance-
compensation/
MIichael S. Dahl, L. P. (2020). PAY-FOR-PERFORMANCE AND EMPLOYEE MENTAL
HEALTH: LARGE SAMPLE EVIDENCE USING EMPLOYEE PRESCRIPTION
DRUG USAGE. Academy of Management Discoveries, 12-38.
Mosca, L. (2021, June 7). 6 Reasons Why Pay-For-Performance Is A Game Changer.
Retrieved from FORBES: https://www.forbes.com/sites/louismosca/2021/06/07/6-
reasons-why-pay-for-performance-is-a-game-changer/?sh=7f295d7871b7
Pay for Performance. (n.d.). Retrieved from HRMHandbook:
https://hrmhandbook.com/hrp/pay-for-performance/
Pay-for-performance compensation: What is it and how it works. (2021, November 19).
Retrieved from Payscale: https://www.payscale.com/compensation-trends/pay-for-
performance-compensation-what-is-it-and-how-it-works/
Peek, S. (2022, November 3). Performance-Based Pay Won’t Motivate Employees as Much as
You Think. Retrieved from Business News Daily:
https://www.businessnewsdaily.com/9712-performance-based-pay.html

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Pillutla, N. K. (2021, January 21). Pay for Performance: When Does It Fail? Retrieved from
Management and Business Review: https://mbrjournal.com/2021/01/21/pay-for-
performance-when-does-it-fail/
Productivity and Quality. (n.d.). Retrieved from Cliffnote: https://www.cliffsnotes.com/study-
guides/principles-of-management/productivity-and-total-quality-
management/productivity-and-quality
Pros and Cons of the Pay-For-Performance Model. (2020, November 24). Retrieved from
Indeed: https://www.indeed.com/career-advice/pay-salary/pros-and-cons-of-pay-for-
performance
Ruzita Azmi, S. N. (2021). MENTAL HEALTH ISSUES AT WORKPLACE: AN
OVERVIEW OF LAW AND POLICY IN MALAYSIA AND UNITED KINGDOM
(UK) . INTERNATIONAL JOURNAL OF LAW, GOVERNMENT AND
COMMUNICATION (IJLGC), 95-108.
Stewart Kaupa, S. O. (2020). Challenges in the Implementation of Performance Management
System in Namibian Public Sector. International Journal of Innovation and Economic
Development, 25-34.
Suzanne F. Delbanco, M. L. (2018, October 24). The Evidence On Pay-For-Performance: Not
Strong Enough On Its Own? Retrieved from Health Affairs:
https://www.healthaffairs.org/do/10.1377/forefront.20181018.40069/full/
Tangem, T. S. (2018). IMPACT OF WORK ENVIRONMENT, COMPENSATION AND
MOTIVATION ON THE. South East Asia Journal of Contemporary Business,
Economics and Law, 157-166.

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SIMILARITY RESULT

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