Performance-related pay
Encyclopedia
Performance-related pay is money
paid to someone relating to how well one works. Car salesmen, production line workers, for example, may be paid in this way, or through commission
.
Business theorist Frederick Winslow Taylor
was a great supporter of this method of payment, which is often referred to as PRP. He believed that money was the main incentive
for increased productivity and introducing the widely used concept of 'piece work
'.
This standards-based system is used for evaluating employees and setting salaries by many employers. Standards-based methods have been in de facto
use for centuries among commission-based sales staff: they are paid more for selling more, and low performers do not earn enough to make keeping the job worthwhile even if they manage to keep the job.
In addition to motivating the rewarded behavior, standards-based methods can provide a level of standardization in employee evaluations, which can reduce fears of favoritism and make the employer's expectations clear. For example, an employer might set a minimum standard of 12,000 keystrokes per hour in a simple data-entry job, and reassign or replace employees who cannot perform at that level.
Employees would be secure in knowing that their performance was evaluated objectively according to the standard of their work instead of the whims of a supervisor, or against an ever-climbing average of their group.
As a simple measure, this gives no regard to the quality of help given, for instance whether the issue was resolved, or whether the customer emerged satisfied. Performance related pay may also cause a hostile work attitude as in times of low custom, multiple employees may compete for the attentions of a single customer. Where a customer has been helped by more than one employee, further resentment may be caused if the commission is taken by whoever happens to make the final sale. Macroscopic factors such as an economic downturn may also make employees appear to be performing to a lower standard independent of actual performance.
Performance-based systems have met some opposition as they are being adopted by corporations and governments. In some cases, opposition is motivated by specific ill-conceived standards, such as one which makes employees work at unsafe speeds, or a system which does not take all factors properly into account.
In other cases, opposition is motivated by a dislike of the consequences. For example, a company may have had a compensation system which paid employees strictly according to their seniority. They may change to a system that pays sales staff according to how much they sell. Low-performing senior employees would object to having their income cut to match their performance level, while a high-performing new employee might prefer the new arrangement.
undertaken at the Massachusetts Institute of Technology
with input from professors from the University of Chicago
and Carnegie Mellon University
repeatedly demonstrated that as long as the tasks being undertaken are purely mechanical performance related pay works as expected. However once rudimentary cognitive skills are required it actually leads to poorer performance.
These experiments have since been repeated by a range of economists, sociologists and psychologists with the same results. Experiments were also undertaken in Madurai
, India
where the financial amounts involved represented far more significant sums to participants and the results were again repeated. These findings have been specifically highlighted by Daniel H. Pink
in his work examining how motivation works.
(See Geert Hofstede
for the dimensions of cultures used.)
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
paid to someone relating to how well one works. Car salesmen, production line workers, for example, may be paid in this way, or through commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
.
Business theorist Frederick Winslow Taylor
Frederick Winslow Taylor
Frederick Winslow Taylor was an American mechanical engineer who sought to improve industrial efficiency. He is regarded as the father of scientific management and was one of the first management consultants...
was a great supporter of this method of payment, which is often referred to as PRP. He believed that money was the main incentive
Incentive
In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...
for increased productivity and introducing the widely used concept of 'piece work
Piece work
Piece work is any type of employment in which a worker is paid a fixed "piece rate" for each unit produced or action performed regardless of time...
'.
This standards-based system is used for evaluating employees and setting salaries by many employers. Standards-based methods have been in de facto
De facto
De facto is a Latin expression that means "concerning fact." In law, it often means "in practice but not necessarily ordained by law" or "in practice or actuality, but not officially established." It is commonly used in contrast to de jure when referring to matters of law, governance, or...
use for centuries among commission-based sales staff: they are paid more for selling more, and low performers do not earn enough to make keeping the job worthwhile even if they manage to keep the job.
In addition to motivating the rewarded behavior, standards-based methods can provide a level of standardization in employee evaluations, which can reduce fears of favoritism and make the employer's expectations clear. For example, an employer might set a minimum standard of 12,000 keystrokes per hour in a simple data-entry job, and reassign or replace employees who cannot perform at that level.
Employees would be secure in knowing that their performance was evaluated objectively according to the standard of their work instead of the whims of a supervisor, or against an ever-climbing average of their group.
Opposition
A fundamental criticism of performance-related pay is that the performance of a complex job as a whole is reduced to a simple, often single measure of performance. For instance a telephone callcentre helpline may judge the quality of an employee based upon the average length of a call with a customer.As a simple measure, this gives no regard to the quality of help given, for instance whether the issue was resolved, or whether the customer emerged satisfied. Performance related pay may also cause a hostile work attitude as in times of low custom, multiple employees may compete for the attentions of a single customer. Where a customer has been helped by more than one employee, further resentment may be caused if the commission is taken by whoever happens to make the final sale. Macroscopic factors such as an economic downturn may also make employees appear to be performing to a lower standard independent of actual performance.
Performance-based systems have met some opposition as they are being adopted by corporations and governments. In some cases, opposition is motivated by specific ill-conceived standards, such as one which makes employees work at unsafe speeds, or a system which does not take all factors properly into account.
In other cases, opposition is motivated by a dislike of the consequences. For example, a company may have had a compensation system which paid employees strictly according to their seniority. They may change to a system that pays sales staff according to how much they sell. Low-performing senior employees would object to having their income cut to match their performance level, while a high-performing new employee might prefer the new arrangement.
Research
Academic evidence has increasingly mounted indicating that performance related pay leads to the opposite of the desired outcomes when it is applied to any work involving cognitive rather than physical skill. Research funded by the Federal Reserve BankFederal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
undertaken at the Massachusetts Institute of Technology
Massachusetts Institute of Technology
The Massachusetts Institute of Technology is a private research university located in Cambridge, Massachusetts. MIT has five schools and one college, containing a total of 32 academic departments, with a strong emphasis on scientific and technological education and research.Founded in 1861 in...
with input from professors from the University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
and Carnegie Mellon University
Carnegie Mellon University
Carnegie Mellon University is a private research university in Pittsburgh, Pennsylvania, United States....
repeatedly demonstrated that as long as the tasks being undertaken are purely mechanical performance related pay works as expected. However once rudimentary cognitive skills are required it actually leads to poorer performance.
These experiments have since been repeated by a range of economists, sociologists and psychologists with the same results. Experiments were also undertaken in Madurai
Madurai
Madurai is the third largest city in the Indian state of Tamil Nadu and one of the oldest continuously inhabited cities in the world. It served as the capital city of the Pandyan Kingdom. It is the administrative headquarters of Madurai District and is famous for its temples built by Pandyan and...
, India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
where the financial amounts involved represented far more significant sums to participants and the results were again repeated. These findings have been specifically highlighted by Daniel H. Pink
Daniel H. Pink
Daniel H. Pink is an American author and journalist. From 1995 to 1997, he worked for Vice President Al Gore in the capacity of chief speechwriter, and before that as an aide to Secretary of Labor Robert Reich.- Personal history :...
in his work examining how motivation works.
Cultural aspects
An international study by Schuler and Rogovksy in 1998 pointed out that cultural differences affect the kind of reward systems that are in use. According to the study, there is a connection among- status-based reward systems (as opposed to achievement-based) and high uncertainty avoidance,
- individual performance based systems and individualism,
- systems incorporating extensive social benefits and femininity and
- employee ownership plans with individualism, low uncertainty avoidance and low power distance.
(See Geert Hofstede
Geert Hofstede
Geert Hofstede, born as Gerard Hendrik Hofstede is an influential Dutch social psychologist and anthropologist. He is a well-known pioneer in his research of cross-cultural groups and organizations. He has played a major role in developing a systematic framework for assessing and differentiating...
for the dimensions of cultures used.)