Pros and Cons of Pay-for-Performance

The making of best and constructive decisions in regard to the employee management, loyalty and satisfaction has been a challenge to many Human Resource Managers. In the recent past, best policies in regard to people management have certainly started to play a critical role in the growth and development of many business firms and are increasingly becoming popular. However, the management of human resource has faced a number of obstacles especially when viewed from the perspective that there is need to develop a continuous motivation initiatives.   According to Organization for Economic Co-Operation and Development (2005), "the question of how to reward civil servants has remained a thorny one, in a changing world where public service posts no longer necessarily offer a job for life and where the public employer is increasingly in competition with the private sector for the top performers."

Performance-related pay (PRP) or pay-for-performance has been advanced as an effective alternative for automatic pay increases for best performers in organizations. "PRP refers to a variable part of pay, awarded to an individual or a team or group basis depending on performance" (Milkovich, Wigdor and National Research Council (U.S.). (1991).  The objectives behind the introduction of pay-for-performance policies revolve around the desire to motivate, compete for the attraction, recruitment and retention of the best talent, contain costs of salary and monitor the level of performance of employees. 

The objective of motivation encompasses the need to improve the performance of the best performers while at the same time encourage and get unmotivated individuals to improve productivity. Whereas the traditional form of reward management as primarily based on promotion, pay-for-performance recognizes and rewards based on the level of productivity. It has therefore been advanced that pay-for-performance reinforces makes an organization competitive in the attraction and retention of best performers and skilled personnel.

The positive impact of cost containment that forms of the organizational objective of pay-for-performance initiatives has been advanced as partially beneficial to the organization and the employees. However, there is agreement on the fact that rising costs related to employee salary has been a burden to most organizations. The realization on the need to measure reward with the performance levels has been pointed as an effective strategy towards achieving the organizational financial obligations and maximizing on costs allocations. In addition to the above, motivation constitutes a core driver to employee satisfaction and increased productivity.

Despite the realization of a bundle of benefits on pay-for-performance initiatives, some of its programs fail to meet the goals and obligations. This is especially poignant when the initiatives conflict with the culture and change process is not given a keen cognizance.  One pivotal disadvantage of pay-for-performance initiatives is that it ignores a number of factors that define overall performance. According to Hopkins and Mawhinney (1992), "the performance of a complex job as a whole is often reduced to a simple, often single measure of performance such as profit, without considering other factors that make up overall performance." It also has the capacity to generate to potential rifts and conflicts among employees. The core objectives of its initiatives may therefore not be achieved since employees are inclined towards demonstrating high levels of performance based on their performance appraisals.

The ineffectiveness of these initiatives arise from the failure to take consideration on the overall best management of people.  It is seen that by shifting the passive management approaches and adopting a more proactive stance, potentially sound outcomes on pay-for-performance initiatives can be generated.  The best way forward for organization struggling with the effective institution of pay-for-performance initiatives is to entrench these initiatives within their core HR practices, effectively manage change and underline organizational culture.