Saturday, February 18, 2017

Is Your Company Grappling with the Idea of Introducing Performance Based Pay?

When scientists seem to be on a constant quest to mechanize and automate every step of the human life, there are many organizations that try to put in place remuneration programs based on the performance of employees. But unfortunately, several companies have failed in their efforts. At the same time, we cannot be oblivious of the fact that an invisible factor seems to be working for some companies that have succeeded in implementing such a program. So, the question is why some companies could succeed in implementing this program and why other companies have not met with success.

Researches done by experts have revealed that the success of a performance basedpay system depends upon a number of factors, the prominent among them is the commitment of employees to the organization. Secondly, what the organization expects from the employees and what the employees expect from the management may also play key a role in implementing this program successfully. Though a number of other factors may also influence the success of a performance based pay program, let us now look at some of these factors.

1. Employee Commitment

Surprisingly, researches reveal that performance based pay programs work well in organizations wherein the commitment of the employees towards their companies is low. On the other hand, in companies where the commitment level of the employees is high, the program does not seem to work. It has been observed that in companies with employees with low commitment levels, workers view a performance based pay structure as an excellent opportunity for getting additional income by performing better than how they normally perform.

On the other hand, the scenario is different in organizations where the commitment level of the employees is high. Employees of these companies generally work very hard and they ensure to meet deadlines also. So, performance based pay or incentive programs may be unnecessary expenses in these companies. In fact, employees of these companies may even view the introduction of such programs as an insult to their commitment.

2. Temporary programs may be successful

If organizations put in place a performance based incentive program purely on a temporary basis, they may achieve success. Researchers have found that employees are capable of adjusting to long-term, ongoing programs. Once they get the taste of the increased pay due to a performance based incentive program, they may feel that injustice is being meted out to them when the management withdraws the program. This may negatively impact their morale as well as their performance. Even Michael Beer and Mark Cannon, renowned business researchers, opine “A workforce that always expects additional pay for additional progress can become a liability.”

On the contrary, if employees are offered a performance based incentive occasionally, they may view it only as a bonus and not as a guaranteed payment.

There is another danger also in performance based pay programs. For example, if there are two equally efficient employees, one of them may hoard vital information and get a performance based incentive. Since the other employee does not have the vital information, he may not get the incentive. This may lead to a situation in which the management may be rewarding knowledge hoarding whereas any company may generally wish to encourage knowledge sharing among the employees.

3. What the employees expect from the organizations and what the management expects from the employees

There should be complete synergy between what the management expects from its employees and what employees are willing to offer. But such a synergy pivots on proper communication between the employees and the management. In other words, proper communication alone can help in achieving success in implementing a performance based pay program. Employees should have clear knowledge of the details like why the program is being implemented, how long it will stay, the ease or difficulty with which they can get the incentives and whether external factors may impact the evaluation process of the program. If employees do not have complete knowledge of these details, there may be all-round chaos in the organization and the program is bound to fail. Most importantly, the program the management introduces should be fair not only to the organization but to the employees as well. 

4. Costs of implementing the program vis a vis its benefits

Companies should neither over-estimate nor under-estimate the benefits they can derive by putting in place a performance based pay program. They must not forget that they will incur considerable expenses in implementing the program. This means the benefits they get should outweigh the costs of implementing it.


Implementation of a performance based pay program may not be as easy as companies think. It is better if organizations analyze all the factors thoroughly before deciding to put a program in place. 

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