Effect Of Performance Pay On Productivity: A Literature Review

Literature Review

Discuss about the Performance Pay and Productivity.

Over decades, firms across the word have introduced various payment schemes to compensate their employees for their contribution to their success.  Among the most prevalent reimbursement packages used by the majority of the organizations in both private and public sector, currently is the performance-related pay, whereby workers are paid based on their individual or group productivity. Enterprise executives utilize such incentive programs to motivate staff members to become more efficient at their places of work, enhance their commitment, augment job satisfaction, lower absenteeism rates as well as employee turnover ratios. Most of the entities that apply performance-based schemes do not establish them by themselves rather as an aspect of the organization transformations on operations, for instance, teamwork, employee engrossment committee or in some cases a total quality management that improves employee participation in decision-making (Park, and Sturman, 2015).

Despite the fact that a lot of research has been made to investigate the effectiveness of performance payment programs, little is known about its impact on the productivity of workers in any organizational setting. The majority of the studies provide that performance-based pay is closely associated with improved productivity among the labor force as well as enhanced quality of the employee-firm match. However, some researchers offer opposing opinions arguing that this type of compensation plan may not always yield anticipated results of increased worker performance since it is often associated with some setbacks (Heywood and Parent, 2012). While it is true that performance-related schemes often supplement employees’ morale and as a result develop their efficiency, it is critical for the firms advocating for their implementation to consider the related setbacks and execute other programs to motivate their labor force rather than using financial incentives to encourage them towards productivity.   This literature review paper examines in depth the issue of Performance-based rewards by examining several theoretical works provided by different theorists and academics over the years. It identifies significant findings of these theories and their common trend in addressing the impact of this remuneration program on productivity of groups and individual employees in various organizations in diverse environmental settings.

According to Lavy (2007), implementation of performance based pay in an organization aids substantially in improving employee overall productivity. He holds that workers remunerated based on their enactment will tend to work harder since they are assured of direct gains in productivity. Lavy points out that financial incentive gives an opportunity to augment staff output in the public sector and as a result governments can apply them in order to deliver loftier public services. Lazear (2000) tended to have a similar school of thought as Lavy since according to him financial rewards not only increase employees output but also attract a splendid pool of new applicants with the passion for delivering. Based on Lazear’s study, paying a worker depending on his or her work accomplishments often augments the quantity and quality of new job seekers thus helping to bring more employees in the labor force, with obvious results for general productivity. 

The Impact of Performance Pay on Employee Productivity

Chiang and Birtch (2010) also provide a related point of view on the correlation between pay for performance and employee attitude towards job. In the course of the research, they surveyed the employees’ level of work satisfaction, managerial commitment towards administrative functions, as well as the overall turnover ratio and how the various parameters were affected by pay for performance remuneration system. The study sample selected by the researchers included the tourism industry in the region and some hotels located in Hong Kong. With the help of various departments at the company, they distributed questionnaires randomly to a sample of workers working in the respective firms. The investigators received about 258 valid rejoinders from seven hotels sampled. Descriptive measurements as well as correspondence coefficients which were used for all research variables were tabulated. In the analysis part of the hierarchical research regression technique was employed. The outcomes of the investigation reveal that when workers anticipate for a high financial reward association they tended to demonstrate augmented positive attitude towards work.  In other words, reward systems, such as pay for performance, take a significant part in the configuration of worker-firm service eminence values. Apart from creating a noticeable association between payment and performance, this remuneration scheme help in enhancing job satisfaction and staff devotion as well as reducing turnover ratios, all of which may consequently boost service quality (Muhammad, 2012).

Financial rewards or penalties often result in desirable consequences for the attraction and retention of exceptionally qualified and able pool of high achievers as well as the turnover of non-performers over time. Besley and Ghatak (2003) figured out that the implementation of pay-per-performance schemes associated with being a productive headmaster in schools resulted in non-performing head teachers resigning from their jobs rather than accepting lower remunerations. Besley and Machin scrutinize the pay levels of principal teachers in the UK in relation to the performance of the learning institutions they are associated with. They realized that headmasters salaried in accordance to their enactment seemed highly incentivized, and their learners’ overall performance was consisted reflecting the great deal of splendid contribution of the institution leadership. 

Burgess and Ratto (2004) expounds on the phenomenon of “ratchet effect” which occurs when employees lessen their efforts so as to convince their employers to believe that the task assigned to them is extremely difficult to carry out than it really is. They argue that Majority of the incentive plans remain active for considerable period of time during which the productivity of workers is assessed and rewards are bestowed multifarious times. In this case, the staff members can, thus, note the capability of the company from the preceding productivity capacities and come up with an assessment of the difficulty of the assigned task. Managers desiring to decrease the expenditures of their remuneration system can then readjust inceptions and elevate objects to restrain the dissemination of monetary rewards at every productivity stages.  In anticipation of such vicissitudes, workers are probably going to lessen their performance in prior stages to misinform the managers into trusting that the work is extra complicated than it is commonly perceived. These theorists, therefore, conclude that ratchet effects have the capacity to affect the efficiency of pay-per-performance systems negatively.

Benefits of Performance Pay

Dixit (2002) however, provide a contrasting view. He holds that career concerns can function in opposing direction to the phenomenon of ratchet effect described above. Whether this occurrence can be overcome depends entirely on the age of a particular worker, his potentials as well as their level of uncertainty in regard to their capability to, amongst other influences. Dixit further maintains that in case an employer is not aware of the real ability of a staff member, the employee can work extra harder at the inception stages, to reveal the impression that they are high achievers. As a consequence, the pay off at this initial stage for the member may emerge in the long term, concerning exceptional job opportunities as well satisfying future earnings. Dixit therefore, concludes that financial incentives may sound unnecessary in motivating younger, untried workers towards productivity.

Propper, Wilson, et.al (2003), on the other hand, address the issue of pay-per-performance from a distinctive point of view. They say that in most of the cases, the public amenities are multidimensional and as such, the goals of a firm are challenging to describe and  also to assess. They give an example of a school whose primary goal is to offer ‘good education, ‘ but this is not easy to describe. Even breaking into sub-components this general school objective can be challenging; there is, for instance, considerable deliberation about what encompasses a commendable degree of a high quality of education. Therefore, it becomes harder to initiate proper performance assessment techniques thus imparting little information about the productivity of a group or individual staff member. As a result, relating financial incentives to the achieving of performance objectives fail to provide adequate inducements, might contribute to particular rudiments of strategic conduct and levies superfluous jeopardy on organization workforces.

In as much as career concerns of an individual employee offer an inner inspiration to put additional exertion even in the nonexistence of monetary inducements, a civic segment (intrinsic) incentive could have a comparable effect, this phase irrespective of the worker’s stage of development and their level of indecision about their productivity (Bonesrønning, 2011). Workers in the public sector may tend to care about the consequences or vision of the public entity and acquire gratification, from knowing that their exertion of effort is directly leading to it.  Francois (2000), in anattempt to address this point of argument, suggests that intrinsically encouraged workforces ought to primarily function preeminent when inducements are trivial or even lacking, and managers obligate not to avert any superfluities or public “proceeds” away from the establishment’s undertaking . Besley and Ghatak (2005) advance this point of view in depth, holding that if civic segment corporations post undertakings in the course of their conscription process, the normal categorization of job candidates will perform the function of monetary rewards. In contrast, pay-per-performance schemes may aid to concentrate determination on other business objectives which might have remained derelict if workers depend entirely on public service incentive only. These points of view bring back the efficiency argument in which pay-per-performance programs aid well showing that intrinsically motivated labor forces tend to prioritize responsibilities in a veracious manner.

Drawbacks of Performance Pay

Another source of substantiation on the effectiveness of financial incentives is derived from the United States Job Training Partnership Act abbreviated as JTPA. This is a centralized recruitment and preparation Programme which endorses anticipated worker code of conduct by use of agency level monetary inducements instead of a consummate directive. In JPTA, the United States Department of Labor rewards training institutes and the bonuses used to award them cannot be used to increase worker remunerations (Plesca, and Smith, 2007).Therefore, though socially motivated workers can acquire benefits from improved amenities and noticing developed member numbers, personal productivity is compensated indirectly. The definite magnitude 16 of the recompense hinges on a particular organization’s productivity in accordance with an array of measures, deemed to have mottled over the existence of JTPA and from State-run to another.  Initially, productivity was gauged in consideration of cost for each member along with their pay levels, engagement ranking, and paychecks up to a period of 3 months following their graduation. Bonuses in this Programme have increased the operational budgeting of training centers by approximately 7% but could not be utilized in employee salary increments (Courty and Marschke 2004). Related conclusions from experimental researches of the JTPA Programme are abridged by various theorists including (Besharov & Cottingham, 2011). At first, they obtained variegated substantiation inclusive of ‘cream-skimming’, the process of choosing job candidates most probable to aid agencies to achieve their productivity objectives. Moreover, Heckman and Smith (2004) in their work view the 16 training centers and, by the act of disintegrating the assortment procedure, figure out that deficiency of cognizance of system suitability instead of cream-skimming by training agency member is accountable for motivating the majority of the striking dissimilarities amongst suitable applicants and chosen members. Scrutinizing a single training center carefully, Heckman, Smith, and Taber realize that the training agencies are intentionally choosing less employable applicants notwithstanding the existence of productivity interrelated pecuniary rewards. Barnow and Smith (2004) on the other hand, recommend that regression-founded approaches to regulating the productivity processes employed in the systems for case assortment have been to some extent efficacious at decreasing the inducements to cream-skim suitable candidates.   

Conclusion

As depicted by the majority of the theoretical works, pay per performance remuneration scheme and employee productivity in any organizational setting have a strong positive correlation. Workers recompensed depending on their level of contribution often exhibit advanced motivation, job satisfaction, declined absenteeism rates as well as commitment. Holding other factors constant which have potentials of influencing the productivity such as working environments, operational hours, and managerial practices, staff members tend to perform optimally with the existence of performance-based compensation programs. Nevertheless, some theorists argue against the natural hypothesis of the connection between worker productivity and remuneration based on performance. They maintain that scheming employees can especially during the work inception stage deceive on their experience with a certain task so as to lure managers to be lenient when assessing their productivity. While it is common knowledge that pay per performance schemes augment employees productivity, it is critical for organizations to consider possible repercussions which might befall. Besides, it can be argued that intrinsic form of motivation helps significantly in improving a corporation’s overall output and since it is not tied to any material gain, it might emerge better comparatively. Financial incentive in some cases may seem efficient in the short run but deemed inefficient over time. Workers working harder for material gain like bonuses may often exhibit declined motivation in cases when the benefits are affected by other external factors like competition, seasonal variations as well as demographic influencers.

Conclusion

References

Lavy, V. (2007). Using Performance-Based Pay to Improve the Quality of Teachers. The Future of Children, 17(1), pp.87-109.

Lazear, E. (2016). Performance Pay and Productivity. [online] The American Economic Review, Vol. 90, No. 5 (Dec., 2000), pp. 1346-1361.

Chiang, F. and Birtch, T. (2010). Pay for performance and work attitudes: The mediating role of employee–organization service value congruence. International Journal of Hospitality Management, 29(4), pp.632-640.

Besley, T. and Ghatak, M. (2003). Incentives, Choice, and Accountability in the Provision of Public Services. Oxford Review of Economic Policy, 19(2), pp.235-249.

Burgess, Simon; Propper, Carol; Ratto, Marisa and Tominey, Emma (2004) “Incentives in the Public Sector: Evidence from a Government Agency” CMPO Working Paper Series No. 04/103

Dixit, A. (2002). Incentives and Organizations in the Public Sector: An Interpretative Review. The Journal of Human Resources, 37(4), p.696.

Propper, Carol and Wilson, Deborah (2003) “The Use and Usefulness of Performance measures in the Public Sector” Oxford Review of Economic Policy Vol. 19 No. 2, 250-268

Francois, P. (2000). ‘Public service motivation’ as an argument for government provision. Journal of Public Economics, 78(3), pp.275-299.

Besley, T. and Ghatak, M. (2005). Competition and Incentives with Motivated Agents. American Economic Review, 95(3), pp.616-636.

Barnow, S. and Smith, A. (2004). Performance Management of U.S. Job Training Programs: Lessons from the Job Training Partnership Act. Public Finance and Management, 4(3), 2004 pp. 247-287.

Courty, Pascal and Marschke, Gerald (2003) “Dynamics of Performance Measurment Systems” Oxford Review of Economic Policy, Vol. 19, No. 2

Plesca, M. and Smith, J. (2007). Evaluating multi-treatment programs: theory and evidence from the U.S. Job Training Partnership Act experiment. Empirical Economics, 32(2-3), pp.491-528.

Top of Form

Besharov, D. J., & Cottingham, P. H. (2011). The Workforce Investment Act: implementation experiences and evaluation findings. Kalamazoo, Mich, W.E. Upjohn Institute for Employment Research.

Heckman, J., C. Heinrich, and J. Smith (2002) “The Performance of Performance Standards” The Journal of Human Resources 37: 778–811

Heywood, J. and Parent, D. (2012). Performance Pay and the White-Black Wage Gap. Journal of Labor Economics, 30(2), pp.249-290.

Park, S. and Sturman, M. (2015). Evaluating Form and Functionality of Pay-for-Performance Plans: The Relative Incentive and Sorting Effects of Merit Pay, Bonuses, and Long-Term Incentives. Human Resource Management, 55(4), pp.697-719.

Bonesrønning, H. (2011). Public employees and public sector reform implementation. Public Choice, 156(1-2), pp.309-327.

Muhammad, G. (2012). Determinants of Employee Motivation – A Case Study of Afroze Textile Industries Limited, Karachi, Pakistan. IOSR Journal of Business and Management, 4(3), pp.22-25.