Performance based payment or pay-for-performance is a strategy implemented by organizations for satisfying the employees and earning high profit. The current study has been conducted in order to identify the measures using which the effectiveness of the pay-for-performance plans of the organizations are evaluated. Along with this, the advantages and disadvantages of the pay for performance plan have been identified from perspective of both employers and the employees.
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How could an organization measure the effectiveness of their pay for performance plans?.
From an employee’s perspective, what are the advantages and disadvantages of using pay-for-performance plan?.
From an employer’s perspective, what are the advantages and disadvantages of using pay for performance plan?.
The pay-for-performance compensation programs are developed for rewarding and providing incentives to the employees based on their performance for achieving certain goals or objectives. This model is used by the organization considering different factors such as the compensation philosophy, organizational budget and its goals. The current study aims at identifying the methods that organizations use for measuring the effectiveness of their pay-for-performance plan. Apart from that, the advantages and disadvantages of pay-for-performance plans from the perspective of both employees and employers will be discussed.
It has been observed that in most of the high income countries depend upon the pay-for-performance systems though, there is a lack of data about how it impacts upon the low and middle income countries (Lavy, 2009). It has been identified that the pay-for-performance system is target based. Targets are set as performance criteria of the employees achieving which, the employees are given the incentives or rewards. There are several methods used by the organizations for measuring the performance of their pay for performance plans which include rate of turnover. However, Podgursky & Springer (2011) mentioned that reward does not ensure that employee turnover rate will reduce if pay for performance or reward is given to the employees. Staff satisfaction rate is another measure that is used by the organization for the purpose of measuring the effectiveness which is similar to the findings of (Goldhaber, Dan & Michael Hansen, 2010).
The length of service distribution and profit are also used as a measure based on the fact as to what extent organizations are able to reach their customers and how that does is driving profit generation. Apart from that organizations also focus on identify the Job offer refusal rate and degree of staff commitment in order to evaluate the current pay for performance plan used in the organization. Another measurement is the rate of productivity. As mentioned by Ammi & Fortier (2017), the performance of the employees has been observed to improve after introducing them with the pay-for-performance plans. However, other related factors such as work environment, pay grade, job position and other factors might also work behind the high productivity of the employees.
Though the pay-for-performance plans are developed and implemented to increase the performance effectiveness of the employees, employees may also find some issues regarding the pay-for-performance plans.
Using an employer’s perspective to understand the advantages and the disadvantages of the pay-for-performance it required to be conducted through analyzing how an organization can be benefited in managing employees and performing well in market.
In conclusion, it can be stated that pay-for-performance plans are those measured by the company’s performance to retain their employees as well as performing wee in the market. Employees find the pay-for-performance plans advantageous as it provides opportunity to high income. However, employers might find the pay-for-performance plan disadvantageous as it might cause increase in the operating cost and low profitability.
Ammi, M., & Fortier, G. (2017). The influence of welfare systems on pay-for-performance programs for general practitioners: A critical review. Social Science & Medicine, 178, 157-166.
Goldhaber, Dan, & Michael Hansen, (2010). “Using Performance on the Job to Inform Teacher Tenure Decisions.” American Economic Review 100 (2), 250–255.
Lavy, V. (2009). Performance pay and teachers' effort, productivity, and grading ethics. American Economic Review, 99(5), 1979-2011.
Podgursky, M., & Springer, M. (2011). Teacher compensation systems in the United States K-12 public school system. National Tax Journal, 64(1), 165.
Rockoff, J. E., Staiger, D. O., Kane, T. J., & Taylor, E. S. (2012). Information and employee evaluation: Evidence from a randomized intervention in public schools. American Economic Review, 102(7), 3184-3213.
Ryan, A. M., Krinsky, S., Kontopantelis, E., & Doran, T. (2016). Long-term evidence for the effect of pay-for-performance in primary care on mortality in the UK: a population study. The Lancet, 388(10041), 268-274.
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