Performance based pay

Business & Finance
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What are the advantages and disadvantages of performance-based pay? Explain why employees in an organization should or should not earn pay based on performance.

Sep 5th, 2015

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Disadvantages of Performance pay

1. Time Consuming

It is recommended that a manager spend about an hour per employee writing performance appraisals and depending on the number of people being evaluated, it can take hours to write the department’s PA but also hours meeting with staff to review the PA.

2. Discouragement

If the process is not a pleasant experience, it has the potential to discourage staff.

The process needs to be one of encouragement, positive reinforcement and a celebration of a year’s worth of accomplishments.

3. Inconsistent Message

If a manager does not keep notes and accurate records of employee behavior, they may not be successful in sending a consistent message to the employee.

We all struggle with memory with as busy as we all are so it is critical to document issues (both positive and negative) when it is fresh in our minds so we have it to review with the employee at performance appraisal time.

4. Biases

It is difficult to keep biases out of the PA process and it takes a very structured, objective process and a mature manager to remain unbiased through the process.

Advantages of Performance pay

1. Performance Based Conversations

Managers get busy with day-to-day responsibilities and often neglect the necessary interactions with staff that provide the opportunity to coach and offer work related feedback.

2. Targeted Staff Development

All employees are on a development journey and it is the organization’s responsibility to be preparing them for increased responsibility.

If done well, an effective performance management system can help to identify employee developmental opportunities and can be an important part of a succession planning process.

3. Encouragement to Staff

Performance appraisals should be a celebration of all the wonderful things an employee does over the course of a year and should be an encouragement to staff. There should be no surprises if issues are addressed as they arise and not held until the annual review.

4. Rewards Staff for a Job Well Done

When pay increases and/or bonuses are tied to the performance appraisal process, staff can see a direct correlation between performance and financial rewards. This motivates and encourages employees to perform at higher levels.

5. Under-performers Identified and Eliminated

As hard as we try, it is inevitable that some employees just won’t cut the mustard as they say.  An effective performance appraisal process can help identify and document underperformers, allowing for a smooth transition if the relationship needs to be terminated.

6. Documented History of Employee Performance

It is very important that all organizations keep a performance record on all employees.  This is a document that should be kept in the employee’s HR file. The goal is to maintain a historical record of an employee’s performance and development journey.

7. Allows for Employee Growth

Motivated employees value structure, development and a plan for growth.  An effective performance management system can help an employee reach their full potential which can be a positive experience for both the employee and manager. A good manager takes pride in watching an employee grow and develop professionally.

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Sep 5th, 2015

Sep 5th, 2015
Sep 5th, 2015
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