Performance Based Rewards: Vital to Retaining Key Employees
Performance Based Rewards: Vital to Retaining Key Employees
Dr.LooSee
LooSeeBeh,
Beh,University
UniversityofofMalaya
Malaya
Dr.
Introduction
Performance management systems consists of several interrelated parts and is often the
responsibility of different business functions such as management information systems,
operations management, human resources and finance. The starting point when designing a
performance measurement system to assist performance management is the business strategy.
Hence, the performance measurement system has to be concerned with measures of outcomes
or results, and the means by which such results can be achieved. To manage the strategic
performance of HR in your firm, you have to be able to effectively communicate your
understanding of HR’s strategic impact to senior executives and line managers.
Support for performance-related pay is theoretically grounded in expectancy theory, equity
theory, reinforcement theory and high performance cycle theory, amongst others. Expectancy
theory is predicated on a belief that individuals will exert effort if they expect it will result in an
outcome that they value. In the case of performance-related pay, employees will work harder if
they value monetary rewards and believe that those rewards result from their increased
efforts. When performance is commensurate with rewards, employees will be more satisfied
vis-à-vis equity theory. In turn, more satisfied employees will be more loyal and committed to
the organization. Reinforcement theory posits a direct relationship between a desired target
behavior (e.g. performance) and its consequences (e.g. pay). It suggests that pay can be used to
create consequences for desired behaviors such as high performance that will reinforce the
behaviors. The high performance cycle model explains how organizations can use goals as
inducements to create and sustain high performance where performance influences job
satisfaction via contingent rewards. Of course, a variety of factors such as employee and
organizational characteristics and environmental conditions, together with pay system design,
affect job characteristics and pay system. These factors influence affective and performance
outcomes which in turn will result in the retention of key high-performance employees.
Performance-based Rewards and Organization
Several contextual factors appear to be associated with the success of performance-based
rewards. These include high levels of trust, adequate rewards, effective performance
appraisals, close geographic proximity and degree of professionalism. Individual incentive
schemes are most likely to succeed for simple, structured jobs and in contexts in which trust is
high and fair performance goals can be set. In a study carried out by National Research Council,
convened under contract to the U.S. Office of Personnel Management, it was found that
performance–related pay systems are best suited for positions in which job responsibilities are
fairly concrete and measurable. Results showed that 20 percent of non-managerial studies
appeared to produce positive performance-related outcomes, compared to 14 percent for
managerially focused studies. This contradicts existing sentiment that performance-related pay
plans will be more effective at higher organizational levels (Risher & Fay, 2007).
Notwithstanding there are also institutional differences between the public and private sectors.
BOSS Solutions Sdn Bhd – Research Paper 2011
In the private sector, the number of items sold, quantity of manufactured goods, percent return
on investment, or the amount of a sale can be used for gauging levels of performance. In
determining the magnitude of the appropriate reward according to the pre-established criteria
is relatively not difficult. Such measures of performance are perceived to be direct outcomes of
the level of effort exerted by the employees. This means that a greater effort is assumed to lead
to better results. To encourage employees to achieve the required levels of performance and
for performance-based rewards to retain key employees, there are four main factors of
consideration:
(1) these employees need to be clear and understand what the company is trying to do;
(2) what benefits, financial or otherwise that these employees will gain from achieving
targets;
(3) Are these employees assessed only on those factors they can control?
(4) The sense of pride that comes from working for a well-known or successful organization
in sustaining competitive advantage.
More recently and fundamentally, on the third factor above, managers may have to adapt to
uncontrollable environmental changes by revising their operating strategies and plans. Hence,
they cannot necessarily be held accountable for implementing predetermined plans, only for
achieving the desired results. The reality is somewhat more complicated.
In retaining key productive employees, organizations should adopt a range of measures
covering the six generic dimensions of performance: financial performance, competitiveness,
quality, resource utilization, flexibility, and innovation. Both internal and external benchmarking
can be used to set standards against which performance is assessed. Further, lower level
employees will only take it (system) seriously if they see it being taken seriously by senior
managers.
Criticisms are centered on the difficulties of establishing fair and objective criteria, which are
not always measureable or tangible, lack of objectivity of the performance appraisal and the
line-manager may not be the best person to judge the performance of the subordinate.
Nevertheless, the linkage between employee retention and performance rewards is obvious
and manifested in both theory (resource-based theories, agency theory, stakeholder theory,
high performance cycle theory, equity theory etc.) and practice of strategic HRM which seeks to
emphasize the link of individual effort(s) to the organizational goals and objectives and
predominantly about managing the employment relationship from a business strategy
perspective by improving the performance of the people who work in them and by developing
the capabilities of teams and individual contributors. In light of expectations and building on
the premise that employees should be rewarded for results and that when emphasis is placed
on incentives, organizational productivity will improve and hence vital in retaining key
employees given the assumptions about human nature and motivation.
Conclusion
The effectiveness of performance based rewards is dependent very much on organizational
conditions. Incentives, financial and non-financial rewards are vital especially in retaining
BOSS Solutions Sdn Bhd – Research Paper 2011
productive employees. There are cases where merit pay had not been successful and the
reasons are varied and sometimes difficult to identify. Difficulties with performance evaluation
include rater leniency, lack of resources to fund the systems at appropriate levels, low levels of
organizational trust, lack of transparency in the systems for employees, lack of trust in
performance-rating systems, and lack of leadership credibility. At best, performance-based
rewards are intuitively appealing to high performance employees and can be effective given a
supportive organizational culture, fair-minded, well-trained supervisors and a system of checks
and balances.
Reference:
Risher, H. & Fay, C.H. (2007). Managing for Better Performance: Enhancing Federal
Performance Management Practices. Washington DC: IBM Center for the Business of
Government.
Additional Reading Material:
What is employee performance management – http://www.peoplestreme.com/what-isperformance-management-shtml
BOSS Solutions Sdn Bhd – Research Paper 2011