Performance Management Linked Reward System

Performance Management Linked Reward System Reward is an incentive plan to reinforce the desirable behaviour of workers or employers and in return for their service to the organization. Compensation and Reward system plays vital role in a business organization. • To connect two ends of the rope, a knot is required; to make it lengthy and useful for long run. Likewise, the tie up between the reward and performance should be made for employee retention and their commitment to work, which ultimately improvise the contributing factor of the employee. • Employees should perform well to be rewarded and the approach designed for this is “Pay for Performance”. • Apart from the base pay, which is based on job description, a variable pay should be announced for their outstanding performance. • Although the pay raise motivates the employees to an extent, ultimately they want them to be appreciated and recognized in a society for their work, here comes the employee recognition program. • Many employees become less committed to work not because of their low pay structure, but for the lack of recognition. • Both types of rewarding system should be ensured for higher motivation, retention, engagement and job satisfaction. Pay for Performance (PFP) or Performance Related Pay (PRP) The term “pay-for-performance compensation” refers to performance-based pay programs where an employee is incentivized and rewarded for achieving goals or objectives. PRP plans are extremely popular and almost 75% of organizations currently leverage pay-for-performance compensation as part of their overall compensation plan. Objectives of PFP • Stimulates higher level of performance • Establishes a high performance culture • View of justice and equality Some of the common organisation PFP plans are : • Incentives: One of the most common pay-for-performance scheme is awarding compensation incentives when an employee has achieved certain management-set goals, such as a specified sales target. This incentive can be based on team/department target or an individual target. • Profit-sharing: Employees who typically participate in profitsharing schemes often receive a stated percentage of the company’s profits, if they meet a set revenue profit. • Gain-sharing: This incentive is used when companies share any productivity or profitability improvements with the relevant employees. • Goal-sharing: Similar to gain-sharing, goal-sharing places an emphasis on employees to reach certain management-set goals. Whichever incentive scheme you choose, a good pay-for-performance needs to be supported by a reliable, clear and transparent performance data collection which employees feel they are fairly measured and evaluated against. Benefits of Performance-based Rewarding approach An effective Performance-based Rewarding approach can bring out multiple benefits to an organization and employees, i. Decreased attrition rate - This empowers employee retention in long run and commitment. Due to decreased attrition rate and increased employee retention, recruitment cost is less which helps in the financial stability of the organization. ii. Motivate employees to perform better, aligning with the organizational goals - Employees get a clear insight of what should be done to meet the goals. iii. Employee involvement (Participation Management) – This is increased which results in autonomy, more productivity and satisfaction. Employees feel that they are part of a big success, enabling more confidence and innovation in work. iv. Enforces Healthy Competition - Rather than working on routine jobs, employees volunteer to work on challenging jobs to increase their recognition levels in the working society. It enforces healthy competition among individuals to perform better. v. Employee gets a chance to learn and enhance their skills, which highlights their development in career. Procedural Justice For the real success of the system, rewards should be implemented without any bias or oversight. When employees perform well, he should be acknowledged rightly by the supervisors. HR department should not make this process to follow over a night; its importance has to be stressed to the supervisors and employees at all levels. When a perfect system is implemented, it results in higher retention of talented employees and greater profits to the organization. There are certain rules to be followed while linking performance to rewards. These rules are a matter of procedural justice. They are : i. Consistency Rule – The allocation processes should be consistent between people and over time. ii. Bias-Suppression Rule – Bias of any kind should not be there during the allocation process. iii. Accuracy Rule – It is necessary to base the allocation on as much accurate information as possible. iv. Correctability Rule – Opportunities must exist to modify and reverse decisions made at various points in the allocation process. v. Representativeness Rule – All the subgroups in the organization and their concerns should be take into account. vi. Ethicality Rule – The fundamental moral and ethical values have to be taken into consideration. Reward Management Reward Management is concerned with the formulation and implementation of strategies and policies that aim to reward people fairly, equitably and consistently in accordance with their value to the organization. Aim of Reward Management • Reward employees according to what the organization values and wants to pay for. • Reward employees for the value they create. • Reward the right things to convey the right message about what is important in terms of behaviors and outcomes. • Develop a performance culture. • Motivate employees and obtain their commitment and engagement. • Operate fairly – employees feel that they are treated justly in accordance with what is due to them because of their value to the organization. • Function consistently – decisions on pay do not vary arbitrarily and without due cause between different people or at different times. • Operate transparently – employees understand how reward processes operate and how they are affected by them. Objectives • Support the organisation’s strategy • Recruit & retain • Motivate employees • Internal & external equity • Strengthen psychological contract • Financially sustainable • Comply with legislation • Efficiently administered Components of Reward System / Classification of rewards Components of Reward System • Intrinsic rewards: The satisfaction one gets from the job itself. These include pride in one’s work, feeling of accomplishment, being a part of team job enrichment, shorter work-weeks, job rotation etc. • Extrinsic rewards : Includes money, promotions and fringe benefits or a write up in the company magazine. • Financial rewards : Direct-through wages, bonuses, profit sharing etc., or indirect- through supportive benefits like pension schemes, leave encashment, purchase discounts etc. • Non-financial rewards: Incentives make life on the job as more attractive like standard and well facilitated workplace, attractive position, responsibility of choice, work autonomy, job security etc. • Performance based: Rewards may be piece rate pay plans, commissions etc. • Membership based: Rewards may be profit sharing, increase in dearness allowances, seniority based or time bound promotions etc. Qualities of a good reward system • Performance based: Better performer must receive better reward than the average and poor performer. • Transparent and predictive: Employees must be familiar with the reward system and the reward must be distributed transparently. Employees should be able to calculate and predict their reward in an advance. Employees become enthusiastic and motivated if they are aware about the type, size and quality of reward. • Cost effective: Reward must have the quality of balancing the cost benefit ratio. The reward received by the employee should not exceed the benefit received by the organization. • Need based: The reward system must match with the need or requirement of the employees. If reward system doesn't meet the need of employees, it will not motivate the employees to perform better in the future. • Unbiased: Reward must be unbiased and fair. Employees identical to their job performance should be rewarded equally. • Competitive: Reward system must be competitive to other organization's provision. Reward must be revised timely. Good reward system will attract and retain the competent employees. Determinants of reward i. Performance ii. Efforts iii. Seniority iv. Skill held v. Job difficulty vi. Punctuality vii.Adhering to rules and guidelines viii.Market competition Motivating different generations Baby Boomers (Born: 1946 – 1964) Baby Boomers are most commonly motivated by things other than just financial incentives, with popular motivators being: • Opportunities for professional development • Positions of authority • Recognition for achievements • Workplace benefits Generation X (Born: 1965 – 1980) Generation Y -Millennials (Born: 1980 – 1995) Generation Z (Born: 1996 Onwards) Generation X employees are most commonly motivated by things which offer them a good home / work life balance including: Generation Y employees are most commonly motivated by things which are a little more on the creative and technological side than other generations including: • Money Opportunities to learn new technologies • An enjoyable workplace environment • Short, changeable and fast tasks • Opportunities to express creativity and opinions Generation Z employees are most commonly motivated by having their voice heard, equality and other motivators including: • Respect • Out of work socialization • Money saving schemes • Experience days • Mentoring platforms Family-based benefits Lifestyle benefits Corporate wellbeing Recognition of achievement • Professional development opportunities • • • • Advantages of Reward Management A. Effectiveness Worth: Creates an increased sense of worth and improved morale in the workplace. Colleagues see that exceptional performance is appreciated by upper management and may step up their own productivity levels with the understanding that their work could be noticed as well. B. Loyalty: When employees are treated like family, they’re far less likely to betray the company for personal gain. This reduces the likelihood of issues like office theft, the release of proprietary information and instances of fudging time sheets and expense reports. Employees are more likely to talk positively about their company in the community thus enhancing the business’s reputation. C. Longevity: When employees feel valued and appreciated and see they have room for advancement, they are less likely to look for other employment, even if the salary is higher. A company that has seasoned, long-term professionals on staff reduces the costs of continually hiring and training new employees. D. Quality: Recognizing employees for innovative ideas and concepts can lead to increased quality of a company’s products and services. Employees who feel their ideas are welcomed and credit is given where it is due may reject complacency and continually strive to perform at top levels. Linkage of Performance Management to Reward and Compensation System • Today organizations are showing a high degree of commitment towards reinforcement of reward practices which are aligned with other HR practices and the goals of the organization for attracting, retaining and motivating employees. • Efficient reward practices helps in attracting result driven professionals who can thrive and succeed in performance based environments. • Hence, it is a crucial motivator and may contribute towards the enhancement of the productivity of the employees if implemented properly. • For example, Continental Airlines as a part of their turnaround strategy introduced on time bonus incentive package according to which an employee will gain a bonus of $65 every month for ensuring on time flight operations. • Example, TISCO, offers instant or on the spot rewards, monthly rewards and annual rewards to its employees under its ‘Shabashi scheme’. Pay for Performance Strategy Category Performance Measures Corporate Leaders BSC, shareholders returns and Employee stock ownership and Basis for Rewards EVA profit sharing. Business Unit Leaders Profitability of the unit Results Sharing. Functional Leaders Level of contribution towards Milestone Awards the corporate goals General Employees Specific KRA’s achieved Profit/gain sharing, bonuses measured periodically Source: Sullivan E (1999), “Moving to a pay for performance strategy: Lessons from the Trenches”, In Risher, H(Ed.), Aligning Pay and Results, AMACOM:NY. Strategies which improve the effectiveness of rewards    Linking rewards with the performance Implement team rewards for the interdependent jobs for example Xerox. Ensuring that the rewards are relevant. Example Wal-Mart, rewards bonuses to the top executives which is based on the company’s overall performance whereas the frontline employees earn bonus on the basis of the sales figure or targets attained by their store.   Ensuring that the rewards are valued by the employees. Checking out for the undesirable consequences of administration of any reward practice. “Do what you get paid for” syndrome The “Do Only What You Get Paid For” Syndrome means that the closer pay is tied to particular performance indicators, the more employees tend to focus on those indicators and neglect other important job components. Therefore, easily measured stuff swamps important but hard to measure stuff. The impact of this kind of behaviour is as follows: • Negative Effects on the Spirit of Cooperation - Employees may withhold information from a colleague if they believe that it will help the other person get ahead • Lack of Control - Employees often cannot control all the factors affecting their performance. • Demotivating when pay is influenced by factors outside one’s control • Difficulties in Measuring Performance - make it hard to assign a pay level. • Unethical behaviour might arise to cut corners, to scheme and receive more than deserved. Types of Pay for Performance Plans These are of four types: A)Individual based Micro Level Macro Level Business Unit / B)Team based C)Plant wide based Individual D)Corporate wide based Merit Pay Team Plant Corporate Profit Bonuses Gainsharing Sharing Stock Bonus Award Piece Rate Awards Bonus Award Plans Pay for Performance : Assumptions • Individual employees and work teams differ in how much they contribute not only in what they do it but how they do it. • Company overall performance depends to a large extent on the performance of individuals and groups. • o attract, retain and motivate high performers and be fair to all employees a company needs to reward employees on the basis of their relative performance. Pay for Performance : The Challenges • Link pay and performance appropriately • Use pay for performance as part of a broader HRM system • Build employee trust Meeting the Challenges of Pay for Performance Systems • Promote the belief that performance makes a difference • Use multiple layers of rewards • Increase employee involvement • Use motivation and nonfinancial incentives Types of Pay for Performance Plans - Individual- based plans Types • Merit pay • Bonus programs • Lump - sum payments Advantages • Rewarded performance is likely to be repeated expectancy theory • Financial incentives can shape an individual's goals • Help the firm achieve individual equity • Fit in with an individualistic culture Disadvantages • May promote singlemindedness • Employees do not believe pay and performance are linked • They may work against achieving quality goals, and they may promote inflexibility. Conditions under which likely to succeed • When the contributions of individual employees can be accurately isolated • When the job demands autonomy • When cooperation is less critical to successful performance or when competition is to be encouraged Types of Pay for Performance Plans – Team - based plans Types • Bonuses • Awards Advantages • Foster group cohesiveness • Facilitate performance measurement Disadvantages Conditions under which likely to succeed • Possible lack of fit with individualistic cultural values • Free riding effect • Social pressures to limit performance • Difficulties in identifying meaningful groups • Inter group competition leading to a decline in overall performance. • When work tasks are so intertwined it is difficult to single out who did what • When the firm’s organization facilitates the implementation of team-based incentives • When the objective is to foster entrepreneurship in self-managed work groups Types of Pay for Performance Plans - Plant- based plans Types • Gainsharing • Bonuses •Awards Advantages • Eliciting active employee input • Increasing the level of cooperation • Fewer measurement difficulties • Improved quality Disadvantages • Protection of low performers • Free riders • Problems with the criteria used to trigger rewards • Management labour conflict Conditions under which likely to succeed • Firm size • Small to medium sized plants • Technology does not limit improvements • Historical performance takes into account different plants’ varying levels of efficiency so as to not penalize efficient plants • Corporate culture - less likely to succeed in firms with a traditional hierarchy • Demand for product is relatively stable Types of Pay for Performance Plans – Corporate based plans Types • Profit sharing • Stock Plans Advantages • Financial flexibility for the firm • Increased employee commitment • Tax advantages Disadvantages • Risk for employees • Limited effect on productivity • Long run financial difficulties. Conditions under which likely to succeed • Firm size • Interdependence of different parts of the business • Market conditions • The presence of other incentives