Effectiveness Of Pay-For-Performance Compensation Plans

Pay-for-performance compensation plans have been controversial for many years. In a pay-for-performance program or system, “employees and owners are clear about and understand the relationship between performance and the incentive” (Aquila & Rice, 2010, para. 4). There are proponents and opponents of this type of plan in a variety of industries. Although many companies have utilized pay-for-performance compensation plans, determining their effectiveness can be difficult. In addition, there are disadvantages in using these plans for both the employee and the employer. This paper will discuss how organizations can measure the effectiveness of their pay-for-performance plans as well as the disadvantages of these plans for both the employer

Some employers expect the incentives in pay-for-performance plans will motivate employees to increase productivity. However, as employees focus on increased quantity, quality may suffer (Joseph, 2011, para. 2). For example, a salesperson may focus making as many sales as possible and fail to complete paperwork accurately, thereby causing customer service issues. Another disadvantage is that studies have found that when incentives are used to motivate workers, may “reduce intrinsic motivation and ethical beliefs…such as fairness” (Paton, 2009, para. 5). Many individuals, who have an inherent need to do their work well, lose their motivation and enjoyment in their work. Another disadvantage of a pay-for-performance plan is the loss of teamwork among workers. Those who are trying to meet their incentive goals may refuse to assist co-workers, which may escalate into conflict among employees (Joseph, 2011, para. 3). Additionally, performance standards may not be specific enough for an employee to understand exactly what is expected; therefore, it may be difficult to determine if an incentive goal has been met. Finally, if employees believe the incentive amount is too low, they may not try to meet production goals. Furthermore, they may resent their employer for establishing a pay plan that will not allow them to earn enough to support their family. As a result, workers

In theory, it makes sense to offer incentives to motivate employees to increase productivity and quality. Often, companies establish these plans as a way to attract and retain the best people to meet the organizational strategies and goals. However, many organizations have found that pay-for-performance compensation plans do not work. In fact, “thirteen separate units of Hewlett-Packard launched pay-for-performance plans in the early 1990’s, and within three years all had dropped them” (Lagace, 2003, para. 3). Hewlett-Packard found that reduced teamwork caused inconsistency among the teams and managers were spending too much time revising pay plans (Legace, 2003, para. 13-14). Some employer disadvantages mirror those for employees. For example, companies learned that pay-for-performance leads employees to focus exclusively on areas related to their incentive goals and neglected other responsibilities. In addition, developing performance standards that clearly explain how and when incentive goals have been met is challenging to many organizations. Furthermore, in today’s economy, determining what must be done in the future accurately enough for a pay-for-performance plan to work well is impossible (Frey & Osterloh, 2012, para.