“Pay-for-performance programs and policies tie employee compensation to performance on the job and have long been common in the commercial sector as a means of providing incentives and rewards to meet specific production targets or goals”
(Marsh, Springer, McCaffrey, Yuan, Epstein, Koppich, Peng, 2011). Over the years, a number of employers have had talk about pay for performance compensation plans. Many of these employees want to introduce performance-based compensation plans to their organizations. The ultimate question is: “Does performance-based pay have an effect on employee performance?” If so, is the effect positive or negative, and in the long run is this deemed beneficial for the employees or even the organization? Well before I get into that I would like to introduce base pay, merit pay, and pay for performance. Base pay is essentially the rate of pay for a job excluding any extra pay such as bonuses, benefits, or over time. For example, sally works at a preschool. Their hourly wage is $10.25 per week and 40 hours per week. Her base pay is $410 per week, $21,320 per year. This is her unadjusted gross salary. Taxes are not yet taken out, if there are any other deductions they are also not taken out. Merit pay and pay for performance are both very similar but not exactly the same.
Merit pay is considered rewards but employees are given pay raises. It is not exactly based on how long a person is with the company or even if the person has been given a promotion. It is based on performance as well. For example, the director of a preschool is able to raise the number of enrollments that the preschool has ever had by 20% and the board decides to reward the director with a pay raise for a job well done. This kind of a compensation plan is beneficial to employees as well as the organization.
Pay for performance is a little bit different. Pay performance is not exactly permanent. When employees receive pay for performance their base pay is not affected. These employees receive a bonus. For example, a call center sales representative exceeds her weekly sales quotas and she receives a bonus. If she wants to continuously receive this bonus, she will have to always exceed her sales quotas. Ultimately, these are totally different compensation plans. In this paper I will be discussing how performance-based pay affects employee performance and I will be linking it back the business world and how it affects me in my current position as a teacher for OSC county public schools as well as in positions that I have previously held that relates.
Background and History of the Topic
“A cornerstone of the theory in personnel economics is that workers respond to incentives. Specifically, it is a given that paying on the basis of output will induce workers to supply more output” (Lazear,2000). Research shows that there are multiple different designs when it comes down to performance-based pay and it is said to work in numerous ways. The goal of pay for performance is to improve efficiency and effectiveness in an organization. The problem is that this doesn’t always work that way. It has been proven time and time again that this kind of system is everything but effective. The theory of work motivation is a major theory that has been tested time and time again along with pay for performance. According to the terminology used in the model by Nadler and Lawler (1977) effort is the indicator of the dependent variable ‘work motivation’. The process of motivation in relation to compensation can be described by three independent variables: effort-performance expectancy, performance-outcome expectancy, and valence. (Igalens ; Roussel, 1999). To sum it up, the organization sets goals and offer incentives and these incentives were meant to encourage employees to put more effort into their work so that they can in turn receive these incentives.
This leads directly to the expectancy theory. In some aspects this theory could in fact be doable however, it usually isn’t for quite a number of reasons. A lot of times these goals are almost impossible to meet. It’s like expecting employees to do the impossible. When this is the case, employees will almost never receive these incentives and when they start to catch on this will have an adverse effect. Employees will start being discouraged and stop even trying to meet these goals because they see them as something that cannot be done.
“Overall job satisfaction is highest for those who do not receive any form of performance pay or profit sharing/bonuses with those who receive profit sharing or bonuses only coming second. Satisfaction with pay is the highest and nearly identical for those both receiving profit sharing/bonuses only and for those receiving these in conjunction with performance pay. Performance pay appears to be associated with lower levels of satisfaction with job security. (Green, & Heywood, 2008)”
Additionally, employers don’t always follow through. For this system to work, employers have to follow through. If there is a pay for performance plan that is in place, when employees meet the given goals, they should be awarded these incentives. It will serve as a motivating factor every time because they saw results. The next factor is the amount of the reward. The size of the reward is can also have an adverse effect. Employees are more likely to appreciate meaningful rewards. If employees don’t see these rewards as meaningful, they will be less likely to put in the effort.
This leads directly links to the goal setting theory. As I previously discussed, employees have to have meaningful rewards and the goals that are set must be doable for them to put forth the effort to meet these goals. So, when employers are planning on using pay for performance this is something that they must put into consideration so that it is successful. Once employees see that the goals can be met, they will be more likely to make an effort to reach it. They will less likely feel like they are expected to do the impossible.
Another reason why employers try to incorporate a pay for performance incentive plan is to improve employee recruitment and decrease employee retention. First, I am going to talk about employee recruitment. When employees are making decisions about joining an organization the compensation is a major deciding factor. Employees are more likely to consider the amount of money that they could make. Employers also include this in the recruiting process.
Think about it, we have all seen those job listings on indeed and other job board. The pay rate states that employees can make up to $37 per hour. However, this is not just the base pay. It includes the bonus and incentives. It is listed this way to attract employees to apply. It is what first attracts the employees to the company. However, it can also have a negative effect when employees realize that the base pay, which is the guaranteed pay is maybe half of that amount. “Employees who are attracted or motivated by this form of compensation seem to seek the satisfaction of a need for comfort and security” (Igalens ; Roussel, 1999). What this means is that even though it attracts employees it ends up turning them away when they realize that they need more security in the form of a guaranteed pay.
With that being said, this leads us into employee retention. Employers hope that employees will be more likely to stay with a company when they look at the money that could be making. This could very well be true, but what happens when these employees run into something that is a bit more guaranteed? Majority of these employees will move onto something that will offer them guarantee. I have worked in call centers where the base pay is $10 per hour but with the pay for performance bonuses that you can receive including sales and up sales bonuses you as employees can make up to $15 per hour. It sounds great, but how often will employees earn these bonuses. In situations like these employees will very well look to the job that is offering a guaranteed base pay of $12 per hour. It is true that these pay for performance plans can bring a challenge to employees and motivate them to do better. This is what employers want, but it is not always the case. While highly motivated employees enjoy a workplace that provides them with a challenge, too much of a challenge can very well have a negative effect on employees.
The next question is the fairness of this kind of compensation plan. Employees earn their bonuses and they are well aware of how it works, so it’s fair right? Wrong! While it may seem fair to employer, organizations may have highly motivated employees who are great assets to company that just can’t earn the bonuses and this in no way fair to these employees. Think about the teachers that can only earn these bonuses based on student performance and achievement. How exactly can this be considered fair? Managers may consider this to be fair but depending on the employee they may argue that this is unfair.
Application to the Business World
“Interest in performance-based compensation in education has a long history in the United States. The current wave of reform efforts follows earlier experimentation in the late 19th and early 20th century, as part of Fredrick Taylor’s scientific management movement; in the 1960s, sparked by the Russian launch of Sputnik and concerns about the quality of American education; and in the 1980s, following the publication of A Nation at Risk” (National Commission on Excellence in Education, 1983; Johnson and Papay, 2009; Springer, 2009).
I am currently working as a teacher at OSC public schools. As a teacher, we face quite a number of challenges as far as our compensation plans. Over the years there have been talks about adopting a pay for performance compensation plan. “In 1999, the Denver Classroom Teachers Association and the Denver Public Schools reached agreement on an alternative teacher pay plan that linked pay to student achievement and professional evaluation” (Podgursky, Springer 2007). There are underlying issues with this kind of a plan. Currently, we have something call a knowledge- skill pay salary ladder. What this means for teachers is that we get paid salary and it is increased based on our education level as well as our years of experience. These factors determine how we move up the ladder. As I previously mentioned, in recent years there has been talks about alternative compensation plans for teachers that include merit pay as well as pay for performance. This could be good and bad, teachers are underpaid as it is.
Following refinement of the pilot model by teachers, principals, administrators, and community members, the Professional Compensation Systems for Teachers (ProComp) was adopted in spring 2004 by the Board of Education and members of the Denver Classroom Teachers Association (Community Training and Assistance Center, 2004). Performance based pay does offer teachers an opportunity to earn more money, however, it is still difficult even imagining getting paid for performance as it drives more competition in the workplace. This kind of competition may start out friendly but could also take a turn for the worst. With these kinds of compensation plans, teachers will be more likely to get bonuses based on student performance on standardized tests combined with the modern-day evaluations performed by assistant principals and principals. “As the productivity gap between more and less skilled workers increases, it becomes more and more advantageous for firms to introduce performance pay to distinguish highly productive workers from less productive worker” (Lemieux, Macleod, ; Parent, 2009). To elaborate, this kind of system can motivate teachers to make improvements in the classroom and it can also weed out the bad seeds. When I say bad seeds, I mean bad teachers. However, the good teachers can end up suffering for the bad teachers in the end with this kind of system.
As I previously discussed, teachers are significantly underpaid. With this opportunity to make extra money without having to pick up an extra job, teachers will most definitely try to put their best foot forward. However, there are factors that are out of a teacher’s control when it comes down to student performance. It can be very difficult to get students engaged especially when there are factors outside of the classroom that is affecting their ability to focus in the classroom. We all know that what students do in the classroom is what translates on their tests. With that being said, teachers can end up being paid on the lesser end for factors that are way beyond their control. I have first had experience with this.
Most recently I have been teaching at a title one school. A title one school has a large concentration of students living in poverty. These students had significant behavior problems and I definitely felt the difference. The specific group of children that I was walking into had 3 teachers walk out because of their behavior. It was difficult to get my students to be on grade level with their standardized test. It was not that these students were not capable of learning, and the problem was not the fact that I wasn’t a good teacher. The problem was that it was so difficult getting these children’s behavior under control and this was the only thing that was stopping them from learning. However, once the behavior got better so did the grades and this is where this kind of system becomes tricky and the friendly competition is not so friendly. As a teacher putting your best foot forward and spending sleepless nights preparing for lessons you too deserve a bonus.
How can teachers possible lose their chance at a bonus for reasons like these? Ultimately, it isn’t the best suggestion, however, there are several districts in which they have incorporated a performance-based pay compensation plan and it has in fact been successful so there is more talk of it spreading across more districts in the United States. It is not that it can’t work. The problem is that in the end a lot of teachers will not end up receiving their well-deserved bonuses and sometimes teachers do have a problem with it but are just afraid to speak up about it.
I have also worked at call centers with ridiculous quotas. Prior to starting my teaching career, I was a sales representative at a call center. Imagine working at a call centers and it seems as if your quotas cannot be me. They are offering incentives but you can never qualify for them. At the call center that I was previously employed, it was our job to sell magazine subscriptions to customers that called in to order something from a catalog. We were supposed to make 90% of our sales. So, if 10 customers called in, we were supposed to sell 9 of them these magazine subscriptions.
It’s 2018, there’s not many people who still purchase magazines because everything that you can find in a magazine you can find it online, and it is the era of technology. Another contributing factor was the audience. Most of our callers were anywhere between the ages of 25 and 35 and were simply not interested in these magazine subscriptions. With that being said, it was very much like pulling teeth to get these customers to buy what I was selling. So here was my organization offering the greatest bonus and incentive plans but it would be a lucky day if we were ever able to earn them. Going in I was very excited and motivated because of the money that I could potentially make as I previously mentioned. I was attracted by the pay that was being offered but it was not the base pay. It included base pay and incentives. Over time I grew increasingly frustrated because I was never able to make the kind of money that I had imagine simply because of factors that were beyond my control.
This kind of system is supposed to discourage employee retention but, in my situation, it encouraged it. It didn’t take long for me to start my job hunt again. This time I was going to look for something that was just a little bit more guaranteed. I wanted something that had a good base pay. Even if they offered bonuses and performance-based pay, the base pay had to be enough to cover all my bills. I didn’t want my bills to solely depend upon whether or not I met my weekly goals.
This relates back to what I was previously discussing about being a teacher and having bonus potentials based on student test scores. What exactly happens when there are factors that are beyond the employees’ control? What about the students who are just not good at test taking? Yes, the bonuses seem like a wonderful opportunity but over time, as teachers, we become frustrated. Why are we getting paid less because of the job students do when we have already done our job? Overall, performance-based pay does have an impact on employee performance but the negative outweighs the positive and merits may prove to be way more beneficial in comparison.
Ultimately, there are pros and cons when it comes to performance-based pay and employee performance. Performance based pay does have an effect on employee performance. It can serve as a motivational factor, and it can also encourage a little friendly competition. However, most of the time it will end up leading to frustration and defeat. It is meant to motivate, but sometimes things just don’t go as planned. Overall, merit pay may be just a little more reasonable for employers and employees. In situations where these bonuses are already so hard to attain, being given a pay raise once your performance has exceeded expectations will be more likely to stick. It will play a much more significant role in employee motivation. Employees are more likely to push towards improvement when the reward is meaningful to them. If it is not meaningful, they won’t even bother making the effort. Once an employee receives a bonus once for outstanding work, they will continue to improve and do outstanding work because as employees we love the sound of pay raises.
Think about it, no matter what job or career path you take a pay raise is always going to be way more beneficial to you as opposed to bonuses. Especially when the goals that are set for you is so hard to reach. For employees to receive the bonus they have to meet or exceed a goal. This means that if an employee wants to earn that bonus again, they have to keep meeting or exceeding that goal. Specifically, as an experienced teacher the thought of having a performance-based compensation plan would make me very nervous.
In the end, teachers will start to teach what is on the test so that they can end up with the higher test scores. What this means is that the higher order thinking that students need will be completely tossed through the window. It is not worth it as it proves over and over again to be ineffective. Employers won’t be satisfied, and employees will become less committed over time as they are overcome with feelings of defeat and frustration. To conclude, performance-based pay does have an impact on employee performance but it is not beneficial to employees or the overall good of the organization.