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Pay for Performance: Fact or Fable


Employees are the key drivers of any organization be it profit either making institution or charity organization. People working in any organization determine the success, market competitiveness, and future of that organization. This is the reason why in every organization there is a personnel department. This department helps in keeping in contact with workers, identifying their needs and making sure that both the needs of workers and that of the organization are met as per expectations.

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According to Arnold (1983 p. 297), A personnel manager should have psychological, sociological, philosophical, political, economical and managerial knowledge for him or her to undertake this complex duty. This department involves planning, organizing, directing and controlling the human resource activities. Planning deals with identifying the job to be undertaken and getting the number of workers that an organization requires to meet its stakeholder’s needs. Organizing is designing of the nature of relationship among jobs, personnel and physical environment, these relationships aid in allocation of duties in order to meet the firm’s set targets and goals.

Directing is the means of getting workers in doing the job allocated to them to put plans into action. Controlling involves regulating the personnel activities. It compares the personnel planed activities against the personnel performance. The managers would identify any deviation and introduce corrective measures. These measures may include increasing more personnel if the outcome was as result of shortage in work force, train the personnel or even fire the worker if he /she underperformed.

The personnel department functions include staff training, development, staff compensation for the employees’ contribution towards firm goals, staff appraising, staff promotion, dismissing and terminating, disciplining, motivating and settling employees’ disputes. All this activities are involved in the process of managing employees’ performance.

“Performance management is the systematic process by which an agency involves its employees, as individuals and members of a group, in improving organizational effectiveness in the accomplishment of agency mission and goals” (U.S. Office of Personnel Management). Modern business environment is changing as a new day comes and goes. Therefore, each organization should work tirelessly to keep phase with the changing environment. As a precaution to this global problem each organization seeking to remain effective and competitive has embarked in performance management.

Performance management process involves activities, which relate to each other and without one or failure to meet one the process would become a failure and objectives of the organization are not met. It is a collection of activities that assist in managing individuals and groups in order to attain high standards of performance. The process of performance management involves planning, monitoring, developing, rating and rewarding.

The first step in performance management is planning on how the work shall be done and setting goal and targets to be met. In order for any organization to achieve its goal it must have a plan before engaging in any activity. Planning for work is done at an early stage for effective organization. Planning is all about giving direction to work groups or individuals in order to join their efforts in achieving organizational mission.

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For employees to perform effective they should be made aware of the organizational goals by being involved in the process of planning. Employees must have insight on what is to be done, the reason for doing it and what is expected to be done before they engage in any activity. In planning for employee performance certain elements and standards to gauge their performance which are measurable and could be achieved are established. This standards and elements give direction on what is expected from them. Employees would be accountable for outcomes of their responsibilities.

Monitoring is another element in performance management process. Whenever individual or groups are assigned duties they have to be continuously monitored. Plan implementation has to be monitored so that objectives outlined in the plan are achieved within the stipulated time. So to monitoring is a continuous measure of “performance and giving feed back to employees and work groups on their progress towards reaching their goals” (The Chartered Institute of Personnel and Development). Monitoring helps in controlling any deviations from the planned expectations for successful achievement of goals of the organization. For effective monitoring a policy document may be prepared to provide regulatory policies to employees towards achievement of the set targets.

In monitoring performance, management does reviews with their employees by comparing their performance against the standards and elements. Monitoring helps the organization to see how its workers are meeting the set standards. As result of continuous monitoring any deviation from expected performance is identified in advance and assistance given where is required before the worse happens.

The third activity in performance management process is development of workers. For an organization to remain effective in implementation of its strategies and achievement of its goal it must have in place the right and quality human capital. According to Maslow’s hierarchy of needs, human beings’ needs represent themselves in levels and need to be addressed. Employees have different needs at place of their work and it’s the duty of the organization to address and evaluate workers’ needs. A gap exists in knowledge, altitude and skills of workers and the firm should understand this. By collecting data on skills of employees will assist in identify what an individual needs to learn in order to be competent at his place of work. Therefore, developing is increasing capacity and ability to deliver.

This can be done through training, improving work processes or employing consultancy services. Workers training can be done through induction training and establishing career development structure. Developing worker would help in preparing workers for higher levels of jobs, improve performance, “increase job related skills and increase competencies on worker s.” (Thomas et al) Development helps employees to keep up to environmental changes both internal and external such as introduction of new working processes, new workmates, technological changes and increased competition. Employee development is key element in performance of an organization since it helps the organization to create the best human capital. It’s through development that any deviation identified during monitoring and planning would be corrected since now employees have new skills and a repeat of the same in future would be avoided. With new skills and ideas obtained during training will help in solving earlier problems.

Rating employees’ performance is key activity in process of performance management. With rating, employees’ performance is summarized, compared and the best performing employee is identified. With time the management would wish to find out how each employee is performing his or her task. Rating will help the management understand the reasons why there is difference in performance of employees. Evaluation might be carried out to identify the weakness of the non- performing employees and proper measure taken to assist them. Rating may be of great importance to the organization because workers would work toward being rated as the best. This comes with improved performance and execution of jobs in time. It’s through rating that the organization would decide on who to reward either by promotion or salary increment.

The last element in performance management is rewarding. According to how one does his or her duty the end result may either be negative or positive. After employees have done their work, and done it properly now the management can decide to reward them with respect to their performance. Rewarding is a means of boosting morale of workers while performing their duties. Rewarding is a means of appreciating individual employees and work groups, “for their performance and acknowledging their contributions” (McGregor p, 90) towards attainment of organizational goals.

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Organizations which have carried the process of performance management including all the elements of the process have been successful in attaining their targets. This has been achieved by setting goals and planning for work and monitoring the activities of each employee. Standards to be followed are set and the right skill developed to attain these goals. Rewards are given to appreciate the efforts that help to accomplish the mission.

Performance appraisal is a tool that assists in performance management. It’s an opportunity whereby individual employees and their managers “engage in dialogue about individual’s performance, development ant the support required from the manager” (Lawler p, 45). Performance appraisal provides opportunity to review on past actions and may be used as platform for enhancing plans and deciding on what to be done in future.

In appraising their performance, performance is assessed against the set targets, workers are given information regarding their performance and whether there is any progress acknowledgement is given to work well done. Direction on areas which require improvement is given, views on; what has happened and how improvement could be achieved are exchanged between the management and employees. Finally in appraising, means of improving performance is agreed upon between workers and employees.

Compensating employees’ contribution towards achievement of organizational goals is aimed at “motivating them to perform their best” (Dyer p, 239). If an organization does not recognize the efforts being made by its workforce may end up loosing if not all a few to their competitors. Another aim of rewarding is to retain workers for long time in order to reduce the cost of training new workers incase some leaves. Performance of an individual determines the range of payment if not a criteria for determining what one would be paid.

Employee’s performance can be of two kind; “incentives pay systems and pay-for-performance system. “In incentive pay plans, organization rewards measures outcome of work while, pay-for-performance systems, the organization rewards individual’s performance as measured by performance appraisal system” (Hammer p, 92). A pay for performance criterion falls in three categories which are input, activity and outcomes.

Input refers to what an individual brings to the organizations. Knowledge, skills abilities and efforts are the inputs which an employee brings into the job. Efforts put by workers in their jobs determine the final outcome. Activities refer to how someone performs his job and measure the way the work is done. It’s believed that if an employee does his work correctly the expected outcome is reached. Outcomes are the end results i.e. the product the employee creates for the organization. Outcomes alone cannot be used to measure performance alone in most cases, because; it’s difficult to evaluate and measure outcome for some jobs, some outcome may be achieved but not in desired or acceptable process, and the manner in which one performs his duty may be of great importance in evaluating one performance.

Compensating employees’ efforts involves many ways. Firstly, compensation can be through payment for salaries and wages. Secondly, promoting employees from their previous position to a higher position, and lastly through rewards and benefits.

“Pay is the most important and contagious element in the employment relationship, and is often of equal interest to the organization and employee.” (Sriyan de Silva) To the organization, pay; forms part of its fixed cost of production, its employees’ performance depends on amount they are paid hence the ability of the organization to compete and the rate of labor turnoff in any organization may be attributed to the amount they are paid. Employee requires to be paid because; he uses the money paid for up keep and also the pay represents his value to the organization.

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Most managers prefer pay for performance instead of merit pay and have been proved that both employees and managers have agreed that performance is important parameter in determining pay increase. For the program of pay for performance to be effective the organization must present a compatible situation such that if it is applied everybody will support the move. For the program to be feasible then it should fulfill the “parts of expectation theory which includes” (Evans p, 730). First, employees should appreciate the fact that the money they are getting is instrumental in satisfying their needs. Because the value of money is different to different people then this program should only work where employees are motivated by the amount of pay. Secondly, for it to succeed pay and performance must have a direct relationship. Lastly, there must be connection between the employees’ efforts and performance.

Employees should be in position to appreciate performance as an outcome of their efforts. The program assumes that all employees can not attain same level of performance hence there is a measurable difference in their performance. In any case there is a difference it might not be easy to quantify it. For example the work is done by a group of individuals one can not quantify who has performed better.

There are advantages of pay for performance system although; they have never been empirically proved. According to the organization if payment is based on pay performance then, an employer may employ more employees because they are only paid if they perform. If profits increase as result of improved performance employees will be paid more. Reduced profits due to under performance from employees may serve as a caution to employees to improve performance so that they could earn more. Pay for performance in an organization increases competitiveness of workers. However, pay for performance system should be applied if the results associated with its application is inline with organization objectives and where is used to reinforce other non monetary incentives used to motivate workers.

However, the principle of pay for performance has some undesirable aspects. First there is “conflict between focus on performance and the compensation goal of equity;” (Dyer and Theriault p, 237) with this it means that there is great difference in the pay employees get especially those in the same work group and do the same thing. Not every body is comfortable with this mode of payment, and incase it is applied in this situation; some feeling of unfairness may arise probably on those who view the system not desirable. As result some workforce may exit organization for others. This is a blow to the organization if in any case they join their competitors.

Another reason which makes the system undesirable is that the system may result to competition among the workers. In an organization there must be cooperation for efficient functioning of the firm. This competition within workers in the organization may distort required cooperation which slows down operations of the organizations. Therefore where people are working together doing same job, any difference in their pay package can bring disharmony hence under performance by the workers.

Thirdly, pay for performance may prove undesirable especially in administrative side. This system requires a lot of effort and time from the management for effective implementation. Incase the required staff effort is not put then the program might bring biased result which may cause conflict between the employees and the management. Also this program may ask for more qualified force to evaluate performance of workers. This will increase the cost of production hence a disadvantage to the organization.

Fourthly, issues to do with trust on the judgment of managers. The management through judgment determines the level of employee’s performance in this system. Employees will perceive this program as success if they have trust in the judgment of their managers. If this does not happen then, the program to them would remain as manipulation of them by their managers. Again, there might not be acceptable criteria to measure the performance of the workers and failure to recognize the fact that some outcome especially profits may be caused by events that cannot be controlled by the employee.


Pay for performance as discussed has it merits and shortcomings. Its effectiveness will depend on the management of the organization. If you ask many of personnel managers they will claim that this program is the best and it helps to promote competitiveness among the employees of organizations. Pay for performance is widely used in organization in performance management because it’s seen to motivate. Today it’s believed that it fair to pay people according to their performance. Competence related pay can be used to replace pay for performance although it’s also difficult to measure competence.


Arnold H. J and Feldman D. C. 1983, “Managing Individual and Group Behavior in Organizations,” New York, McGraw-Hill, pp. 296-301.

Dyer, L. Schwab, D. P. and Theriault, R. D. 1976, “Managerial Perceptions Regarding Salary Increase Criteria,” Personnel Psychology, 29: pp. 233-42.

Evans W. A. 1970, “Pay for Performance: Fact or Fable,” Personnel Journal, pp. 726-29.

Hammer, C. W. 1975, “How to Ruin Motivation with Pay,” Compensation Review, third quarter, pp. 88-98.

Lawler, E. E. and Porter, L 1969,”Perceptions Regarding Managerial Compensation,” Industrial Relations, 3, pp. 41-49.

McGregor, D. 1957,”An Uneasy Look at Performance Appraisal,” Harvard Business Review, pp, 89-94.

Sriyan de Silva: an introduction to performance and skill-based pay systems. 2008. Web. 

The Chartered Institute of Personnel and Development, performance appraisal. 2008. Web.

Thomas J. Atchison, David W. Belcher, David J. Thomsen, pay for performance. 2008. Web.

U.S. Office of Personnel Management, Performance management. 2008. Web.

White, D. S. 1983, “Can Merit Pay Work in Education?” American Educator, winter, pp. 8-1 1.

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