Performance related pay
Reward can act as the 'catalyst' for improved performance and better productivity. But reward, as such, is not enough and in any case it is not a substitute for good management. Rather, it is a part of management. Certain basic criteria are essential for rewards to be effective. These include:
- Reward should be quick.
- Reward should be significant.
- The goals and rewards must be; known, understandable, and attainable.
- Reward must be distinctly and directly related to performance.
- Reward should be irrevocable.
- Reward should be compatible with job measurement.
If the reward plan is seen to be unfair and unrealistic, for example promotion on the basis of seniority or favoritism, it may have a definitely negative effect as a motivator. For rewards to be effective, they have to be generous and significant as noted above, hence they must be structured to attain a proper balance of motivating people to purpose and at optimum effort.
Rewards are generally reckoned to improve productivity by somewhere of the order of 20 to 30 per cent. This is nearly twice as much as that attained by goal-setting or job-redesign. But each incentive or reward system is likely to have value under certain conditions only. Hence to be effective, the rewards must be 'tailored' and changed to suit the specific conditions. There is no magic formula for all situations and at all times.
Productivity is usually but erroneously associated only with the workshop floor. But total productivity which ultimately determines the profitability of the entire organization is the sum total of the productivity at various levels right up to the CEO.
For if the workers are not given the right materials at the right place and at the right time, their productivity will suffer due to no fault of theirs. The manager, therefore, plays a vital role in the productivity of the workers and team.
One can even go as far to say that productivity is the only reason for the existence of the manager. Individually the manager may be considered nonproductive, in that he or she does not contribute directly to the production, but is responsible for integrating the work of his or her team into a total productivity effort, Thus, a manager can increase productivity indirectly by aiding to produce more, and here too, financial motivation plays a major role.
The financial rewards are basically of three types:
- profit sharing;
- job evaluation; and
- merit rating.
Profit sharing could be on a macro basis or on a micro basis. The former relates to the entire company as a whole and the latter to a particular section or group dealing with a particular activity and/or product. On a macro level, it would be difficult to identify and reward outstanding performance. This is possible on a micro level by treating the particular activity as a cost and profit center by itself. This is easier said than done, since overheads and other common services have to be charged and this cannot be done completely objectively. The cost allocation in such cases is somewhat arbitrary and the profit will therefore not be a true reflection of the performance of that particular group or activity.
In case of job evaluation, the various component factors have to be isolated and evaluated for purposes of inter-job comparison. Each factor is assigned a rating on the basis of a scale agreed beforehand by the union and the management joint committee. The total rating for each job then forms the basis of wage structure. However, there must be a base level, representing, in effect, the 'minimum wage', depending on the nature of work and the geographical area. In some cases and in some countries these are stipulated by law. A typical, though somewhat broad, list of job factors is as follows:
- working environment;
- physical characteristics;
- mental characteristics;
- extent of responsibility;
- training and experience.
In case of managers, the factors are:
- human relations.
Merit rating has been used as an indicator of performance. Each employee is rated, typically as excellent, good, average or poor, in respect of the following abilities:
- human relations, including leadership and motivation;
The rating, unfortunately, tends to be carried out purely mechanically and it carries a heavy bias of the rater who may be too lenient, may not be objective and may also have favorites or otherwise in the group being rated.
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