The Relationship between Pay and Performance
As the competition level rise in the market, the business organizations are in search of finding new techniques and procedures to increase the productivity level of the organizations. To grow and sustain in the competitive market, business organizations needs new and innovative talents to work in the organization towards achieving organizational goals. Generally, talented and skilled employees are often limited in the labour market, so highly attractive pay structures can bring them under the organization. For any business organization, the pay system is important and is always willing to understand what will validate the pay system. Thus the human resource management is focusing on the compensation management to increase the employee performance and motivation within the organization. But how to measure the efficiency of pay for performance is one of the major complex tasks for most of the organization and human resource departments. In most of the contemporary business organizations, pay system is equivalent to the organization’s production and performance. This system is much of a basic and simplified approach and no matured appraisal technique is applied in the process.
In this article, the author is going to discuss the necessity for the evolution of efficiency of the pay system professionally and accurately as the decisions regarding designing and execution of pay for performance system as they are fundamental for organizational performance and sustainability. As a result, organization’s decision makers must cautiously judge the payment design alternatives considering the negative and positive impacts that will have on the organization. In this report, the author has covered the Efficiency Wage theories focuses exclusively on the relation between pay and performance. This article is about critically exploration and analyzing the relationship between the pay and performance through focusing on the actual scenario of the labour market and existing literature studies conducted on the relationship.
There have been a number of studies performed by human resource scholars regarding the relationship between pay and performance and recognized a causal relationship between them. However, there has been little in-depth analysis regarding relationship involving pay and performance in Australia. According to many scholars has believed of an existing relationship between pay and performance but no empirical evidence or comprehensive study has not been conducted to support the relationship. So, there is an urgent need for filling the knowledge gap that is present in this subject matter. Considering the theoretical aspect, human motivation and performance at the workplace are taken to be that of reinforcement (Liu, 2013, pp-526-528). To understand the relationship between pay and performance first it is important to understand the concept of pay. Payment and compensation are two words which are often used interchangeably by scholars, but often they are treated in a different way from the concept of rewards (Bebchuk, 2009). So, it can be stated that the two terms can have different literal meaning but are very close when referring in context to human resource. Payment can be explained as the term which means reward that is given to an individual in exchange for his skill, labour or knowledge (Pieroni, 2014). The reward can be further sub-divided as basic pay, contingent pay, variable pay, and reimbursements and compensation (Armstrong & Murlis, 2004). Scholars and management practitioners often argue that pay system is an essential factor that motivates workers to perform better. Pay is the most crucial and contentious factors in the employment system and attracts an equivalent interest from both the employer and employee (Sommerfeld, 2013, pp. 4236-4247). For an employer, payment represents an important part of his expenditures and is also significant to his workforce’s performance and to competitiveness and it can also affect the organizational capability to retain the workforce and upgrade its quality. It is significant to an employee because he is compensated in exchange for his knowledge, skill, and labour and it also helps him to fulfill his basic needs in life. Sometimes, pay is also important for the government as it has a direct and indirect relation with the macroeconomic constancy which includes unemployment rates, inflation, and purchasing power of the population and socio-economic growth of an economy (Bootsma, 2010).
Efficiency Wage Theory
Business organizations often motivate and persuade employees by using rewards and praises, which are often considered as monetary benefits. Employees experience the benefits and adapt their behavior consequently. The performance based remunerations and pay system was initiated during the late 1980s. It can be simply explained as the payment that is remunerated to an employee based on the performance at work. This is one of the most common motivation techniques that management uses in modern business organizations to motivate and enhance employee performance (Caldwell, 2010, pp. 87-88). The term performance can be best explained as the potential way by which an organization utilizes individual and resources to achieve the desired goal or objective. The main focus of performance is to achieve the desired result. The level of performance generally describes how effectively and efficiently the organization has utilized its resources to achieve the desired results (Greene, 2013, pp. 1415-1432). The idea of performance-based payment was first proposed by Frederick Winslow Taylor as Taylorism. In his book The Principle of Scientific Management, Taylor argued on gaining maximum efficiency in manufacturing units from both the workers and tools and enhancing the performance and profit margin of the organization (Noe, et al. 2010). He introduced the idea of production efficiency methodology by splitting and dividing every job roles and responsibilities into the minute and smaller segments for the better understanding of the workers. The basic idea of scientific management is to attain the highest job responsibility breakup to minute details of skills requirements and job learning points which are done by work planning. The system also divides direct labors from the indirect labors and substitutes the thumb rule productivity estimations with accurate measurements which initiate the time and motion learning for optimal performance, cost accounting, and tool and workstation design. As a result, the scientific management makes possible the system of wage determination. From the dawn of the industrial revolution, there has been a rise in concern among the scholars and practitioners regarding the subject performance management. Performance management is a method for creating a mutual consideration concerning what is to achieve and how it is to be achieved and it is a process of effective management of workforce which amplifies the chance of achieving the desired organizational objective (Taticchi, 2010). Organizations and managers use this tool to establish the efficiency in support an individual performance and achievements in relation to the institutional goals and linking performance to rewards and remunerations in reference to the diagram bellow. An excellent performance management system facilitates in the direction of the development of the overall organizational performance by supervising the performances of the workforce to ensure to achieve the organizational objective effectively. The figure 1 in bellow, illustrates the whole process of performance management system. This process sends regular and transparent feedback to the management for evolution of employee performance and accordingly facilitates in good planning for distribution and allocation of rewards and compensation.
The contemporary scenario is experiencing the rigidity in pay structure and unintentional unemployment within the market and wage difference in the industry. Researchers and scholars have come up with multiple theories to understand and explain the events about the relation between pay and performance. In the Effective Wage theory, an organization chooses to pay a higher wage so that the turnover rate of the organization reduces and enhance the productivity (Dunlop, & Segrave, 2016).
Snowdon, B., & Vane, H. R. (2005). Modern macroeconomics: its origins, development and current state. Edward Elgar Publishing.
The term market clearing wage rate can be explained by the number of labour supplied is equivalent to the demand of quantity of labour and in this case, the market will ultimately clear all the overkill the supply and demand. Some government policies extend the increase in pay in some specific situations and the result is sometimes productive but it can also worsen the unemployment scenario. According to economics scholars, efficiency wage is excessively elevated and so results into unemployment which is also very high. The efficiency wage model was developed to explain the unemployment and pay structures that surpass the market-clearing levels (Chiang, & Birtch, 2010, pp. 632-640). The model shows the reasonable justification for salaries that do not come under clear labour markets in existence of involuntary unemployment. Prominent economics scholars argue that “in the labour market, the concept of efficiency wages have a specific ring of truth” (Card, & Krueger, 2015). The simple efficiency wage theory explains the possible foundations of pay structure difference among employees with similar characteristics and the prolongation of dual labour markets (Weiss, 2014). These pay structures are not recompensing dissimilarities for non-pecuniary factors of job responsibilities which can have a direct effect on employee welfare (Weiss, 2014). On the other hand, the alternative efficiency wage models explain more precisely the microeconomic fundamentals for the payment efficiency correlation in developed markets. There is a direct origin of the wage-productivity relation from hypothesis about tastes, expertise, and data and statistics are essential to explore the benefit implications of unemployment and labour market segmentation in the alternative effective wage theory (Schmitt, 2013, pp-22, 1-28).
In the journal Pay for performance and work attitude: The mediating role of employee-organization service value by Flora F.T Chiang, the author has analyzed the different aspects of job satisfaction, the commitment to the management and turnover targets and how they affect the pay performance of the organization (Bootsma, 2010). The article has taken the tourism industry in Hong Kong and Hong Kong hotels are taken as the sample for the study. The sample collection was done on a random basis by distributing questionnaires across seven hotels and the total sample size was two hundred and fifty-eight. The result of the study shows that employees recognize higher a high PFP link they are likely to display extra optimistic work attitudes. The study also shows the relationship between the PFP link and work attitudes was intervened by P–O fit. Thus in the above-discussed article, new findings showed the significant relation between the reward practices and employee performance. The PFP improved the employee loyalty, satisfaction and performance and reduced the turnover rate in organizations which improved the overall service quality of the Hotels. This study contributed important aspects in the future study of service value congruence.
The article Is the Pay-Performance Relationship Always Positive? Evidence from the Netherlands examines the different aspects of management payment structures, managerial compensations, organizational performance and size and corporate governance in modern organizations. For the study, a total number of seven hundred and fifty annual reports were collected by the author in between the year 1998-2001 and information about executive compensations were collected (Duffhues & Kabir, 2008, pp. 45-60). Income tax statements and balance sheets were also collected in reference to the measurement of organizational performance and organizational size. The study explains how the strong empirical examination becomes unsuccessful in spotting and recognizing a constructive pay-performance correlation. Thus the article implied that other sources of deciding organizational trouble and narrative justification of managerial rewards could give a proper insight into the relationship between pay and performance. The findings of the study show how the predictable understanding the managerial compensation assists to line up shareholder’s interest along with managers. Thus, this study shows how dominant and powerful managers can influence the pay structure of an organization.
In the article “The Determinants of CEO Compensation: Rent Extraction or Labour Demand” the author shows that there is no direct relationship between the CEO salaries and organization’s performance among Australian Organizations. The CEO remunerations are one of the divisive topics and attract the constant attention of shareholders. The author has explored the factors like labour demands and rent withdrawals are the main reasons for CEO compensation in Australia. The authors have analyzed the factors like economic, legal, political and ownership to CEO compensation levels and investigated the connection involving expected surplus payment and succeeding organizational performance (Chalmers, et al. 2006, pp. 259-275). The result showed that there is a direct relation that links economic, legal and ownership traits that determine CEO payments or rewards. Although the study also explains how rent extraction is economically insignificant and does not sustain more than a year which is just opposite to its US counterpart.
McDonald’s is the largest fast food network around the globe and also ranked the most favorite fast food chain in Australia. McDonald’s has a very transparent and well-structured pay structure within the organization. In the Australian market, McDonald’s is one of those business organizations that have successfully implemented the rewards and provision systems to build a positive relation with its employees and make them motivated and work committed. The management of Australian McDonalds has made it a point that all its compensation strategies are aligned with the business strategies (mcdonalds.com.au, 2017). This initiative was appreciated when McDonald’s own Employee Benefits Award in 2014 and the organization is making a great effort to maintain that. According to the Andrew Gregory, CEO of Australian McDonalds, the business strategy, and the employee rewards strategy should go hand in hand otherwise the organization is going nowhere and expected to fail in the long run. So, the management is making sure that the reward strategy is by no means out of alignment. By any means, it happens the management will take initiatives to keep back on track.
Motivation is the key factor that keeps the employees focused at work. The management also gives incentives and supports favoured behaviours by allowing two bonus schemes among its employees. One of such initiatives is that in all top 10% of performing restaurants, employees receive additional 50p based on mystery shopper scores. Plus, the managers of the restaurants are also eligible for bonus systems also based on business growth, revenue collection, and mystery shopper score (CSR-McDonalds, 2017). So, it can be observed that how McDonald’s reward strategies well aligned with the business objective strategies. This has directly helped the organization to motivate its employees and give the exceptional performance which ultimately helped in achieving organization’s sales goals. The strategies well coordinate with organizational strategies which have also helped to improve the employee engagement and employee loyalty metrics. But the management of McDonald’s is flexible when it comes to employee benefit schemes. It allows employees to choose the benefit scheme that best suits them. McDonald does also have an effective employee communication system. The Total reward system and employee portal have assisted the employees to better understand and recognize the benefits that McDonald’s is offering them. The effective reward structure and efficient communication system in McDonald’s have resulted in the increase in employee satisfaction level in 2015 where 75% of the workforce in the organization feels that they have been benefited from the total system. The organization has also started different employee welfare benefits like pensions, healthcare, and well-being, staff travel allowance, family benefit, etc. From all the employee benefits that McDonald’s provide for the staffs with a helpful and convincing package has facilitated to increase employee engagement and performance in Mc restaurants.
Conclusion:
There is a direct and an indirect relationship between pay and performance. This article demonstrates the understanding the different aspects that affect the relation between the pay and performance. Pay on performance was initiated at the beginning of the industrial revolution and is still considered to the best approach when determining payment for the workforce. There has been different approaches and studies conducted to identify factors to improve performance in organizations as it is directly responsible for organizational performance. So, it can be concluded that organizations fix attractive salaries and other rewards to attract best talents in the market and also to decrease the turnover rate. For explaining situations specifically in Australia, author has analysed the reward and compensation strategy of McDonalds and examined how the organization is keep a close track between organization’s business strategies with employee reward strategies. Although pay on performance does not implies when concerning the top level management rather other factors like economic, ownership, legal, etc. Although pay on performance does not imply when concerning the top level management rather other factors like economic, ownership, legal, etc.
Reference:
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