Performance Management and Reward
Lockett (1992) had very rightly said that “the essence of performance management is the development of the individuals with competence and commitment working towards the achievement of shared and meaningful objectives within the organization. All this supports and encourages the achievement.”
Performance Management is a process which is designed to improve organization team and individual performance. It is a shared/participative process, an integrating process which is based on agreements on accountability, measurement and review, feedbacks, development and improvements on a continuous basis.
Table of Contents
- 1 Performance Management and Reward
- 2 Components of Reward System
- 2.1 Financial Reward
- 2.2 Non-financial Rewards
- 2.2.1 Enhanced Dignity and Satisfaction from Work Performed
- 2.2.2 Enhance Physiological Health, Intellectual Growth and Emotional Maturity
- 2.2.3 Promote Constructive Social Relationships with Coworkers
- 2.2.4 Design Jobs that Require Adequate Attention and Effort
- 2.2.5 Allocate Sufficient Resources to Perform Work Assignments
- 2.2.6 Grant Sufficient Control over the Jobs to Meet Personal Demands
- 2.2.7 Offer Supportive Leadership and Management
- 3 How to Link Performance with Compensation?
- 4 Implications of Performance Linked Reward System
In the present scenario, the biggest challenges before the compensational reward system are to attract the right kind of human capital and to motivate them to develop and perform in a way that increases shareholders value.
The moment unless their reward and compensation system accomplishes these two objectives, most organizations cannot be affected in a highly competitive business environment. Just in case, simply spending a large amount of money is not enough; the money must be spent in ways that attract, retain and motivate the right people.
The organizations have to safeguards some points before introducing Performance Pay and these are given below:
- The criteria for measuring performance of work and contribution to company needs to be developed, communicated, understood and accepted.
- There should be clarity in setting target/results for measuring performance.
- Regular/Periodic Feedback on Performance should be conducted.
- Reward System/Performance Pay on line with desired target/result to be achieved.
- Appropriate ratio in pay which is subject to performance should be linked.
- Need for a periodic evaluation of the scheme.
- Need to recognise that performance when influenced by factors outside control how will they be evaluated (Exchange rates, recession, sudden spurt/fall in demand).
To create reward systems that focus on excellence and treat employees as human capital; the investors require a major change in the way most systems operate. The reward system generally treats employees as jobholders and rewards them individually on how well they perform their jobs.
The investors suggest a different approach to rewards by viewing them as human capital in two respects:
- It suggests basic reward on the value of human capital that people bring to organization because their job is at a particular moment is much less important than the value of their knowledge and skills.
- It also suggests that rewarding people according to how effectively they use their human capital – their knowledge, skills and competencies – to help the organization improve its business performance.
In organizations, creating a reward system that recognises the value of human capital and reward performance excellence is not easy because it requires a total departure from the traditional compensation system and careful articulation of the existing reward system, business strategy, organizational design, information systems, etc.
When designing a performance-linked reward system, it is conditioned by a variety of factors; such as, nature of business, type of technology, the attitude of unions, and human resource strategy of the organization. Therefore, there is no standard model can be recommended and it has to be customized.
When performance is linked with reward systems, it reduces labour cost, results in an increase in real wages and motivates performance. They provide a method of observing cost escalation on account of pay increase from time to time. Thus, help in sustaining the competitiveness of the organization.
If performance-related pay is used in isolation, it has been increasingly realised that it may have little impact on motivation for performance. The appropriate conditions have to be created in the organization for performance-linked reward system to be motivationally effective.
Proper information, proper consultation, proper communication, proper training and development of the employees, developing a proactive attitude and performance-oriented culture, providing non-monetary incentives and evolving an efficient management performance involved as an outcome of this.
The performance of employees depends on mainly three factors: skill, knowledge & motivation:
Employees performance= f (SKM) + External Environment
S = Skill & ability to perform task
K = Knowledge of facts, rules, principles & procedures
M = Motivation to perform
Components of Reward System
The key components or elements of an organization’s reward system can be categorized as follows:
The financial rewards include direct monetary rewards in terms of cash for their work and achievements. For example Salary, wages, incentives etc. given to the employees.
Behavioural scientists have been describing for the past 50 years that non-financial rewards is critical which contains many of the reward components for improving workplace performance. The non-financial rewards can be given in different forms which are as follows:
- Enhanced Dignity and Satisfaction from Work Performed
- Enhance Physiological Health, Intellectual Growth and Emotional Maturity
- Promote Constructive Social Relationships with Coworkers
- Design Jobs that Require Adequate Attention and Effort
- Allocate Sufficient Resources to Perform Work Assignments
- Grant Sufficient Control over the Jobs to Meet Personal Demands
- Offer Supportive Leadership and Management
Enhanced Dignity and Satisfaction from Work Performed
It is the least costly and one of the most powerful rewards an organization can offer to an employee to recognize the person as a useful and valuable contributor at the workplace. When this kind of recognition is given, it leads to employee feelings of self-worth and pride in making a contribution. At the same time, there are few people want simply to be given something.
They have the personality who would much prefer to know that through their own efforts, they have earned and deserved rewards. Every compensation and non-compensation reward component used in organization should carry with it the message. “We need you and appreciate your efforts.”
Enhance Physiological Health, Intellectual Growth and Emotional Maturity
If the organization is considering the number of hours a person spends on the job i.e. on travel to and from the work site, and off the job in attempting to resolve job-related problems frequently receive minimal attention until a serious problem occurs.
Once this situation occurs, it overrides all other employee concerns and activities. In present scenario, the modern health practices recognize the direct relationship between the physiological health and intellectual and emotional well-being of each individual.
There is an old saying that “One man is no man.” Although there are constant reminders of what one dedicated person can achieve, there are even more reminders that one human alone is weak and however, with concerted action, people can accomplish almost anything.
This is the world of extreme specialization where people need and rely on other people more than ever. There is the opportunity to interact in a socially constructive manner with other people is one of the most valued rewards gained from working to enjoy the comradeship of workplace associates.
Design Jobs that Require Adequate Attention and Effort
Organizational scientists have discussed at length the problems arising boredom related to work assignments over the past 40 years that were developed in the last quarter of the nineteenth century.
The jobs were designed so that workers could be taught quickly how to perform a few highly repetitive tasks and workers then were required to perform these few tasks for as long as they remained on the job. It is proved to have serious drawbacks what first appeared to be an efficient way of melding human resources with machine technology.
Allocate Sufficient Resources to Perform Work Assignments
When the organization requires employees to perform assignments for which they have neither the knowledge nor the skills opens the door for problems. In this situation, not only is the organization likely to suffer because of outcome failures but employee job-related interest and satisfaction are apt to break down because of the likelihood or inevitability of failure.
In these times, most employees seek a sense of accomplishment from their work and they want some degree of challenge, but they also want to feel reasonable, sure that they can succeed.
Grant Sufficient Control over the Jobs to Meet Personal Demands
Behavioural scientists have discussed the need to grant employees greater opportunity to participate in organizational decision-making processes from the 1950s to the present time. The organizations are composed of all kinds of people with all kinds of decision-making desires is one problem with this participation concept.
There are some people who simply want to be told what to do, to be shown what is an acceptable level of performance, and then to be left alone to do their jobs. At the same time, there are few people in every organisation want to tell top management how to run the organization.
Between these two extremes present in every organization is a wide variety of demands for a greater voice in determining how to perform assignments.
Offer Supportive Leadership and Management
This dimension is very crucial and difficult to separate from all other non-compensation rewards, but it is so important that it must be recognized as a unique dimension of the non-compensation rewards and not just a component of the other factors.
A performance appraisal system is often the link between rewards which the employees hope to receive & their productivity. The linkage can be thought of as follows:
Productivity — Performance appraisal — Rewards
Performance-based compensation affirms the idea that there will be rise in pay for performance accomplishments rather than for seniority.
What is variable pay?
Pay for performance linked with normal compensation is also known as variable performance-linked to pay or contingent pay where a performance-oriented philosophy is followed.
The organizations do not guarantee additional or increased compensation simply for completing another year of organizational service instead, pay and incentives reflect performance differences among employees. The employees who perform will receive a larger compensation increase but those who do not perform satisfactorily see little or no increase in compensation.
Thus, there are employees who perform satisfactorily, advance in relation to market compensation levels, whereas poor or marginal performers may fall behind. Along with this, the bonuses are determined on the basis of individual, group, and/or organizational performance. There are few organizations follow totally performance-oriented compensation practices.
However, in the midst of organizational restructuring occurring throughout many industries, organizations look for compensation systems that break the entitlement mode and even in the public sector, some organizations have recognized the need to shift toward more performance-oriented reorganized compensation practices.
The set of four main questions in relation to reward system are coming to existence which are as follows:
- Who should be rewarded?
- What rewards should be given?
- How should assessment be done for deciding the rewards?
- How rewards should be given?
We shall discuss each issue with examples of practices in the Indian organizations:
Whom to Reward?
The rewards are symbols of appreciation and recognition and it reinforce what the organization values and wants to be strengthened. Therefore, almost every one related to the organization can be covered by the reward system.
Individual Employees: The individuals who were showing exceptional behaviour and high performance should be rewarded and they are being rewarded by all organizations that follow a reward system. The variable pay is one type of reward and probably about 20% of managers are likely to get rewards.
Teams: It has been already stated that individuals work in teams, and the organizations need strong, cohesive, competent and self-managed teams and therefore it is required that in future more and more rewards should be given to teams. The teams need to be empowered by giving more autonomy and resources to high performing teams.
Organization: Exceptional performance by the organization needs to be celebrated and everyone belonging to the organization then has a sense of pride.
Outsiders: The customers, suppliers, vendors etc. can also be covered in the reward system.
What to Reward?
It is obvious and proved that rewards are meant to reinforce desirable behaviour, high performance, values etc. It is about whatever the organization wants to be strengthened and promoted further and some of the following aspects can be rewarded; some of them are:
Performance: Employees performance needs to be rewarded; both of individuals and teams and the criteria of performance excellence and their weightage may be already determined.
Organizational level: At the end of every year the organization have to declare profit, market share, customer satisfaction, employee satisfaction, achievement index of one thrust area. They should also celebrate exceptional events like new product launches, export awards, crossing a significant milestone etc.
Unit/Department level: They should declare in advance the internal customer satisfaction, innovations leading to efficiency, achievement-index-of one thrust area, quality, culture building, team work, creativity, internal customer service, cost reduction, strategic initiatives, etc. Any of these could also become annual thrust areas or some other thrust areas could be declared by the organization or the unit/department.
Speed and efficiency: Ericsson Falcon Award is given for Speed and efficiency. The purpose of this award is to promote a fast, urgent work pace with speed and efficiency. The Qualifiers are: increase in efficiency; cost savings for the company; earnings/rewards for the company. The demonstrated behaviours for the award are:
- Exceeds timelines consistently
- Completes projects in record time
- Always withstands pressures
- Does not wait for assignments, decides what is needed to be done
- Respond promptly to sudden/unexpected problems in own unit/department
Loyalty: When employees of Hughes Software complete their first year, they are presented a watch; when they complete five year, they (and their families) are given a company paid holiday. Ernst & young also reward people who stay in the company in considerable time.