The stated advantages of time-rates payment are:
- Time-rates pay system is simple for a business to calculate and administer.
- It is suitable for businesses that wish to employ staff to provide general roles (e.g. financial management, administration, maintenance) where employee productivity is not easy to measure.
- It is easy to understand from an employee’s perspective. The employee can budget personal finance with some certainty.
- The quality of the output would not have a negative impact, since this system does not emphasise quantity of output.
- This system makes it easier for the employer to plan and budget for employee/labour costs (e.g. payroll costs will be a function of overall headcount rather than estimated output).
- This time rate system is open to inspection, since it is only based on the number of hours worked by the employees (McKenna, E. and Beech, N. 2002).
- The system encourages the retention of human resources by creating stability. The rationale is that employee retention and the stability of the labour force offer staff the chance to enhance their skills and efficiency over time (McKenna, E. and Beech, N. 2002).
The main disadvantages of time-rates payment are:
- It does little to encourage greater productivity – there is no incentive to achieve greater output.
- Time-rate payroll costs have a tendency to creep upwards (e.g. due to inflation-related pay rises and employee promotion.)
It could be argued that the TRP system has provided the baseline while other dimensions of wage system are developed, for example PBR is related back to TRP, where it is calculated on the basis of time saved in doing a particular job. Extending working time provides a mechanism for increasing output and enhances earning through overtime-pay (White, G. and Druker, J. 2000).
TIME RATES PAYMENT: PERSONAL EXPERIENCE
PAYMENT BY RESULT (PBR)
One basic way of regarding today’s competing organizations is to view them as a system. Doing so, there are multiple factors that need to be assessed in order for companies to achieve their objectives. Reward management is a crucial element for the present and future of a company’s survival. The reward system that we will cover at the moment is Payment By Results.
The perspectives from which we can evaluate the quality of this system are motivation, commitment and flexibility. We must bear in mind that each company has a specific strategy in a long-term basis; therefore all the decision-making should be compatible to the latter. Apart from that, limitations, in terms of environment have to be considered.
Employees want to earn higher or extra pay. Managers must believe that the “financial motive for work is extremely important, more so than non financial motives…and the most effective way of harnessing this motive is by the use of Payment By Results system…not simply by paying higher wages”(Behrend, 1959).
In a Payment By Results system, the individual is paid as per his or her output.
ie. Output α Payment (Reward)
Therefore, extra effort gives additional income to the individual.
Examples of this system include piece rates and commission.
Using this system, with examples including piece rate and commission, employees earn one third more than colleagues on a time rate system (Cowling & James, 1994). It goes without saying that every reward system can have benefits as well as drawbacks for every organization. These depend on a number of factors.
Advantages
As mentioned previously, companies have found it imperative to motivate their employees in order to engender their performance at work. According to this reward system, the extent of the additional income of the employees will be closely related to the quality of their work. Needless to say, this is an effective way of giving the right incentives to a company’s workforce to encourage them to excel and perform to the optimum. Apart from that, the creativity and imagination of each employee will be enhanced, so the company will be able to strive in their field.
Cost-effectiveness is vital when a company requires goals that will create beneficial results. PBR can reduce a company’s supervision costs. Since they already understand that due to the policy of the company they will be paid according to their own results, it gives them an incentive to perform as if they were supervised. So, it is all about finding the right way to harness an advantage. And PBR can offer a very effective solution for a company, because it is easily transformed efforts into high earnings achievements (there is no cap in earnings to an individual; the sky’s the limit).
In addition, the emphasis reinforces the psychological contract between employer and employee and implies that the company wishes to “share” with their workforce. By showing interest in offering the conscientious employees additional income, organisations can, in a discrete way, enforce their employees’ commitment and, moreover, make them believe that the company will provide them its full support. This entirely beneficial outcome is possible by being as objective as possible when assessing the individual’s output.
Taking into account the Proctor and Gamble (P&G) case study, Bob Wehling, P&G’s Global Marketing Officer asserts that their main objective was to increase top-line sales growth. The tool they used to achieve this was PBR. Putting aside the commission-based agency remuneration, PBR was the system they fostered to pay their advertising agencies a percentage of the sales and increase their flexibility. So the advertisement business world found an ally for a more optimistic future development.
The creation of a stable workforce is also a rather favourable goal, especially when occurs for the long-term. Making use of the PBR reward system companies can acknowledge the value of each employee and offer them benefits accordingly. Therefore, it is rational to believe that by doing so the employees will be highly satisfied by the behaviour and the recognition of their company.
Disadvantages
However beneficial can this reward system be, it relies heavily on sensitive criteria because the quality of individual’s work is not the easiest thing to assess in many jobs. So, this can bring about many drawbacks. Someone might argue that it is in the company’s hands to take such difficult situations in their stride by setting appropriate criteria for evaluation. Yet, problems regarding this do occur. Some companies do measure their employees’ outcome by sales (like the Procter& Gamble case study) and others by the increased number of clients. However, what is vital for a company is that they should be aware of their employees’ average abilities and make effort in guaranteeing that the final quality of the products or services they provide is always more important than the quantity.
Problems may also arise when it is difficult for internal or external reasons to install PBR or when the trade unions might feel upset or unwilling to accept the way by which they are evaluated. In addition, PBR is likely to bring about a friction between employees when it comes to team-work, due to the fact that on the one hand all will try to perform their best, but on the other hand the will try to improve themselves at expense of their colleagues. Again, it is the obligation of the organization to settle specific rules and roles in order to avoid a negative potential situation like that. Payment By Results system is expensive to install and maintain. Output cannot be easily measured – data can be manipulated and falsely recorded. One important condition that should not occur is that increase in production or output must not be at the expense of quality. Money is not the only Motivator.
Recommendations
One could reasonably wonder whether PBR is a reward system that is worth installing and maintaining. Although there is no certain answer to a question like that, it is recommended that any company interested in using this system should take some things into consideration. For instance, the organisation must have clear and well-planned standards not only of the goals of a company, but in the regard to the procedures that an employee’ s outcome is measured. Apart from that, a healthy interaction is more than necessary, in order to bring about a balanced rapport between company, managers and simple employees. We note that all of these are mere recommendations and that each company, according to their culture, strategy, structure and power, can have a distinct way of installing a Payment By Results system.
PAYMENT BY RESULT: PERSONAL EXPERIENCE
I worked in ING Vysya Life Insurance Company in India. My pay structure varied according to grades which were dependent upon an individual’s performance, competence or skill.
ING Vysya Life Insurance Company Case
Work from 30 minutes up to ‘n’ hours.
Payout ∝ Commission
i.e. Larger payout ⇒ Larger commission.
My commission was at 8 % of the premium collected. However the grade structure was:-
Premium > Rs.20,000 ⇒ 10 % of premium collected
Premium > Rs.30,000 ⇒ 12 % of premium collected
Premium > Rs.40,000 ⇒ 14 % of premium collected
Premium > Rs.50,000 < Rs.70,000 ⇒ 16 % of premium collected
Premium > Rs.70,000 < Rs.90,000 ⇒ 18 % of premium collected
Premium > Rs.90,000 ⇒ 20 % of premium collected
In addition, the company also provided daily spiffs (Special Performance Incentive Fund For Sales)…First sale = Rs.100
Premium > Rs.15,000 ⇒ Rs.300
My Company also provided incentives for people with maximum premium volume collected for the month, maximum sales for the month and maximum policies for the month. These incentives included free holiday packages, free watches, free company ties ( given only on the basis of performance ), free food vouchers, etc.
ING Vysya Life Insurance Company was an informal company with a laid back attitude but with a zest for competition. Every individual got paid on the basis of his or her performance.
Like Charles Darwin said, “ it is the survival of the fittest. ”
The advantages of this system are:
- Clearly indicate pay relativities
- Allow better control over the fixing of rates of pay and pay progression
- Easy to explain to employees
- Adds motivation for employees to aim higher
The disadvantages of this system are :
- Defining grade boundaries is a matter of judgement which may not always be easy to defend
- Pay ranges create the expectation that everyone is entitled to
- Reach the top of the scale
As you can see from my personal experience, the system that ING Vysya followed was Payment by Results.
If I had to sum the pay structure it would be…
Result ⇒ Pay (Reward)
No Result ⇒ No Pay
Conclusion
With the move towards Human Resource Management, traditional Payment By Results schemes have tended to be subsumed under the general term of performance related pay. Nevertheless, there does appear to be a resurgence of the use of Payment by results schemes through the payment of bonuses that are tied closely to tangible results.
For example, Easyjet pays each employee a fixed sum of 80p for every seat they sell and this is done at the employee’s own pace. Originally Easyjet had a fixed salary and a small commission but the company had to pay supervisors to monitor. The switch to piecework eliminated this problem completely. Now the staffs supervise themselves and the motivating effect of this payment is very clear.
PAYMENT BY RESULT: CASE STUDY
Taking into account the Proctor and Gamble (P&G) case study, Bob Wehling, P&G’s Global Marketing Officer asserts that their main objective was to increase top-line sales growth. The tool they used to achieve this was PBR. Putting aside the commission-based agency remuneration, PBR was the system they fostered to pay their advertising agencies a percentage of the sales and increase their flexibility. So the advertisement business world found an ally for a more optimistic future development.
The creation of a stable workforce is also a rather favorable goal, especially when occurs for the long-term. Making use of the PBR reward system companies can acknowledge the value of each employee and offer them benefits accordingly. Therefore, it is rational to believe that by doing so the employees will be highly satisfied by the behavior and the recognition of their company.
PERFORMANCE RELATED PAYMENT (PRP)
Swabe provides a clear definition of performance related pay as ‘a system in which an individual’s increase in salary is solely or mainly dependent on his appraisal or merit’ (1989). Whichever definition one favors, there are a number of consistent features including (i.) it being a top up on another method of payment which will typically be time based, (ii.) a bonus measured by the level of the performance (iii) performance assessed by predetermined objectives e.g. Good customer service, and (iv) an assessment normally conducted by a manager.
Various commentators have listed a number of advantages and disadvantages in order to assess the value of PRP in relation to the modern business environment. These are usually suggested without placing any particular weighting, and the following tend to be the most common.
Advantages
- Provide employee incentive by rewarding them for reaching targets.
- recruits high performers and poor performers leave
- provides feedback to employees as they know when they have performed well
- equitable in that better performers get paid for their efforts more that poor performers
- facilitates organizational culture change from one that is performance focused from one that is complacent
Disadvantages
- discourages open communication as employees fear appraisals being adversely effected
- undermines co-operation
- complicated to calculate and measure which effects time and cost
- can be subject to bias through subjectivity of appraiser
However, in order to evaluate this method of payment thoroughly we cannot somply list a set of various advantages and disadvantages. We have to also assess whether or not the advantages outweigh the disadvantages. Byars and Rue have asked ‘if relating rewards to performance is desirable, why the practice is not more wide spread?’ They conclude that the answer is the absence of any preconditions including:
- trust in management: skeptical employees wont buy it
- absence of performance constraints: employees should not be hampered by factors beyond their control
- trained supervisors: understanding appraisal technique is not straight forward
Additionally, Applebaum and Shapirro (Mckenna and Beech 1995, p 137) have added other factors including:
- sufficient differences: must be possible to distinguish employees on the basis of performance
- Pay ranges: there must be sufficient width in the pay structure to accommodate the above distinction
In reply to the question above Shaler asserts that ‘when appropriate conditions do not exist, disadvantages far out weigh the advantages’. However, does the reverse hold true?
It is possible to conclude that whether the advantages outweigh the disadvantages will always depend on the company. However, this is a rather inconclusive and unsatisfactory statement. A more appropriate conclusion is that when the preconditions do exist there is no reason why the advantages of performance rated payment should not outweigh the disadvantages. Further, Duncan Brown of Towers Perrin has stated ‘failures don’t stem from fundamental weaknesses or conceptual motivation issue but typically relate to unclear objectives, bad design and poor implementation’
A case study of a success might shed some light on the subject.
PERFORMANCE BASED PAYMENT: CASE STUDY
Local government Chester Council, Pennsylvania:
It is evident from the case study that the reasons for failure that Brown highlights, including unclear objectives, bad design and poor implementation were absent.
Cleary defined objectives were set out and the use of skilled Management Consultants guaranteed the quality design of the implementation of this pay system. The pay for performance applied by the company, Chester County, resulted in the employees having a clear view of what was expected of them and they were given the chance to advance their careers through their own hard work. Further, once the implementation was complete various assessments were conducted to effectively appraise the system in term of employee performance and satisfaction. This facilitated the successful implementation of the PRP system.
PAYMENT SYSTEMS AND MOTIVATION THEORIES
Whatever method of payment system being used by an organization there is an inherent limitation in that any method of payment is only one factor of the much broader topic of worker motivation. Discussion of the merits of various pay systems would be deficient if the theories regarding worker motivation were not examined. A brief analysis of a number of these theories shall facilitate further clarification as to which method(s) are most appropriate in the modern business environment.
The discussion of various motivational theories allows exploration of the validity of these various payment systems from one another. For instance, F. W. Taylor, famous for the development of the school of ‘scientific management’, identified money to be the single most important goal for workers and was therefore vital to motivate them (1911 cited Dawson 1993, p.7-8). However, there were substantial problems with Taylor’s theory, most notably that money was not the only motivator. Further, White and Smith assert that while money may affect motivation it may not create the effects desired by employers (1981 and 1983 cited Dawson 1993, p. 8). Workers often resist the offer of increased wages because they fear that acceptance will result in job loses as less people will be required to work faster. Also, they may fear that the increased performance targets, occurring as a direct result of higher wages, will become the normal expectation once they have been initially achieved. Thus, Taylor takes a very narrow view when trying to fully understanding worker motivation.
One of the most influential motivation theorists is Maslow (1943; 1954; 1971 cited Huczynski and Buchanan 2001, p 240) whose work has been particularly influential, receiving wide recognition amongst practicing managers because of the theory’s intuitive logic and ease of understanding. Rather than emphasizing a single source of motivation, he hypothesized a hierarchy of needs in which individuals sought outcomes that satisfied needs in an ascending order. He suggested that within every human being there exists a hierarchy of five needs. As can be seen from Diagram 1 below, these needs include Physiological, Safety, Social, Esteem and Self-Actualization. Physiological can be understood in terms of basic biological needs
Including hunger, thirst, shelter and sex. The participation in paid employment can satisfy the majority of these needs effectively. Safety is seen in terms of security and protection form physical and emotional harm (for instance, a safe working environment) while Social needs are indicative of affection, belongingness and acceptance (such as, social clubs and good relationship/friendships with your work colleagues). Esteem is concerned with self-respect, autonomy and achievement (for instance, being given more responsibility within the workplace to make you feel like your employment actually means something) while Self-Actualization refers to the desire for self-fulfillment, the desire to become everything that one is capable of.
Diagram 1: Robbins 2001 p. 156
As each of the needs become satisfied the motivation to satisfy the next becomes more dominant and the individual moves up the steps of the hierarchy. Thus, once a need is substantially satisfied it no longer becomes the dominant motivator. Further, Maslow separated these needs in to a Higher (Self-Actualization and Esteem) and Lower (Psychological, Safety and Social) Order, where higher order needs were made internally (intrinsically) and lower order needs were satisfied externally (extrinsically). Additionally, payment systems themselves can actually act as intrinsic and extrinsic rewards themselves. For instance, PRP can give the employee the security in knowing that the financial bonus achieved is recognition of hard work. This will impact positively upon their self-esteem with the knowledge that hard work and a successful job completion was recognized by superiors.
Dispenza states that Maslow’s hierarchy of needs ‘may be seen as yet another pseudo-scientific managerial attempt to understand what makes employees tick’ (Golding and Currie(ed.) 2000, p 25).
However, the weakness of the Maslow theory is that its places its main emphasis upon extrinsic rewards. In contrast, modern theories of worker motivation tend to emphasis the more intrinsic rewards of work over extrinsic, asserting that these are much more likely to promote an effective work performance. Herzberg’s study (1966; 1968 cited Huczynski and Buchanan 2001, p 255), coming some 22 years after Maslow’s original study, promotes this. His study found that intrinsic factors, such as the work itself, responsibility, and achievement seemed to relate to job satisfaction while extrinsic factors, such as supervision, pay company policies and working conditions tended to cause dissatisfaction. Further Herzberg identified what he saw as the ‘two-factor theory of motivation’ illustrating the two factors to be motivator and hygiene including where hygiene are context related, such as pay, company policy, and motivator are content related concerning factors including advancement, recognition and responsibility. He states that motivation will come, not from improving the hygiene factors to reduce dissatisfaction but in improving the motivator, or rather intrinsic, factors. Consequently, intrinsic rewards are understood by employees to be value outcomes that they can directly control, such as feelings of satisfaction and achievement. These finding were later corroborated and developed by Edward Lawler (1973 cited Huczynski and Buchanan 2001, p 256) who argues that the relationship between performance and intrinsic reward are generally more immediate and direct than those between performance and extrinsic rewards. It is argued that intrinsic rewards are more important influences on our motivation to work.
Therefore, in relation to the value of various payment systems it seems appropriate to favor those that create strong intrinsic rewards for the employees because these will motivate them to a larger degree. The theory appears to support the view that in the modern business environment the use of basic pay in relation to time should be limited, as it only seems to provide only extrinsic satisfaction, and often dissatisfaction. Meanwhile, payment schemes that reward the intrinsic needs within an employee should be endorsed. Therefore, following this argument to its conclusion, Performance-Related Pay allows the employee to confidently assume that they are doing a good job. Therefore, these payment schemes help to foster, among many things, self-confidence and self-esteem and a very real indication that their performance, and themselves, are being recognized by their superiors.
However, a word of caution should be stated when we consider that incentive schemes fail to affect productivity because ‘workers wish to assert their independence from management’ (Dawson 1993, p.8). Kohn states that performance-related pay schemes are founded on a misunderstanding of extrinsic and intrinsic motivation:
The more we experience being controlled, the more we tend to lose interest in what we are doing. If we go to work thinking about the possibility of getting a bonus, we come to feel that our work is not self-directed. Rather it is the reward that drives our behaviour. Anything presented as a prerequisite for something else – that is, as a means towards another end – comes to be seen as less desirable.
(1993/4 cited Huczynski and Buchanan)
Another theory that appears to promote these two types of payment over Time related pay is Expectancy Theory, originated by Vroom (1964 cited Huczynski and Buchanan 2001, p 248). This theory asserts that behavior results from decision-making processes based on the individual’s subjectivity. For increased motivation, productive work has to be seen as a path to valued goals. If an employee expects to get more money for working hard, and they get more money, then it is hypothesized that they will work hard. Therefore, this this theory is much unlike Maslow’s universal content theory of motivation and can be specific in terms of understanding individual motivation Therefore, in its most fundamental interpretation, this theory further corroborates what has already been borne out by the previous study.
Also, Porter and Lawler (1968; and Lawler 1973 cited Huczynski and Buchanan 2001, p 250) developed Vroom’s expectancy theory further. According to Porter and Lawler expectancy is not solely based upon an individual’s perception but also on abilities, traits and role perception. This is a much more integrated approach incorporating job satisfaction and employee perceptions regarding intrinsic and extrinsic rewards. Therefore, it creates a number of managerial consequences, some being directly related to the issue in hand. For instance, if different employees value different kinds of reward then it may be necessary to introduce a
further, more comprehensive pay system that includes a ‘cafeteria benefits’ scheme with choices between various fringe benefits including, for instance, medical insurance and car breakdown coverage.
Therefore, a critical analysis of various motivation theories and an understanding of their implications within the business environment appear to bring some clarification when assessing the relative value of the various payment systems under examination. The theory tends to support the continued use of Performance-Related Pay and Payment By Results in preference to Time Rates Pay.
CONCLUSION
It has been cited, from the initial step-by-step approach at the beginning of this portfolio, that there are a variety of positive and negative points of view regarding each payment system under review. Consequently, there are many contradictions that have to be resolved in order to specify one payment system as the most appropriate for the modern business environment – if this is indeed possible at all.
Evidently, to complete a thorough evaluation and to bring a relative degree of clarification to this topic other approaches had to be taken. Various personal experiences allowed us to place in context various pay systems and draw conclusions that did not necessarily subscribe to textbook evaluations. For instance, discussion of the Kazakhstan Oil and Gas industry highlighted that in certain circumstances time rates payment was an effective motivator for employees, however it should be noted that this conclusion could only be drawn from certain employee sectors within the company. In contrast, analysis of various Motivational Theories appear to indicate that pay systems that provide intrinsic rewards (such as payment by results and performance related pay), as opposed to extrinsic rewards, for the employees are much more immediate motivational tools.
Therefore, we are able to make a number of conclusions. For instance, the choice of payment system used by a company should be determined by company goals and employee objectives. Also, ideally there should be a blend of payment systems in operation across organisations to satisfy appropriate criteria.
APPENDIX A
National Staff 2001 Performance Review
Name:
Staff or Agency:
Current Position:
Department:
Reports to:
Special Certifications/Specialities/Education:
Glossary For Evaluation
Exceptional – individual’s performance is the highest level and is reflected in results achieved. Contribution is clearly identifiable both inside and outside the Directorate/KIO.
Strong – achieves highest performance standards on critical objectives. Good team player and networker. Has a very high level of personal commitment and performance standards is supported by results achieved. Acts as good role model for others and has the ability to transfer skill sets.
Fully Satisfactory – understands the skills and its relationship or importance to the discipline. Has done it in the past or could do it with minimal training. This is the basic standard of performance expected from employees.
Needs Improvement – performance fails to meet expected standard despite regular training, coaching and counselling. Work requires frequent supervision, and the quality and timeliness of performance is below standard.
APPENDIX B
APPENDIX C
APPENDIX D
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