Hello there. This week our blog series on performance management will delve into the tricky waters of performance evaluation and compensation. For many organizations this area can be quite difficult — particularly managing an employee’s evaluation and matching compensation, which requires some tact and an understanding of broader compensation issues.
The main reason for conducting performance evaluations is to improve performance. There are, of course, many other reasons, but improving performance is the main goal. Improving performance through evaluation and compensation needs to be handled carefully. As we will discover, there is a fine line between rewarding employees in order to improve performance and controlling employees with rewards, which can decrease performance.
The organization should offer its employees incentives for achieving high performance appraisals, thereby motivating employees to perform well. In order to motivate employees with incentives, employees need to believe that:
- If they put in the effort, they will perform well.
- If they perform well, they will be rated high in an evaluation.
- If they are rated high, they will be rewarded with something of value to them.
Choosing a Performance Compensation
Let’s take a look at some of the most common methods of employee compensation.
- Individual incentives: pay incentives are associated with increased performance and productivity. For example, employees receive a pay raise for reaching a certain level of performance. Bottom line increases in quantifiable productivity are associated with individual incentives, with studies showing increases on average of 30 percent when incentive programs are introduced.
- Merit pay: this involves giving employees bonuses or other compensation when they perform well. It is the most widely used method for organizations. Research studies show that there is some support that merit pay is associated with increased performance, though many studies failed to demonstrate a definitive impact of this system on performance.
- Profit sharing: this involves rewarding employees when profitability targets are met. Studies suggest that they do have an impact on performance. However, employees may be less motivated by this type of reward as compared to other reward systems, because they may not see the connection between their own efforts and increased profits. Profit sharing rewards are also often disseminated in the future (e.g., at retirement) and can therefore be less motivating than immediate rewards.
- Stock plans: this involves offering employees the opportunity to buy stock in the company at a fixed rate. Studies investigating the impact of this approach for middle and upper management show positive results. However, this option has its issues — for example, when stock prices fall, this could impact employee motivation. It also opens the door for ethical and even criminal violations to occur.
- Gain sharing: this involves rewarding employees based on group performance, accounting for the interdependent nature of jobs. Studies show that this approach is effective, and that it can result in high performance, teamwork, increased profits, and decreased losses.
Offering a variety of performance incentives is best. For example, some programs emphasize individual performance, while others reward group performance, and so it is best to offer a range to balance the benefits and risks of these, thereby avoiding unhealthy competition while maximizing motivation.
A Caution on Using Financial Compensation
A Stanford Professor, Jeff Pfeffer, once remarked in the Harvard Business Review that the idea that people work for money it is a “myth.” Organizations often risk focusing too much on monetary rewards. Studies suggest that too much emphasis on working for pay can decrease the employee’s intrinsic motivation (the degree to which they do something because they want to, or because they experience some internal satisfaction).
Research and theories on motivation all deduce that financial rewards are not a major driver of an employee’s motivation to strive for high work performance. The exception to this is employees at low-income levels, who tend to be motivated with financial rewards. This, however, will not be news to a manager who understands their employees’ motivation.
Use Financial Compensation as Employee Feedback for Performance
To counter these effects, organizations should avoid presenting monetary rewards as though it is a means for control over employees. If employees feel that they are being controlled by money, obviously this can decrease the personal interest they have in doing the job well, and instead it can build resentment and a loss of trust. It is best if employees work to fulfil that intrinsic need for self-determination — to achieve the goals that they wish to accomplish, to learn, to grow, and to develop themselves.
More fittingly, monetary rewards should be regarded as a way of providing feedback on their performance — not as a way to control their performance. This will increase their personal interest, which is what an organization wants from its people. In this manner, the employee will take better care when making a decision to do the job in a certain way and then they can receive feedback that the approach that they chose to take was really good. Then, the monetary reward is something that confirms their competence, rather than something that emphasizes the control of the company over their performance.
That’s it for this week’s post on performance evaluation and compensation. Join us next time as we look at more strategies that will improve performance, specifically, workplace positivity.
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