Linking Pay with Performance Pay-for-performance programs link financial reward to successful job performance. A recent survey found that approximately 50% of the companies responding have some form of pay-for-performance program for employees. The plans which include a fixed wage base and a variable pay portion are generally accepted by employees. While enthusiastic about the extra earnings potential, they worry about the objectivity in employee ratings. To effectively link pay compensation with performance, an understanding of motivation theory is necessary. It is important to understand the difference between intrinsic - extrinsic rewards; expectancy and equity theories as they relate to compensation and performance; and finally, an implementation action plan to assure an effective link has been made. Compensation plans linking pay with performance were first introduced by Frederick Taylor, the father of scientific management. Based on the belief that money is the prime motivator, these incentive systems were widespread from the early 1900s through World War II. The direct connection between money and performance began to be questioned by the 1950s. Humanistic theorists (e.g. Herzberg, McGregor) developed motivation theories that considered both intrinsic and extrinsic factors. Underlying these approaches was the belief that the only real motivators of work were intrinsic rewards like responsibility, autonomy, feelings of accomplishment, etc. The only way a manager could improve performance was through intrinsic reward provided through job design to include more responsibility, autonomy and control. Pay was shrugged off as an expense and managers devalued the reward system's ability to help improve productivity. The intrinsic-extrinsic approach ignores the individuals' perceptions and expectations about rewards. An understanding of these can be gained through the study of expectancy and equity theories. Under expectancy theory, if a valued reward is made contingent on actual performance, the employee will become more productive. Equity theory argues that an employee remains motivated as long as he/she perceives the rewards he/she receives in comparison to a peer are appropriate given the employee's perception of the efforts made by both parties. With these basic understandings of motivation theory, compensation and performance, it is possible to develop an action plan to design and administer the reward system that can help employees reach higher levels of productivity. Steps to consider in designing the system are: Develop a list of all the rewards the organization offers its employees. Decide the purpose of each reward and express it in behavioral terms. Conduct a survey of employees to find out how they perceive each reward. Examine the findings of the survey and investigate those rewards where the perceptions of employees are different from those of established by the organization. Review and reformulate the compensation system to link pay with performance.
What are the factors that would make you most likely to quit a job? Is the relationship between your pay and your perception of your performance a reason? Why or why not? What could your organization do to keep you?