Essay Example on Performance-Based Pay: Merit, Recognition, Incentives & Earnings

Introduction

As a method of employee compensation, the performance-based pay system provides compensation focusing either on individual or group performance instead of pay as a wage or salary. There are different forms of performance-based payment, such as merit, recognition, incentives, and earnings at risk that equally influence the employee and the employer (Newman, Gerhart, & Milkovich, 2016). Under recognition, it includes remunerations such as allowances, certificates, perks, and bonuses. Merit includes base pay increase, gift, or promotion, while incentives may be delivered in the form of commission, profits, as well as rewards. As for the earnings at risk, this includes pay rates and commissions added to base salaries (Newman et al., 2016). However, in different ways, the various forms of performance-based pay affect both the employer and employee either negatively or positively. This paper will describe the weighty benefits and limitations of the types of performance-based compensation from the employees and the employer's perspective. Also, the possibility of unethical behavior by employees due to performance-based compensation will be described.

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Major Merits and Demerits of Performance-Based Pay Forms from Employee's Perspective

Recognition

Despite ordinary pay structures and systems, recognition frequently makes exceptional ventures that reward magnificent laborer execution. As a primary benefit, recognition plays a vital role in motivating employees to work harder and achieve higher rewards (Boachie-Mensah & Dogbe, 2011). Further, recognition can improve workers' support and dependability when they feel that managers pay attention to their hard work, which also promotes their contribution to the organization.

As a limitation, using recognition could backfire since they are likely to trigger bias and expectation. In other cases, recognition may result in motivation issues among employees as since of them may feel excluded or incapable of achieving higher.

Merit

There could be motivation or demoralization when one meets excellence or fails to qualify for merit pay, respectively. Primarily, merit pay helps employees understand their position in the organization. Merit helps the employee remain aware of what needs to be done to achieve higher pay. Also, merit pay gives the employee the inspiration they need to achieve the desired goals. Employees who are paid subject to their performance are customarily merited by results rather than dynamically unique procedures, making extended versatility (Froese, Peltokorpi, Varma & HitotsuyanagiHansel, 2019).

However, as limitations to the merit pay, there are concerns of favoritism among employees. In numerous organizations, the value of an employee is subjective and is determined by a supervisor. Thus, they could dispute the merit pay developed. Also, merit pay could deliver communication troubles between employees as they feel unimportant.

Incentives

The significant advantage of incentives is that they bring out the best out of the workforce. By ensuring clearly defined goals, incentives help employees determine what is required of them. Less frequently, some employees need to be continuously pushed to give their best performance. Others may have the capacity yet no drive to perform well. Moreover, through incentives, employers increase the individual performance of the employees, happiness, and promote job satisfaction, which is healthy for workers (Rehman & Ali, 2013). Another advantage is that incentives could provide employees with an opportunity to acquire more if they achieve more can give them the feeling of control over their career. As work satisfaction rises, employees get the urge to remain within a particular organization. Some forms of incentives offer distinctions to any person who meets the benchmarks, while others are obliged to a limited number of top-performing employees. It inspires employees to compete with others in the different areas of specialization (Jackson, Schuler, & Werner, 2009).

However, a significant limitation for incentives is that it could result in resentment among employees and could undermine teamwork. Often, some workers may resent employees achieving objectives with less effort, thus undermining each other's efforts and could equally result in conflict. Another limitation for incentives is that some employers consider money very important and may end up overworking. In different ways, over-working could negatively affect the employee both physically and mentally. Along with the creation of tension among workers, incentives may push some employees to indulge in unethical organizational activities to earn more rewards.

Earnings at Risk

The primary benefit of pay at risk for the employees is based on the ability for increased compensation. Also, employees are allowed to set out the different incentive pays designed to boost performance. Further, high performing employees who are content with their pay and working environment will undoubtedly be retained in a business rather than exploring various possibilities. They could also attain a given level of eminence and respect in the association due to their achievements.

The major disadvantage of pay at risk is the possibility of a gap in the proportion of base pay created by cutting down base wages. In turn, this attracts dissatisfaction to the employees.

Significant Merits and Demerits of Performance-Based Pay Forms from the Employer's Perspective

Recognition

From an employer's perspective, the considerable advantages of recognition include an increase in employee productivity, which in turn builds higher profitability for the organization. Also, recognition benefits the employer by ensuring the retention of talents and creativity of a collaborative work atmosphere. In other cases, recognition promoted a positive organizational culture. There is no better method of dealing with poor performance than recognition (Boachie-Mensah & Dogbe, 2011).

In consideration of the demerits of recognition to the employers, it holds no long-term benefit to the organization. Another major disadvantage of recognition is the rise of organizational costs as managers or supervisors need to award employees. Also, recognition could tamper with the planning and execution of corporate objectives.

Merit

A primary advantage for merit pat is its ability to attest and communicate employer objectives and values. It helps the employer outline the most valuable traits in employees. Furthermore, merit is used as a measure of individual performance. Another benefit of merit pay is its ability to promote employee retention as the employer can distinguish between low performing and high performing employees and reward the top performers (Newman et al., 2016). When the performance does not meet the set merit, executives get an opportunity to discuss unequivocally how the delegates ought to improve their performance to achieve top quality, thus an increase during the next pay raise. In various work environments, the estimation of a particular laborer is passionate and, in the end, directed by managers (Froese et al., 2019).

Nonetheless, a significant disadvantage for merit pay under the perspective of an employer is that it has some constraints which limit an employer's ability to communicate to each employee regarding their responsibilities, and what unmatched performance is needed that makes one qualify for merit pay (Froese et al., 2019). Also, another major limitation for merit pay is the fact that it consumes resources and time that could have been utilized elsewhere in the organization. The time required to evaluate performance for merit pay by employers could be used to work towards the achievement of the company's objective. Hence, the benefits of merit pay are often not worth the time and resources spent.

Incentives

The primary benefit of incentives for employers is its capacity to bring healthy competition in the organization. Often, competitiveness in the organization help boosts organizational performance as it takes advantage of the desire for humans to win. Next, incentives are beneficial as they result in higher sales with increased engagement in the organization. Be ensuring proper incentives for employees who meet the sales objective. There is increases motivation within the sales team, which, in exchange, offers high performance boosting sales (Jackson et al., 2009). Another primary benefit for incentives is the increased possibility of reduced turnover since employees are satisfied with the compensation strategy, whether it involves bonuses of commission. The incentives decrease the likelihood of employees to leave the organization in search of employment from competitors with higher pay (Rehman & Ali, 2013).

In consideration of the disadvantages of incentives, the major limitation is a hindrance to teamwork. Often, employers depend on team productivity to achieve maximum results. However, incentive-based pay hinders collaboration as the employees develop the mindset that their employment is about their performance and pay, blocking them from seeing the ultimate objective of the organization. Also, incentives could disadvantage an organization due to much focus on financial compensation. Such attention is likely to overshadow the purposes of the employer hence posing negative results to the company. Additionally, another disadvantage of incentives it the possibility of elimination of productivity from low-level performers. Under-appreciation of particular employees may deteriorate the consistency with the performance, which negatively affects a company. Also, there is too much focus on competitiveness in the company instead of focus on meeting the quality requirements.

Earning at Risk

The significant advantage of earning at risk is that it is planned to redesign performance. Earning at risk triggers increasingly critical effort composed toward performance, which reversed compensation with pay. There is no much advantage when it comes to employers since a base wage is created to compensate employees.

The downside of this system is that executives may go up against a difficulty with EAR catalyst plans. These pay plans may incite higher concentrated on performance behaviors, yet they in like manner may be associated with cutting down base compensation satisfaction, higher turnover, and recruiting challenges. Managers considering an EAR plan may not view high turnover as an essential issue if poor performers exit the organization.

Challenges Associated with using Team Incentives

Often, team-based incentives are likely to cause a revolt by top-level performers since they may feel that they would be far much better if their incentives were based on their performance rather than on team performance (Taylor, 2010). In most of the cases, the performers view other team members lesser and as a weight holding them down. In different ways, they choose to rebel against the set objectives or the system as a whole. Also, a team-based incentives initiative could result in a loss of view of individual performance by the management. In every team performance, own actions and performance are essential since it helps the management outline particular goals and enhances delegation. However, evaluating teams as a whole may hinder the view of individual performance, which could likely result in challenges. In other cases, team-based incentives may lead to the creation of the perception thereof or free riders in the company (Taylor, 2010). When individuals are rewarded based on teamwork, some team members may free ride the efforts undertaken by other members. Similarly, some members could feel compelled to work more than others, which may result in conflict.

However, performance-base...