Pay for Performance - What Happened to Salary Jobs?
Traditionally, workers receive a standard salary or hourly wage for their work, providing an expected level of stability regardless of individual performance. This model is decreasing in popularity, however, as cash-strapped organizations increasingly rely on performance-based pay instead of the salary model.
Paying more for increased performance makes sense on the surface; after all, higher performance means more revenue for the company and an accordingly-increased ability to pay employees. This model could have detrimental effects on workers themselves, however, focusing entirely on monetary productivity rather than less tangible factors.
Benefits to Employers
Pay for performance schemes allow employers to avoid an excessive commitment to workers. Providing a bonus for the year requires only a single cash payment, while even a small salary increase involves a commitment for the life of the worker. By providing performance-based pay incentives, companies decrease their direct risk and potentially make more money in the long run.
Benefits for Employees
Workers do receive some benefits from performance-based methods. These include the ability to work towards a specific goal, as well as a known reward for achieving that goal. In cases where pay for performance methods work well, employees are able to reduce wasted hours and receive more money than they might have otherwise. Some very driven workers even prefer these riskier models, due to their ability to potentially do better than they would have in a basic salary model.
Despite its short term advantages, the pay for performance model comes with a number of disadvantages. The biggest of these is the ease with which employers can abuse it. It becomes easy to neglect total employee compensation by prioritizing only profit, and increases the risk of an environment in which workers are regarded as disposable.
In many situations where pay for performance is the primary method of compensation, employees are subject to a constantly-escalating standard in which more and more work must be put in to maintain the same level of pay. This increases the risk of exhaustion, burn-out and health problems, effectively allowing the employer to profit at the expense of workers who will eventually drop out or seek other jobs in order to survive.
Taking employees off of a traditional salary model can have a detrimental effect on their focus. It often makes economic performance the only standard by which workers are judged, decreasing rewards for good interaction, honesty and other intangible but desirable characteristics. It encourages workers to focus only on numerical rewards rather than doing a good job in general. This can lead to greater levels of customer dissatisfaction, especially in cases where customer service workers are rewarded for factors such as short call times, rather than solving customer problems.
Another problem with pay for performance is that it frequently shifts the risk from the employer to the employees. While companies and organizations reduce their financial burden by providing bonuses instead of raises, worker end up taking on far more. They lose the ability to ask for raises and keep their wages above inflation levels.
They also find themselves in danger of losing money if they suffer from injuries, become sick, suffer a family tragedy, or are involved in any other situation that may affect their productivity. While proponents of pay for performance often ascribe low worker productivity to laziness or entitlement, the reality can be far more complicated.
Worker Satisfaction Problems
Overall, decreased economic and job security seems to be correlated with a decrease in worker satisfaction. Surveys of employees in a range of positions and industries suggest that many people are willing to accept less total compensation for a decrease in risk.
Dissatisfaction correlates more strongly with decreased job security in older workers, women and ethnic minorities, who may have trouble finding new positions or who doubt their ability to be fairly recognized in a pay for performance environment. Previous studies have shown a direct relationship between high levels of employee satisfaction and increased company profits, making performance-based pay a potentially dangerous choice in the long term.
Making a Performance Basis Pay
While a significant percentage of workers prefer traditional salary-based jobs, there are ways to decrease the disadvantages of performance-based pay. These all require additional effort on the part of the employer and cannot be ignored. For instance, without work to ensure that performance is actually measurable, companies may find themselves rewarding inappropriate factors, such as large account volume, that don't actually show employee effectiveness.
Businesses that use this method must also make sure that their system is not abused by individual managers who want to preferentially reward their friends or favorite employees. Periodic review to weed out discrimination and favoritism may be required. Human resources departments must make sure that managers are not simply using a performance basis to reallocate funds to their departments after budget cuts. They must also make sure that the company follows up on all promises; attempting to transition to a performance-based pay model and reneging on commitments creates a poisonous culture that stifles productivity quickly.
Increasing focus on cutting costs and boosting productivity may be making stable jobs for good workers a thing of the past. When companies are tempted to move to a pay for performance model, it's vital to pay attention to all the potential effects, not simply the immediate monetary benefits.
Big changes in worker pay can produce a cut-throat business culture and alienate certain kinds of workers, resulting on an overall reduction in performance and decreased fairness among employees. Unless companies work to avoid them, these consequences could erase any benefit gained by eliminating the traditional salary model.