Performance and Compensation Management - Example

Running header: PCM Student’s name: Instructor’s name: Subject code: Date of submission: Performance and compensation management (PCM) entails all activities geared towards ensuring that organisational goals are continually being achieved in an effective as well as efficient manner. This focuses on the performance of an entire organisation, an individual, a department or even processes that build a services or a product among other areas. At the organisational level, performance and compensation management aims at aligning employees personal goals with organisational goals with an aim of increasing and improving productivity and profitability of the organisation. As such, performance and compensation management is an integral part of the organisational management. In this regard, the organisation provides monetary value to its workers in exchange for the work performed. Does performance and compensation management improve individual, team, and organisational performance? PCM to a great extent improves individual, team and organisational performance. This is because it helps in attracting, recruiting and retaining the right employees (Shark, 2010). This is because the top performing employees are paid more than the average performing employees. As such, this encourages top performers to work harder thus creating a competitive atmosphere in the organisation. This then results in the overall success of the individuals, departments and the organisation as a whole. Performance and compensation management comprises of all the activities that ensure goals are consistently being met in the organization in the most effective and efficient manner. Its focuses on the organization as a whole, its’ departments, the employees or internal processes that take place in the work place to produce goods and services as well as support other areas. Armstrong and Baron (1958) defined it as a strategic and integrated approach to increasing the effectiveness of organizations by improving the performance of people who work in them and by developing the capabilities of teams and individual contributor. Compensation refers to providing monetary value to the employees for the work they do (Judy, 2009). Managers are required to give compensations that will retain quality employees but should also be cost effective to the total pay roll cost. There are various methods of compensation. They are monetary or non monetary and include; Basic wages Basic wages refer to cash components of the adopted wage structure. It’s rather fixed for most firms but it may change from period to period due to increments. Both wages and salaries are subject to such increments and they differ from person to person due to the firm or industry of work, nature of work done, level of employment and merit. Dearness allowance This is an allowance given to employees to cope up with increasing prices of good s and services due to inflation. This may be a fixed percentage on the basic wage. Incentives These are paid over and above the basic pay and are based on variables such as sales, profits and productivity (John, 2007). They may be paid to individuals or as a group depending on the work done. Bonus Bonuses are paid to employees annually based on profitability of the firm or as a percentage of basic salary. They may also be based upon piece wages and depends upon labor productivity. Non monetary benefits on the other hand are aimed at giving psychological satisfaction to the employees even when the monetary gains may not be available. They include conducive work environment, promoting growth prospects and giving challenging duties among others to the employees. Mixed plans This is employees earn both a basic salary and a commission. Commissions are based upon certain achievements or targets after which employees receive them. It is also referred to variable component of compensation. Piece rate wages These kinds of wages are most common in manufacturing firms. They are based on work done by each laborer. It is meant to improve the quality as well as the quantity of production. It is totally based on the productivity and not any other factor (James, 2010). Fringe benefits These are benefits and services that are received by the employees to make their comprehensive package. They are treated as conditions of employment and not as a result of performance by the employees. They include house, medical and transportation allowance among others. Profit sharing This is an arrangement among the employer and the employees to receive a share of the net profit. Such employees are expected to have worked for the firm for a given number of years and are in a certain level of management. These compensation methods have various merits and demerits to the employers as well as to the employees. The merits include, The basic pay may be a tool used by the employer to obtain and retain highly qualified employees (Ann, 2009). A good basic salary accompanied by a conducive working environment increases the morale as well as the productivity of the employees. Dearness allowance necessitates the employees to run their day to day activities with minimal effects of actual inflation which improves their standards of living. Incentives paid to the employees tend to increase the productivity as well as profitability in the work place. This is because employees tend to apply more effectiveness and efficiency for them to maximize on such benefits. Bonuses given to the employees make their lives better each period they are reviewed. It also acts as a check point for such employees who tend to be rigid in the adjustments of salaries and wages. Commissions also tend to increase the efficiency of employees in order to attain their targets and enjoy from the benefits of attaining such targets. Non monetary benefits enhance the psychological satisfaction to employees. It increases their confidence and self esteem in the work place. Fringe benefits also tend to play the same role of psychological satisfaction (Sarah, 2008). It also defines the employees of a given firm from another as they tend to be different from firm to firm. They foster loyalty among the employees as is provides some security. Piece rate wages also tend to increase the productivity of workers for them to obtain the maximum return. It acts as a measure of productivity among the employees when all the other factors are held constant. Profit sharing involves the employees in the appropriation of profits which improves their morale as well as productivity. The employees are informed about it at the begging of the period. This helps them to work together towards such a goal. It also helps retain employees with experience in the work place as this benefit can only be enjoyed by those who have been in the organization for a stipulated period of time. More diligence is applied by the workers in the work place. However there are certain limitations that come with the various methods of compensation which include, Salaries and wages although may keep the employees. Are not adequate enough to make the working environment ideal. They should not just be raised as it may be unaffordable to the firm. A balance should be stricken between he pay and other factors in order to achieve an ideal work environment. Payment of dearness allowance may not present the ideal situation in the prevailing market condition and it tends to be too low or too high in most firms. Incentives, depending on how they are shared among the workers may result to conflict as some employees may feel vulnerable for being paid equally while they input different effort towards the achievement of goals. Managers tend to set commission on targets way too high beyond the reach of their employees efforts to avoid spending so much. Such targets tend to demoralize the employees. Piece rate wages is not a fair way of remunerating employees as is it only based on productivity but none other qualitative factor. Managers should therefore realize that their employees will always compare salaries in order to attain maximum return for their labor. Appropriate wage levels should be set in order to retain skilled employees but not at the expense of the firm (Houston, 2010). Other psychological factors should also be taken into consideration for the employees to have a proper working environment. Why does PCM work in some organisations and not in others? Many organisations find performance compensation management (PCM) a very useful tool in achieving overall organisational success. The organisations see it as a tool for retaining quality employees. As such, the organisations invest a lot in developing effective compensation structures that assist them in many ways including: motivating employees to work harder and hence improve their productivity, assisting the organisation in conducting evaluation of employee performance easily and in a transparent manner so that there is no favouritism, helping the organisation adhere to all relevant labour laws such that disputes between the managements and employee unions are minimised while improving performance and reduction of employee turnover and creating a conducive working environment within the organisation . it may be worth noting however that performance and compensation management systems have failed to work in some organisations. Failure of PCM in an organisation could be attributed to the organisation not having sound employee performance and compensation management systems. The following are some of the reasons why performance compensation management work in some organisations yet it fails in others; a) Goal setting and involvement of employees For an organisation’s performance compensation management to succeed, the management should ensure that the employees own the process and identify with it. This will ensure that the employees understand the system and what is required of them. In addition, it will help them in setting their own goals and work harder in achieving them. In turn, this will translate into overall organisational success. As such, the organisation should; Design a PCM system that helps employees take ownership of the goals that the organisation aims to meet as well as goals that can be subjectively set and met. Communicate the organisational goals or enable the workers to participate in setting of the goals in order to develop more employee ownership of the set goals. Ensure that the employees are involved in determining how they want to go about achieving their performance goals. Assist the employees in knowing what to measure and how to measure in order to enable them judge whether they are making progress in meeting their performance goals/ expectations (Daniel, 2010). b) Delegation The management should delegate projects and activities which will assist the employees in meeting their departmental goals using appropriate delegation methods. This will help the employees in a number of ways and as such, the organisation should; Assist the employees in making their overall work plans with set dates and timelines for key deliverables for review. Share any preconceived pictures you may have of what you may want the outcome/ deliverables to be like. Establish the success criteria At designated time intervals, the evaluators should meet with employees with an aim of assessing progress made and challenges that need to be dealt with. As such, any difficulties that may prevent the achievement of the overall organisational goals as well as the employees’ individual goals will be identified and dealt with and hence ensure timely achievement of the organisational goals. c) Performance development planning and feedback The organisation should use a performance development planning process that will enable employees understand the organisational goals. As such, the relevant manager should make an initial performance development plan with the individual employees. The manager and the employees should then meet regularly with an aim of reviewing progress and setting new goals where necessary. One-on-one meetings should also be held regularly with each reporting staff in a bid to staying in touch with performance progress and accomplishments. As such, the organisation will help the employees to always be aware of what is expected of them. This will enable them work hard towards achieving their goals in order to achieve the compensation set for certain levels of performance. d) Training, education and development For an organisation’s performance and compensation management to be effective, the organisation will have to invest in the training, education and development of its employees. This will equip them with knowledge as well as the necessary skills required in the attainment of their desired level of performance and hence achievement of the organizational goals. Training will play a great role in helping the employees know what is expected of them. It equips them with tools and skills essential for them to succeed in their jobs (Maxwell, 2007). It is therefore necessary for an organisation to realise that employees’ ability to grow and develop their skills is essential to the employees’ motivation and success. As such, they should coach employee skill development regularly in order to identify areas of improvement. This implies that an organisation that does not invest in employees’ development is therefore likely to have its performance and compensation management systems/plan fail. Recognition and reward All the above strategies can prove a waste of time if employees improved performance is not recognised and rewarded appropriately. Apparently, this is the reason why most organisations fail in their performance and compensation management. For PCM to be successful, employees must feel that their efforts are being recognised and appropriately rewarded. In other words, recognition is the most powerful form of employee feedback. Timely, appropriate recognition to an employee is feedback that reinforces actions you want to see more of from the employee. Thus for an organization’s PCM to be successful, the organization should; Provide recognition that is timely, and that reinforces employee learning and goal accomplishment. Recognize employees for doing what it wants them to do. Furthermore, the reward should match the efforts expended by the employees. This way, employees will feel that the organization genuinely cares about them. Thus, if all organizations can ensure that they do all of the above recommendations, they will be sure to have their performance and compensation management efforts succeed. There are three approaches to compensation management. These include paying for position, paying for person and paying for performance. In the first case, when the firm pays for a position, value is attached to such position rather than the person doing the work or his performance. This is not an appropriate base for payment as some employees may not have the required skilled yet they will be paid according to the title. The management may also choose to pay according to the person being paid. This method of appraisal is not appropriate because it tends to favor certain individuals over others. An employee may end up either been under paid or overpaid (Maxwell, 2007). Skills, knowledge and the efficiency applied by an employee in his duties is the most appropriate way to evaluate an employee. Paying by performance refers to remuneration of employees basing on how they perform in the organization. It is the most appropriate than other methods because pay increases with the performance of the employee which is advantageous to the employee as well as the employer. The performance compensation management is rather traditional and most firms have not adopted other modern methods. For instance, some firms are still paying their employees based on the title of the work rather than their performance. Pay should be based on competencies and the performance of individuals in order to maximize the value of both the firm as well as the employer. Firms should move away from the traditional pay and incorporate rewards that are based on the achievement of employees towards the goal realization of the firm. Managers should clearly discuss and inform the employees regarding bonuses and other benefits so that they may understand what they are working towards unlike the traditional way where the managers hardly discuss on the ways of achieving such targets (Stanley, 2005). Managers should be careful to point out how each individual contributed towards the goal realization so that they may assess themselves. Managers should help create a powerful link between performance and reward. This will help employees to improve and meet their expectations. Both the strengths and the weaknesses of the employee should be addressed and any changes in the pay should be based on the overall assessment. Therefore, the major intention of a compensation system should not only be to attract and retain key employees but also reward them for their achievement. In conclusion, for performance compensation management to move forward from where it is today, discussions regarding pay should be openly discussed. Employees should be clear with every criterion in order to improve on their productivity. Monetary rewards greatly affect the employee motivation and thus the managers must acknowledge that. There should be some restructuring in the pay models. Conclusion; Based on the discussion above, performance and compensation management works because it plays a great role in encouraging employees to work harder. Performance management if well organized will enable each employee to know what the management expects of him or her and hence work harder towards achieving this. Furthermore, employees are helped in setting achievable goals and facilitated towards their achievement. A good compensation plan will on the other hand encourage /motivate employees to work harder. This is because every employee would want to be rewarded for good work. However, for performance and compensation management to work effectively, it should be organized in a way that employee will own it. It should also be transparent and be seen to be so. Otherwise, employees are likely to reject it. References: Shark, T. 2010. Employee compensation. African human resource journal, 25 (3), 179-182. Judy, M .2009. Performance appraisal. World economic review, 5(5), 15-21. John, S. 2007. Managing employee performance and reward (concept, practices, and strategies). Cambridge University Press: London. James, K.2010. Performance management. Longman publishers: New York. Ann, N. 2009. Performance and compensation management. American Human resources Management, 22(3), 18-25. Sarah, P. 2008. Managing employees. Macmillan: Sydney. Houston, M.2010. Employee motivation: performance based compensation. Rutledge: London. Daniel, M.2010. Human resource management: Improving employees’ performance. Prentice Hall: London. Maxwell, O.2007. Win- Win Performance management /appraisal: A problem solving approach. Wiley: New York. Stanley, C.2005. Managing employees in the work place. Cambridge University Press: London. Read More