CHAPTER 2: THEORETICAL AND CONCEPTUAL FRAMEWORK
2.4 Constituent Elements of Remuneration
2.4.2 Performance-Based Pay
2.4.2.3 Performance-Based Remuneration Examination
There is consensus in both the literature and general market that variable remuneration is the single significant contributor to individual performance and ultimately organisational performance. This is attested to by Becker et al (1997) who argues that variable remunera- tion has become an interior constituent of a performance management systems and an “es- sential element of the infrastructure that supports the value creation process” as it tend to provide strong motives to compel employees to give their best.
Page | 42 Bratton and Gold (2007) suggest that correctly designed performance-based pay systems have numerous advantages. Firstly these signal key task behaviours and provide infor- mation about current performance levels. Second, they reduce the need for other types of managerial control over the labour process. Third, the practice helps to change the culture of the organisation and promote an entrepreneurial type of behaviour
Additionally, Becker et al (1997) advocate that variable incentive compensation plans are a critical success factor for organisational performance and “must define desired employee behaviours and reward those behaviours in meaningful ways when goals are achieved” and should “reflect the values of the workforce that the organization wants to attract”.
However, variable remuneration is not the alpha and omega and does have its weaknesses.
For this compensation structure to be efficient, all factors outside the manager‟s control must be eliminated from the equation and the manager should not be able to manipulate company performance. An author that has rather been very critical of variable remunera- tion is Alfie Kohn (1993: 54-63), an Author and Lecturer in Education and Management.
Kohn (1993) cited in Perkins and White (2008: 165) questions the soundness of variable remuneration as an instrument to enhance organisational performance. He is specifically critical of the use of basic staff motivational theory models and considers the deductions they are based on to be defective. In support of his contention Kohn (1993) cites a number of studies that use a variety of laboratory methods to confirm a relationship between re- ward and productivity. Kohn (1993) draws many of his conclusions from the absence of such a relationship and goes on to argue that this absence of evidence in fact constitutes a negative correlation.
Kohn (1993:54-63) examines some of the literature around the link between executive re- muneration and corporate performance and overtly questions the authors‟ conclusions, based upon re-interpreting the evidence to support his hypothesis.
Based upon a series of both direct and „meta‟ studies, Kohn (1993) describes a six point framework that examines the downside of an extrinsic incentive program:
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Pay is not a motivator - Kohn places the perceived value of financial remuneration well down the list of employees‟ priorities
Rewards punish - Kohn sees punishment and reward as two sides of the same coin.
Rewards are controlling and will be perceived in that light over time, especially if an expected reward is not received.
Rewards break relationship - Incentive programs, and the performance reviews that ac- company them, destroy cooperation in a workforce. Employees see co-workers as ob- stacles to their own success.
Rewards ignore reasons - Rewards and incentives obscure underlying issues and give management the ability to avoid giving staff what they need to do a good job.
Rewards discourage risk taking - The single minded effect of an incentive program limits creativity and aggressively reduces an employee‟s willingness to explore possi- bilities or alternative solutions.
Rewards undermine interest - No artificial incentive can ever match the power of in- trinsic motivation.
However, Kohn (1993) seems to look at incentive schemes as the exclusive approach for incentivizing employees to attain high performance within an organisation. Kohn (1993) appears to have become too simplistic by selectively picking financial incentives out of the rather multifaceted world of employee motivation. Literature has generally confirmed that motivated staffs are more productive and contribute more to an organisation‟s overall ob- jectives than demotivated staff. Whilst his arguments might appear to be making sense, his conclusions are based on rather inconclusive studies and further research may be warranted before one can take his conclusions seriously (Perkins and White, 2008).
It is thus unsound to look at incentive schemes in seclusion from wider motivational fac- tors. Incentive plans are just but one instrument available to Managers when facing the composite challenge of creating and sustaining a high performance culture in the organisa- tion. Of course there are many options and the research in the area is immense (Perkins and White, 2008).
Page | 44 Whilst it is obvious that financial incentives will not be effective for all employees all the time and that employees at any level within an organisation vary in the way they respond to similar aspects of their jobs, it is worth looking at incentive schemes in the context of motivation theory by considering the three key questions raised by Bowditch and Buono, 2005.
According to expectancy theory, motivation comes from a combination of three factors or assumptions:
Increased effort leads to good performance
Good performance leads to good outcomes
The outcomes are worthwhile (rewards, promotion, bonus or whatever)
It follows that financial incentives might be effective if the outcome or reward is seen by the employee to be of value. Unfortunately this is a subjective evaluation and may differ by employee, context or time. That is, just because one employee finds an outcome or reward valuable at one point in time, there is no guarantee that all employees will find the reward valuable all (or any) of the time (Vroom, 1964).
Whilst Kohn (1993) makes the somewhat unsupported statement that such extrinsic moti- vators as financial incentive schemes are not effective, he also erred in stating that they tend to undermine intrinsic motivation. This would seem to imply that a well-designed and balanced motivational scheme, comprising fitting extrinsic and intrinsic motivational fac- tors, is either impossible to achieve or less effective than a purely intrinsic motivational environment as he seems to suggest (Perkins and White, 2008).
This supposition is not empirically supported and certainly makes for an interesting re- search area, as this appears to contradict the numerous examples that exist of organisations and individuals that are achieving outstanding results based on the premise of a competi- tive incentive scheme that reward high performance.
Literature has undoubtedly confirmed that performance-based pay positively influence corporate performance. The pay-for-performance practice is therefore critical strategy for motivating employees to expend greater efforts to drive corporate performance. The use of
Page | 45 remuneration scales can continue to be used cleverly aligned to this strategy. For example, whilst in the past the only reason for the existence of salary scales was to reward loyalty based on years of service, modern business imperatives dictate the only reason is actually to reward performance.
Therefore, in the absence of empirical evidence pointing to the contrary, the success and impact of variable incentives schemes on corporate performance remains unquestionable.
Increases and adjustments made to remuneration components / elements are a function of what is generally known as pay drivers or remuneration factors. These are categorized into internal and external pay drivers, emanating from the organisation‟s remuneration policy.
These are explained next.