¶ … employment pay program identified as pay for performance have been part of the business landscape for many years (Bloom). The debate centers on a variety of issues but it also seems to be hobbled somewhat by a lack of clarity and agreement as to what pay for performance actually is. Some in the debate seem to speak of the program as a system of base salary increases that are linked to performance appraisals while others in the debate focus on incentives. For purposes of this discussion, pay for performance means a variable pay approach that is anchored to a measurement of performance, whether that's how many hours an attorney bills every month or a more subjective standard -- how well a manager fosters teamwork, for instance. Often, evaluations are based on best-to-worst forced ranking systems -- known to many employees as rank and yank -- which are thought to provide a way of identifying and rewarding strong performers and encouraging everyone to work harder and smarter. True pay for performance is more formalized than an occasional bonus. It is variable compensation that must be re-earned each year and does not permanently increase base salary (Silva). A pay for performance system demands that all involved abandon their traditional views relative to employee compensation. Traditionally, employee compensation programs attempted to treat all employees the same and based compensation on some form of pre-ordained schedule or based on tenure or education. Such systems were clear and precise but there was little incentive. Everyone was paid regardless of how well they were performing based purely on how long they had been with the company or how many degrees they held.

A properly conceived pay for performance program, however, shifts the emphasis from preciseness to incentives. There can be little argument that motivation is a key element in the success and failure of any business (Steers). A motivated workforce is more productive and more efficient. As we live in a money oriented world, money is a far better motivator than nearly any other compensation device and so it is understandable that compensating job performance through the awarding of money is a far better motivator than mere praise or personal satisfaction (Tang). A system that rewards anyone, regardless of performance and dedication, does little to motivate and stimulate effort and achievement.

The major goal of any compensation program should be to motivate employees to do their best. Since the dawning of globalization the United States has seen its world market share begin to erode and employers have been experimenting with methods to increase productivity while keeping costs low in order to allow American businesses to remain competitive on the world stage (Kose). The old compensation programs that most American businesses were using provided good wages for their employees but there were little built-in incentive for the employees to cooperate in a way that reduced costs and increased production. Under traditional compensation programs employees received their pay regardless of how well they performed.

The programs that employers have begun using go under a number of vernacular names such as merit pay, variable pay, alternative pay, and pay for performance (Koss). Each of these programs has its own nuances and its advantages and disadvantages but they are all based on the idea of providing compensation based on performance.

It should be obvious that most employers are attracted to a system that pegs pay to performance. Such a system forces an employee to work efficiently and eliminates the worker who punches in and fails to be productive. As an employee's output is increased, the employer is provided with more products to sell which in turn increases profits.

Despite its obvious appeal, there are some aspects of pay for performance that are disadvantageous. For example, in the United States the concept of equality is a strong one and it has come to occupy the workplace. In a pay for performance workplace, employees working the same job may not receive the same rate of pay. As pay is based on performance, every employee's salary will be different and those who are receiving less may begin to resent those who are receiving more. This situation may be counterproductive and create morale problems within the workplace.

A pay for performance system automatically creates a competitive workplace. Each worker is attempting to increase his compensation and this may not translate into creating a feeling of cooperation within the organization. In many job situations, cooperation is a necessary element of productivity and efficiently and a pay for performance...

Managers within the company must be diligent in how they measure an employee's performance and all measurements must be done in a consistent and fair manner. When pay is based upon performance employees will be highly cognizant of not only what they have accomplished but also what their fellow employees have accomplished. As a result, the company must be careful to administer the program as even handedly as possible.
Finally, a pay for performance system is highly dependent on the trust level between employee and a company's managers. It is essential that employees working in a pay for performance situation be able to trust the judgment and skill of their managers. The employee is totally dependent on the ability of the manager to evaluate the work being completed and that said manager properly attributes the work to the employee. If this trust does not exist, the employee will begin to feel manipulated and used and the entire pay for performance system will break down.

A pay for performance program is based on the concept that money is an appropriate reward. Although a strong argument can be made that money is the most universally accepted method for rewarding someone, the value of money is perceived differently by everyone. A pay for performance system will work best where the workforce places a high value on money. If the involved workforce is motive by factors other than money a pay for performance system will be ineffectual. Edward Lawler (Lawler), one of the most respected experts in the area of human resources, describes the conditions that permit the effective use of money as a motivator:

employees attach a high value to pay, employees believe good performance will result in higher pay, employees have enough control over the job that their own efforts can have a material impact, and superior performance leads to more positive than negative results (e.g. more acceptance than rejection by coworkers).

It is easy to see how subjective many of these conditions are so the attitude of the employees toward the pay for performance remains essential.

Beyond the incentive factor it is also important to the success of a pay for performance program that the business considering utilizing such a system is organized in such a manner that performance can be easily converted to reward and that the employees fully understand that their performance is directly connected to their compensation. Unless both elements are present, the system will not work.

Pay for performance systems should be kept as simple as possible in order for them to work effectively. The employees must be intimately informed as to what the goals of the project are to be and how they will be rated and ranked. Allowing these processes to become too complicated will cause doubt and distrust to develop within the ranks of the employees. Employees respond more readily if they are advised of the expectations and will feel as if they are being paid fairly for their services.

There are many who are critical of the pay for performance system but if it is structured properly such system can reap major advantages for both the employee and employer. Proper organization includes making sure that each employee is being paid within his or her salary range within the market. If the incentives are set too low, dissatisfaction will soon enter the equation and the employer will have unhappy employees. Goal setting is essential. Proper goal setting can motivate an employee. Setting the bar either too high or too low can be demoralizing. Employees are encouraged by being able to accomplish goals and the competition that ensues between employees to reach reasonable goals results in increased productivity. Finally, all employees must understand their role in the company and how essential that role is to the success of the company. Employees who are not aware of their importance tend to perform poorly. Those who are aware of what they can do for the business tend to take more pride in their work.

As mentioned earlier, the role of the administration in operating a pay for performance system cannot be emphasized enough. It is from the administration that the employees receive their guidance and direction. If the business administrators are not communicating successfully with the employees the system is likely to fail. Employees are financially dependent on the administrators properly evaluating their performance and any breakdown in this system…