Financial Rewards: Performance Related Pay Essay

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Secondly, performance-related pay increases prevents inflationary tendencies since such increases are the outcomes of increased productivity. Managers and employees are benefited by performance-related pay increases in the following way: when profit or performance goes up higher earnings go to the employees. However, when the profits come down, the lowering of performance-related pay can protect employees from job losses. Moreover, there is enhanced motivation as employee can identify with the success of the business. Depending on the information-sharing habits of the management, pay variations may result in employees knowing more about fortunes and misfortunes that a business goes through. (de Silva, 1998)

Other advantages of performance-related pay include the following: it is an effective method of coping with poor performance; introducing such a reward system can help to develop a performance culture within the company; it can work as a direct incentive for employees to help reach defined job targets; an employee gets due recognition through a tangible reward for his/her work contribution; launching a system for rewarding employees demonstrating high performance can help to build up retain the most capable workforce in the company; it is highly likely that employees will place more emphasis on the areas in which they must improve if the improvement is directly related to pay. (Unison. 2006)

Different cultures have different perceptions about performance-related pay increases. However, one thing common amongst all countries is that all countries view pay incentives as extremely important. The Mexican, American, Latin American and Taiwanese employees regard job performance as more suitable for pay increases whereas Japanese, Taiwanese, as well as Indonesian staff consider seniority as more significant for any decisions about payment. Chinese employees feel that material and socio-emotional rewards should be differentially allocated whereas American employees feel that material awards should be performance-based and socio-emotional rewards should be equality-based. It has been observed that American employees give maximum importance to financial rewards as a motivating factor. (Vance; Paik, 2001, p. 279); (Gunkel, 2006, p. 105)

As per a Tower Perrin report of 2002 which studied executive compensation in different countries, it was observed that CEOs in France received one-third the compensation received by CEOs in the U.S. And even the highest paid CEOs in Europe such as the Swiss got only half of what was paid to American CEOs. Many experts are of the opinion that this difference is mainly cultural since most Europeans would be embarrassed by any kind of ostentatious or lavish pay whereas Americans are willing to go far in rewarding success. Performance-based pay in Japan and Korea seems to be appropriate in its historical and cultural context which places more emphasis on age, tenure, social class and education. China displays more complexity with the existence of three or more distinct subcultures within the same country. For instance, the subculture of the western and central regions is more collectivistic whereas the subculture of the southeast region is more individualistic. (Vance; Paik, 2001, p. 279); (Gunkel, 2006, p. 105)

Thus the importance of pay for performance also varies from region to region. Countries which display high individualism like United Kingdom, United States, Sweden, Canada, Italy, France and the Netherlands focus on individual performance-based rewards whereas countries which display low individualism like China, Taiwan, Hong Kong, Korea, Ecuador and Colombia use non-direct group-based contingent financial rewards which meets the minimum recognition needs of individual distinction.

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(Vance; Paik, 2001, p. 280); (Gunkel, 2006, p. 112)

Some countries which are rated high in terms of uncertainty avoidance such as Germany, Japan, Spain, Belgium, Turkey, Spain and Portugal may make a limited use of performance-based pay in order to maintain predictability. On the other hand, countries which are rated low in terms of uncertainty avoidance like Singapore, Malaysia, India, the United States, the United Kingdom and Denmark may favor an increased level of external market-based and performance-based pay as well as flexible arrangements in terms of pay structure like broadbanding where there are less pay grades. Again, in countries like Switzerland, Italy, the U.S., UK, Japan, Germany, Mexico and Austria which are rated high in masculinity, the compensation practices clearly favor individual-based performance-related pay whereas in countries which are rated low in masculinity and high in femininity like Norway, Sweden, the Netherlands, Denmark, Finland, Chile, and Thailand, the compensation focuses more on sharing rather than competing for rewards and the rewards also are more oriented towards job security, work/life balance, and social benefits. (Vance; Paik, 2001, p. 280); (Gunkel, 2006, p. 114)

A survey conducted on employees in countries like China, India, Japan, Korea and Singapore found that most employees were motivated by pay and a significant fraction of them were not satisfied with the reward system and felt that their performance was not duly recognized. (Bucknall; Wei, 2005, p. 172) In the mid-nineties, Ireland initiated skill-based pay whereas the state of Indiana, U.S. has a more customized scheme where government agencies can choose between skill-based, competency-based, performance-based and gain-sharing schemes. Countries like Korea, Germany and Austria pay their employees on market-based rates. Again the state of Virginia, U.S. provide starting salaries based on experience, skill and competence. (Peters; Pierre, 2007, p. 42) Skill-based pay is employed by over sixteen percent of the Fortune 1000 companies as a motivational technique for their employees. Some companies like United Technologies and GE use a combination of gain-sharing and skill-based pay whereby an employee is switched over to gain-sharing once he/she has "topped-out" on the skill-based pay scheme. Many Japanese countries like Seiko Instruments use profit-sharing schemes where biannual cash bonuses are paid to employees. (Hellreigel; Slocum, 2009, p. 186)

The failure and success of performance-related pay not only depends on the circumstances but also varies between countries and cultures. Thus, if performance-related pay turns out to be successful in one particular organization transplanting the same to another organization without considering the various factors governing its efficacy would be futile and may not produce the desired results. The effects of performance-related pay must not be overestimated. A hybrid form of financial reward system may prove to be more effective in the long run than simply a performance-based, skill-based or profit-based pay. (Warner, 2005, p. 310); (Pilichowski; Arnould; Organisation for Economic Co-operation and Development, 2007, p. 99); (de Silva, 1998).....

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