HomeOpinionPerformance-based rewards: Pros, cons

Performance-based rewards: Pros, cons

Most organisations have tried to implement performance management systems with differing measures of success.

Report by Sam Hlabati

Several models used over the years have gained acceptability and are now being replicated across organisations and industries through benchmarking initiatives.

The ultimate goal of most performance management efforts is to improve productivity and reward employees for their efforts. To this end, there have been efforts to link performance and pay. However, the success stories have been minimal.

In this instalment, we will discuss the systemic issues that could make pay-for-performance fail.

Let us start by determining why employees get a wage or salary from their employers. The contract between the employer and the employee is that of exchanging labour for a pre-determined reward.

Though we mostly view the gesture of the employer to give a prospective employee a job as an offer of employment, from a systemic perspective, the actual product being sold is not the job offer but the labour required to perform the job.

In essence, it is the employee who offers the product (labour) for which a price is determined; the employer bids a price for the product; with the employee choosing to accept or decline.
The terms of the contract are usually determined in the contract of employment, which would mention the job title, department, grade and other high-level information.

The job description would then point out the duties to be carried out in more detail. It is important to distinguish between contractual obligations and pay-for-performance.

The employee has the duty to avail his/her labour to the employer during the time that is determined as duty time, performing duties at required performance levels.

As the purchaser, the employer has the obligation to pay for the duties. Therefore, the employee delivers no less than expected and the employer is expected to pay no less than the predetermined price.

Let us look at the basis upon which performance-related pay such as bonuses in organisations is founded. For illustrative purposes, let us assume there is an organisation that has a simplistic performance rating system that has the following assessment criteria;

Performance above expectation – Rating 1
Performance at expected level – Rating 2
Performance below expected level – Rating 3
Poor performance – Rating 4

Let us link the assessment criteria to what the employer’s obligation to pay a salary would be as per contract of employment. Remember, the employee is not expected to deliver a labour service less than the required levels if he has to deliver as the contract of employment.

It follows then that an employee who delivers less than the required levels is regarded as not meeting his/her contractual obligations.
The employer’s obligation to pay the full pre-determined reward should logically start at Rating 2 in our example.

The implementation of pay-for-performance should take cognisance of the contractual obligations between the employer and the employee.

However, the scenarios that manifest in reality are that many organisations pay employees a full wage or salary for the provision of labour service delivery below the contractual obligations.

This results in the pay-for-performance system being used to get employees’ performance to the expected contractual obligation delivery levels. We are going to unpack this question to explore the common systemic inefficiencies of pay-for-performance practices.

In most organisations that have pay-for-performance, there is a link of reward to either discretionary basic pay increases or periodic bonus payments. Look at the assessment criteria above where we noted the Rating 2.

The systemic question of what is the real link of this level of performance to the employee output required as per contract of employment needs to be answered. This is a straightforward case of the employee meeting his/her contractual obligations, thus warranting a full contractual reward and nothing more.

However, organisations would normally consider such an employee for a discretionary performance-based salary increase or bonus. The question to be answered by business leaders is whether this individual performing at expected performance levels (Rating 2) deserves to be given a performance-related reward. The systemic answer to this quiz is that such an individual should be getting their due remuneration only and nothing more.

Nevertheless, we all know the reality is that such an individual at expected performance levels (Rating 2) will get a performance-related reward. In our example employees performing at Rating 1, should be the only ones that should get a performance-based reward.

There should not be any problem with such an arrangement, as the employee would be giving output above their contractual obligation.
One wonders why many organisations miss the mark by awarding a questionable performance-related reward to the employee assessed as Rating 2 as we have noted.

Consider the other assessment ratings in our example, namely Rating 3 and Rating 4, in the context of the employer an employee obligations as per contract of employment.

We noted the employee should reasonably expect a full payment of the contractual salary or wage only when he or she delivers his or her own part of the contract; thus availing labour at expected performance levels.

In a room full of business executives, I bet I would get few honest individuals would raise their hands to testify to the fact that organisations pay proportional contractual salary or wages to employees performing below the expected level of output, thus Rating 3 and Rating 4, in our example.

Even though executing such a move would be logical, there are many impediments rooted in labour legislation and legal drafting of the employment contract that require massive legal intellect to manoeuvre.

We will discuss the systemic impediments of labour legislation in future instalments of this column.

Hlabati specialises in human capital business strategies advisory services.

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