Compensation System: Employee Performance

Introduction

The centrality of employee input in an organization’s overall performance can only be ignored at the peril of an organization’s long-term survival. The significance of employee performance in the contemporary business environment is accentuated by workers’ contributions in promoting organizations’ capacity to cope with the intense competition (Ola & Trond, 2015). While it is possible to acquire top-notch technologies to improve operational effectiveness and efficiency, it is relatively complex when dealing with human resources. Despite the complexity, developing an effective workforce cannot be ignored. Different concepts and theories on human resource management have been formulated to assist organizations to develop a robust workforce. However, a conclusive theory or approach to human resource management has not been established to guarantee better employee performance.

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One of the most controversial issues in the study of human resource management processes that are geared towards employee performance is the role of compensation in the employee performance. Whether higher compensation leads to better performance is a very contentious issue that has attracted both proposing and opposing opinions from different spheres of human resource management. Considerable research has gone towards the study of the link between employee performance and its relationship, or lack thereof, with the amount of pay the employees receive. This dissertation proposal investigates whether an organization’s overall performance is a factor of the individual employee performance. The dissertation considers the integration of compensation systems as one of the fundamental strategic issues in the contemporary business environment.

Problem statement

Most organizations have over-relied on pay-for-performance approaches to their strategic human resource management practices. Torre, Giangreco, and Maes (2014) affirm that organizations have extensively relied on pay compensation systems in an effort to improve organizational performance by positively influencing their employees’ behavior. Consequently, different pay structures have been formulated to assess their contribution to employee performance. The integration of dispersed pay structures in an organization’s compensation system may culminate in negative effects. Torre et al. (2014) claim that the contribution of dispersed pay structures to employee performance might be insignificant.

While many people have developed the perception that more pay can lead to better performance, this issue is more complex than meets the eye since employee performance is a mix of many factors, which do not necessarily end with better payment. Torre et al. (2014) emphasize that even though the issue of the significance of relative and absolute pay has been extensively researched, numerous gaps remain unexplored. Lawler (2000) further supports this view by emphasizing that the pay-for-performance approaches are not always effective in producing the desired results. Therefore, in the course of formulating employee compensation systems, the dissertation suggests that an organization’s management teams must evaluate the correlation between the employee’s pay level and their performance.

Research Purpose and Rationale

This proposal aims at studying whether paying employees more leads to more performance. To understand these issues, the proposal will deploy the case study of Google Inc. Further, it will incorporate the existing literature that has discussed employee performance and factors that determine such performance in an organization. Incorporating the existing literature will lead to a better appreciation of key issues that relate to the subject that the case study will reveal. The rationale for conducting this study has arisen from the need to understand the relationship between pay level and employee motivation. Currently, organizations are increasingly appreciating human capital as a source of sustainable competitive advantage. Thus, the need to develop and retain a strong human capital base has increased considerably. However, organizations’ management teams must appreciate the contribution of their employee compensation systems to worker performance. Such consideration will provide the organization’s management team with an insight on how to adjust their employee compensation systems.

Research Objectives

This proposal intends to achieve several objectives, which include:

  • To evaluate the relationship between pay and employee performance
  • To assess the impact of high employee pay on employee motivation and productivity

Research Question

The above research objectives will be assessed by taking into consideration the following research question.

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  • What is the impact of the level of pay on employee performance?

Research Hypothesis

To achieve the research objective, the proposal is based on the following null (H0) and alternate (H1) research hypotheses.

  1. H0: High employee pay is directly correlated with high employee performance.
  2. H1: There is no correlation between high pay and high employee performance.

Literature Review

This section highlights the key ideas and arguments that have been presented in the existing literature on the issue of performance management in organizations. Among the many factors that may be revealed in the literature concerning performance management and the role of compensation will be discussed deeply. The section will also incorporate important literature that relates to Google Incorporation on its employee performance management issues.

The profit and non-profit oriented organizations are increasingly being concerned with employee motivation to improve their performance (Brown, 2002; Patel, Messersmith & Lepak, 2013). Most organizations are adopting a flat organizational structure to limit the available promotion opportunities. Consequently, firms are considering alternative approaches to sustain their employee level of motivation. This plan has led to the adoption of payment systems in their employee compensation plans. One of the payment systems that are commonly used by organizations entails the integration of wages and salaries. Adiguzel, Yuksel, and Tekin (2010) assert that wage entails the price of labor. The incorporation of wages and salaries in employee compensation processes has led to the integration of diverse wage management practices. One of the most notable practices entails the increase in wage levels. Firms are linking pay to performance to remain competitive through improved employee productivity (Finney, 2008). However, in the course of designing the pay-for-performance schemes, organizations must take into account the relevant factors that affect performance.

Google Incorporation is one of the global organizations that have integrated the concept of pay as a way of motivating its workforce for high performance. For example, on March 26, 2015, Google Incorporation announced its decision to pay the incoming Chief Finance Officer [CFO], Ruth Porat, US$70 million by 2016. The pay package comprised a US$650,000 annual base salary. The pay package also included a special one-time bonus amounting to US$5 million. However, in the event of the incoming CFO terminating the contract before completing one year within the firm, he or she will be required to repay all the advanced special bonuses. Apart from the salary and bonuses, the pay scheme for the CFO further comprised equity grants, commonly referred to as Google Restricted Stock Units [GSUs] (StreetInsider, 2015). The above aspect illustrates the extent to which Google Incorporation associates high pay to increased employee performance.

Adiguzel et al. (2010) assert that businesses progressively perceive wage as an element that can promote an organization’s superiority concerning competition, rather than cost. This trend is most prevalent within the private sector. Lucifora and Origo (2015) contend that organizations in the private sector are gradually aligning pay schemes with employee or organizational performance. Consequently, the popularity of performance-related pay has increased considerably. Adiguzel et al. (2010) define the performance-related system to include “a system which awards workers who have worked above their normal working levels with money” (p. 284).

Several past studies on the impact of pay on employee and organizational productivity have shown that pay contributes to productivity gains (Lucifora & Origo, 2015). The contribution of the payment schemes to employee and organizational performance varies, depending on whether the payment is individual or collective performance-relate. Moreover, Lucifora and Origo (2015) emphasizes, “the returns to performance pay are larger for ethnic minorities, particularly n the case of women” (p. 607).

One of the theories that explain the adoption of the performance-related pay is the tournament theory. According to the theory, individuals compete to access prizes in their workplace such as promotion and pay increments (Arthur, 2008; Baldwin, 2003). Consequently, integrating wage factors among employees in different levels of management plays an essential role in motivating them to put more effort into their job roles and responsibilities. Subsequently, the organization’s performance is improved considerably (Hamann & Ren, 2013). Therefore, the theory accentuates that wage inequality is directly correlated to organizational and individual performance (Gittleman & Pierce, 2015).

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The second theory that supports the pay approach to performance is the fair wage theory. The theory proposes that employees compare their salary or pay levels with those of their co-workers or the prevailing market rates to determine whether they are fairly remunerated (Price, 2007). This strategy explains why organizations should assess the internal and external equity in formulating the performance-related pay schemes (Pynes, 2013). This behavior arises from the fact that employees have expectations on wage levels and job positions (Holbeche, 2012). If they perceive that they are unfairly compensated or paid, they are likely to reduce their effort in executing the assigned job tasks. Moreover, the development of the perception of being underpaid is likely to contribute to negative workplace behavior amongst employees. Examples of such behaviors include absenteeism, sabotage, lack of cooperation, and cohesion amongst employees. This aspect might significantly reduce the overall organizational performance.

The third theory that forms the basis for pay as a strategy to motivate employees entails the efficiency wage theory. The theory holds that paying employees high salaries and wages improves an organization’s competitiveness in the labor market, hence improving the likelihood of attracting experienced and talented workforce (Torre et al., 2014). Furthermore, the theory proposes that high pay acts as an incentive in promoting employee performance. A study involving over 8,000 employees who were selected from Japanese and American manufacturing firms showed that employees who received high pay put more effort into their jobs. Such employees are more likely to quit their workplace. Furthermore, a study by Forrest and Simmons (2000) on the performance of the English, German, and Italian football leagues shows that high wage levels are positively correlated with the respective team performance. Torre et al. (2014) assert,

At the theoretical level, if employees perceive to be paid a high salary, they will be incentivized to perform at a high level to maintain their salary equitable, viz. balance the inputs and the outputs and to reduce the risk of losing their highly paid jobs because of poor performance” (p.88).

Despite the assertion that high pay promotes employee performance, employees in high paying job positions fear the risk of losing their job and wage premiums. Torre et al. (2014) affirm that this strategy is mainly prevalent in organizations that have adopted individual performance-related pay systems. Under such circumstances, employees understand the apparent consequences that are associated with poor performance.

However, one can claim that associating high pay with performance poses a risk of employees losing their job positions in case of failure to achieve the expected performance. This case might adversely affect the extent to which the employees identify with the firm, despite the past studies. The probability of encountering a high rate of voluntary job turnover is relatively high. Jensen, McMullen, and Stark (2007) accentuate that the increase in voluntary employee turnover might adversely affect the attractiveness of an organization in the labor market. Subsequently, the effectiveness and efficiency with which an organization develops long-term competitiveness concerning human capital might be adversely impacted.

In addition to the above challenge, over-relying on pay to performance systems might unfavorably affect an organization’s long-term survival. This view arises from the fact that the business will be subjected to economic changes such as inflation. During an economic downturn, an organization might not sustain pay increments. Snell and Bohlander (2013) define such a phenomenon as pay compression. Moreover, Heneman (2002) contends that the existence of small wage differentials between the high and the poor performers during periods of economic downturn might negatively affect the high performers’ attitude. For example, employees might develop a ‘why bother’ attitude.

Lucifora and Origo (2015) are of the view that linking pay to performance might complicate the payment schedule that an organization adopts. For example, by continuously increasing the good performers’ pay, the organization can reach the top range. This claim means that making additional pay increments, despite the employees earning it, will be substantially difficult. Therefore, the pay-to-performance system is not sustainable. Generally, the average performers might progress through the pay scale due to their duration of service in an organization (Nyberg, 2008). The overall effect is that the pay-to-performance system might be rendered irrelevant due to the compounding effect. Under such circumstances, top performers might consider seeking job opportunities elsewhere.

Research Methods and Methodological Processes

The purpose of this research proposal is to create a room for further research that will assess the relationship between the employees’ pay and their level of performance. Consequently, the research study is exploratory. According to Saunders, Thornhill, and Lewis (2009), exploratory research studies provide researchers an opportunity to assess areas that have not been extensively researched. Therefore, engaging in exploratory studies contributes to the development of additional knowledge on the issue or phenomenon under investigation. This goal will be achieved by testing the stipulated hypotheses. To undertake the research study, a comprehensive research methodology will be integrated.

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Research Design

Considering the exploratory nature of the research study, the researcher will adopt the mixed research design. The study will take into account the qualitative and quantitative research designs. The choice of the mixed research design has arisen from the need to improve the quality of the research study. First, integration of the qualitative research design will aid in the generation of adequate data from the field to support the study. Moreover, the researcher will have an opportunity to collect data from the natural setting, hence improving the relevance of the research study. In the course of implementing the qualitative research design, the study will take into account the grounded theory.

According to Strang (2015), the grounded theory entails “the discovery-form facts that are systematically obtained from social research to develop a theory” (p.449). Subsequently, incorporation of the grounded theory in the qualitative research design will enable the researcher to elucidate the issue under investigation. For example, the research study will contribute to a further understanding of the importance of adopting a multi-dimensional approach in formulating the employee compensation policies. Conversely, the quantitative research design will aid in improving the effectiveness with which the research data is analyzed and interpreted by the target research audience such as organizations’ human resource managers.

Population and Sampling

The study targets employees who work in Google Incorporation as the study population. Because Google Incorporation is a multinational entity, the researcher intends to evaluate the application of pay on employee performance. The choice of Google Incorporation has arisen from the fact that it has integrated high pay as one of its employee motivation strategies.

According to Scott (2011), conducting a study on the entire population is not manageable due to the high cost and amount of time that has to be spent. Consequently, the research study will take into account the sampling technique. To make the study manageable, the researcher will integrate the simple random sampling technique in constructing the research sample. This technique will ensure that bias in conducting the study is eliminated. A sample of 100 respondents who will be selected from different Google Incorporation subsidiary firms in the Americans, European, and African regions will be developed. The study will take into account both males and females in constructing the research sample. The study assumes that the selected research sample will be representative of the workforce perception on the relationship between pay and performance. The choice of these regions has arisen from the need to understand the impact of social and cultural diversity on the employee perception and hence performance.

Data Collection and Instrumentation

The research data will be collected from primary sources. Adoption of primary sources will play a fundamental role in improving the relevance of the research findings. To collect data from the field, the interviewing technique will be integrated. Consequently, a set of questionnaires will be developed. The questionnaires will act as a guide in conducting the interview. The questionnaires will mainly be composed of open-ended questionnaires to provide the respondents an opportunity to answer the required issues based on their opinion. The questionnaires will be administered to the respondents directly through online media. Thus, the data collection method will entail an online survey. Adopting this method of administration is informed by the need to minimize the cost of the study because respondents are geographically dispersed.

Data Analysis and Presentation

The collected data will be analyzed quantitatively. This goal will be achieved by incorporating quantitative data analysis tools such as tabulation, use of graphs, percentages, and charts. Because the research study has integrated the qualitative research design, the data analysis and presentation method will entail the adoption of the textual presentation technique. This technique will be implemented by using statements that comprise numerals. One of the textual presentation tools that will be adopted in analyzing the research data entails the Likert scale. By using this tool, the researcher will be in a position to evaluate the qualitative data using point scales such as the 5-point Likert scale. In addition to the above technique, the researcher will integrate the Microsoft Excel data analysis technique. The adoption of this technology will play a fundamental role in improving the effectiveness and efficiency with which the collected data will be analyzed using tables, charts, and graphs. Moreover, incorporation of the Microsoft technique will play a fundamental role in improving the ease with which the research data will be interpreted.

Research Time Plan

In the course of conducting the research study, the researcher will ensure that time is effectively managed. Consequently, a research schedule outlining the various research activities will be developed. The time plan will be designed by breaking down the overall research project into manageable subcomponents. Additionally, the schedule will outline the predetermined start and completion duration of the various research activities. The research time plan that will be followed in conducting this research study is illustrated below.

Research Activity Start date Completion date
Conducting a preliminary study to understand 1st May 2015 5th May 2015
the relevant issues [literature review]
Designing the research questionnaire 6th May 2015 7th May 2015
Evaluating the relevance of the questionnaire to the study 8th May 2015 10th May 2015
Seeking authorization to conduct the study from Google Incorporation 9th May 2015 10th May 2015
Actual data collection 11th May 2015 18th May 2015
Analysis of the data collected 20th May 2015 25th May 2015
Compiling the first research draft 26th May 2015 30th May 2015
Evaluating the first draft to assess its logic and completeness 31st May 2015 1st June 2015
Revising the research draft 2nd May 2015 5th May 2015
Composition, editing, and proofreading of the final draft 6th May 2015 7th May 2015
Presentation of the draft 8th May 2015

Conclusion

Most private and public organizations are increasingly being concerned with their performance. However, based on the expositions that have been made in this paper, the degree to which firms attain high performance depends on the contribution of their workforce. Subsequently, employee motivation has become a fundamental strategic human resource management aspect. Firms are integrating high pay in an effort to promote their employee performance. However, the above literature review underscores the existence of significant discourses concerning the appropriateness of the pay to performance approach. This research proposal will provide additional insight into the effectiveness of pay in promoting employee performance. This goal will be achieved by assessing the opinion of Google Incorporation employees.

Reference List

Adiguzel, O., Yuksel, H., & Tekin, P. (2010). In terms of strategic human resource management, the importance of individual performance related pay. The Journal of Faculty Economics, 15(2), 283-296.

Arthur, D. (2008). Performance appraisals: strategies for success. New York, NY: American Management Association.

Baldwin, D. (2003). The library compensation handbook; a guide for administrators, librarians and staff. Westport, Conn: Libraries Unlimited.

Brown, M. (2002). Paying for performance; an international comparison. Armonk, NY: Sharpe.

Gittleman, M., & Pierce, B. (2015). Pay for performance and compensation inequality; evidence from the ECEC. International Labour Review, 68(1), 28-52.

Hamann, D., & Ren, T. (2013). Wage inequality and performance in non-profit and profit organisations. Non-profit Management & Leadership, 24(2), 207-228.

Heneman, R. (2002). Linking pay to performance. Greenwich, Conn: Information Age.

Finney, M. (2008). Building high performance people and organisations. Westport, Conn: Praeger.

Holbeche, L. (2012). The high performance organisation. New York, NY: Routledge.

Jensen, D., McMullen, T., & Stark, M. (2007). The managers’ guide to rewards: what do you need to get the best for and from your employees? New York, NY: American Management Association.

Lawler, E. (2000). From the ground up: six principles for building the new logical corporation. Hoboken, NJ: John Wiley & Sons.

Lucifora, C., & Origo, F. (2015). Performance related pay and firm productivity; evidence from a reform in the structure of collective bargaining. International Labour Review, 63(3), 606-632.

Nyberg, A. (2008). Performance, compensation and turnover. London: ProQuest.

Ola, K., & Trond, O. (2015). The tenuous relationship between effort and performance pay. Journal of Public Economics, 121(5), 32-39.

Patel, P., Messersmith, J., & Lepak, D. (2013). Walking the tightrope; an assessment of the relationship between high-performance work systems and organisational ambidexterity. Academy of Management Journal, 56(5), 1430-1422.

Price, A. (2007). Human resource management in a business context. London: Thomson.

Pynes, J. (2013). Human resources management for public and non-profit organisations; a strategic approach. San Francisco, CA: Jossey-Bass.

Snell, S., & Bohlander, G. (2013). Managing human resources. Mason, Ohio: South-Western Cengage.

StreetInsider. (2015). Google [GOOG] agreed to pay incoming CFO Ruth Porat $70 million by 2016. Web.

Torre, E., Giangreco, A., & Maes, J. (2014). Show me the money! Pay structure and individual performance in golden teams. European Management Review, 11(8), 5 -100.

Saunders, M., Thornhill, A., & Lewis, P. (2009). Research Methods for Business Students. New York, NY: Prentice Hall.

Scott, S. (2011). Research Methodology: Sampling Techniques. Journal of Scientific Research, 2(1), 87-92.

Strang, K. (2015). The Palgrave handbook of research design in business and management. New York, NY: Palgrave Macmillan.

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