Employers use different pay and reward schemes to attract, retain and motivate employees towards the attainment of organizational goals. All pay systems are intended to elicit the cooperation of employees and eliminate tensions in employment relations, but some pay systems have been found to actually contradict the basic goals of human resource management. For example, it is believed that the pay-for-performance scheme undermines the building of an employee complement strong on teamwork and cooperation. The reason is that when performance is made the basis of higher compensation or pay increase, this will cover only employees that perform well to the exclusion of non-performing employees or those that perform below par. By thus creating an elite group of employees, the performance-based pay scheme promotes individualism and disunity in the workplace, which organizations can ill afford. Nonetheless, organizations apparently derive more benefits from the pay-for-performance scheme than from the usual job-based pay such that the scheme has been the pay scheme of choice in private sector employment for the past 20 years (Bowman, 1998). This paper examines the performance-based pay scheme to determine if this system is applicable for teachers, which are among the lowest-paid professionals.
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There are three types of pay system – basic rate scheme, incentive scheme, and efficiency or productivity gains (Association of Consulting Actuaries, 2006). In the basic rate or job-based scheme, the pay is based on the job structure or classification developed through an evaluation process. Under this scheme, a grading structure is established that puts jobs in appropriate grades or bands. Tensions arise in basic rate pay when employees feel that the scheme does not offer enough incentives for their improved performance or quality. As for the incentive pay scheme, which is also known as pay for performance, it may be given to an individual or group on a short-term or long-term basis. When given to individuals, the incentive pay is rewarded through bonuses or commissions as a short-term incentive. If given to a group, the incentive pay is rewarded through such schemes as profit sharing and stock options, which take the form of long-term incentives. The idea behind the grant of bonuses and commissions is to motivate employees so they would deserve bigger bonuses in the future, while the rationale behind the grant of profit shares and stock options is to make selected employees identify more with their employers. Finally, there is the efficiency or productivity gains scheme, which is given to selected employees who were perceived to have increased their efficiency or productivity on the job (Association of Consulting Actuaries, 2006).
There is balance and mutual satisfaction in employment relations if employees perceive that the distribution of company resources is just and fair. According to the equity theory introduced by workplace psychologist John Stacey Adams in 1962, employees try to maintain equity between their inputs into a job and the outcomes they receive for them. These are then compared with the perceived inputs and outcomes of others in the organization. In employment relations, inputs consist of the employee’s time, expertise, qualification, experience, and other intangible qualities like drive and ambition or personal skills (Berman, et al., 2005). Outcomes, on the other hand, are the rewards accruing to employment such as monetary compensation, benefits, and perks as well as flexible working schedules and similar special work arrangements. Employees who feel that there is inequity in the pay system will try to reduce it by distorting the inputs or outcomes in their minds, which leads to altering these or leaving the organization.
The evaluation process for performance-based pay sometimes involves schemes that separate the good performers from the bad performers and those in-between. Big companies like Ford and Goodyear implemented such a system called forced ranking and distribution scheme by grouping workers into three categories. The employees ranked as good performers received bonuses and increases while the worst performers were deprived of a bonus for the first year. If the ranking is not improved in the succeeding years, the worst performers face possible dismissal. In both firms, the scheme provoked perceptions of stature and discrimination such that employees complained that it discriminated against certain types of employees (Gabris, 1986).
The paradox in organizations is that one part emphasizes individualism, equality, and participation but another part places a premium on conformity, uniformity, and submission to authority. In effect, the freedom that is valued by people is reduced in organizations. This gives rise to questions that organizational processes and procedures actually hinder instead of helping these paradoxes in the working life. In the universal desire to gain competitive advantage and snag the best talents, many organizations adopt a pay policy above the prevailing market rates, especially for certain skills groups. On one hand, this scheme gives firms an elite reputation since it can attract the most competent people who in turn will feel that they are fortunate to be working in this company. However, the presence of such elite employees is also likely to create tensions among workers in the same firm receiving lower pay. The distortions in pay rates thus breed a low-trust business environment and, as in the case of Ford and Goodyear, create disunity among employees.
In one case, the administrators of a non-government organization reformed the pay system after noting that the old pay scheme that rewarded staff on an individual basis was not working. Performance-based pay maybe a favored approach to employee’s compensation in Western countries but this is a new idea in Asia (Kellough & Lu, 1993). In Japan, for example, Fujitsu tried for eight years to make the pay-for-performance scheme work and failed. The scheme called for basing pay increases and promotions on how well employees meet self-established goals. For this reason, they set only easily achievable and less challenging goals that yield immediate returns. In effect, the employees failed to produce better products and neglected after-sale service since these are seldom factored into performance reviews. In time, Fujitsu realized that the performance-based pay is not for a Japanese firm since it is focused on personal goals rather than team goals, which has made many Japanese companies succeed. Kellough & Lu (1993) in fact observe that performance-based pay, which is also called merit pay, has failed precisely because it is based on individual performance. Supervisors often support the merit pay scheme less for the purpose of improving productivity than for maintaining their sense of control in the organization (Gabis, 1986). Although employees generally view merit pay as biased, unfair, and unrelated to individual productivity, managers and supervisors are willing to tolerate such problems in the pay evaluation process in their desire for power. Appraisal systems related to merit pay rarely work but managers dislike giving up a source of their power, thus exacerbating the discord between supervisors and subordinates.
In a study of pay systems in the pharmaceutical industry, Randle (1997) found no evidence that performance-related pay improves the performance of individuals or organizations. This belies the theory that employees who receive pay increases based on performance are highly motivated such that the pay scheme results in better performance. The study concluded that this payment system is not only unpopular but also has serious dysfunctional side effects in a research-and-development environment.
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According to Bowman (1998), the paradoxes in compensation include the contrast between individual and group experience and the disparity in pay between one employee group and another. In a school setting, for example, it was noted that the pay scales for teachers have deteriorated compared to other employee groups in similar occupations or trades. A 1988 study by Hay Management Consultants cited by Bowman (1998) showed that university faculty career earnings were lower than those in the private or public sector holding the same jobs. While equivalent professionals in the private sector earned $2,273,424 yearly, teachers in the public sector earned only $1,904,128 and university professors had $1,673,600. Teachers in state-run elementary schools suffer the worst during regimes of fiscal restraint in their local governments because their earnings deteriorate. As a result, it is said that public school teachers earn only one-third of the career earnings of friends who had chosen to forego graduate school and entered the labor market after a BA degree. These teachers also contend with an extraordinarily long probationary period, during which they are considered alternates receiving commensurate pay.
The conflicts and tensions in the pay system are especially pronounced in the public sector because of the political nature of employment relations and human resource management in government (Berman, et al., 2005). Because of fiscal constraints, for example, pay rates are fixed based on two considerations: an employee’s needs or the type of his work. This means that employees with less need for money get less pay too if their work does not warrant higher pay. Another area of conflict and tension is the often rigid state control of pay levels, which goes against the universal urge of individuals for bigger incomes and bonuses. There is also the usual lack of inputs from employees in wage-setting done by the state (Kellough & Lu, 1993). According to Gabris (1986), the pay for performance is only an “additive” in the private sector, given on top of the job-based pay as a reward for established quotas, sales targets, and profits, which become the basis on which performance is measured. In the public sector, where most teachers work, the pay for performance is not an add-on but a replacement for the job-based pay and there are no standards by which performance can be measured.
The rationale behind pay for performance is to motivate employees so they would receive bigger bonuses and benefits in the future as well as to make better-performing employees identify more with their employer. This seems to be better than the job-based pay scheme, in which there is no motivation for employees to improve their work performance since they receive the same pay whatever the quality of their work. However, performance-based pay requires an evaluation process that often calls for separating the good from the bad performers. The resulting pay distortion is likely to create tensions and disunity in the workplace, with the employees categorized as non-performing complaining of discrimination and bias. In this study, it was shown that performance pay is essentially based on individual performance, such that it is not conducive to cooperation and team working that are important for the long-term success of organizations. In the case of teachers, there is also the difficulty of finding the performance standards on which the appropriate pay increases can be based. Also, the pay scale for teachers in the public sector is often based on the lump sum received by agencies. In sum, it may not be advisable for teachers’ pay to be given based on performance.
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