Question

In: Economics

how does a paid for performance scheme o facilitate a more efficient allocation of resources (effort)...

how does a paid for performance scheme o facilitate a more efficient allocation of resources (effort) on the part of the employees (agents) within the firm? I’m not necessarily talking about the agency problems here … just how P4P could be better than some mandated policies and procedures imposed by a manager.

Solutions

Expert Solution

P4P is a salary /wages paid system based on positioning the individual, or team, on their pay band according to how well they perform. For example, car salesmen or production line workers may be paid in this way, or through commission.

Many employers use this standards-based system for evaluating employees and for setting salaries. Standards-based methods have been in de facto use for centuries among commission-based sales staff: they receive a higher salary for selling more, and low performers do not earn enough to make keeping the job worthwhile even if they manage to keep the job. In effect, the salary would be re-evaluated up, or down, periodically (usually annually) based on the performance of the individual or team. The reward is the salary: with an expectation to be high on the pay band for high performance and low on the band for low performance.

In comparison, the P4P system would see the reward given in the form of a pay rise. The better the performance of the individual or team the larger the rise, likewise, if the performance was poor the associated rise would be minimal, if any at all. The reward is the pay rise: with an expectation of a high pay rise for high performance and a low or zero rise for low performance.

In addition to motivating the rewarded behavior, standards-based methods can provide a level of standardization in employee evaluations, which can reduce fears of favoritism and make the employer's expectations clear.

How P4P could be better than some mandated policies and procedures?

1. Objective Evaluation: Managers objectively evaluate employees through monthly performance scorecards ( In traditional systems, managers subjectively evaluate employees according to preset schedules - say, annual, bi-annual reviews)

2. Pay is dynamic: Pay is based on individual employee performance and company profitability ( In traditional methods, pay is static. It is based on predetermined employee salary )

3. Ownership mentality: Performance measurement reestablishes the connections between an employee's performance, organisational profitability and the pay. ( In traditional ways, employees view pay and annual increases as entitlements rather than pay for performance

4. Individual Rewards: Performers are rewarded on the basis of their direct contributions and rewards ( In traditional procedures, high performers are rewarded on par with low performers)

5. Skill based promotion: Employees are promoted on need and are given to employees who have the interest and skills to be an effective manager ( In traditional procedures, employees are promoted as rewards for good performance which take the high performers out of their jobs, placing people into management who may be unmotivated or ineffective.


Related Solutions

Define the statically efficient allocation of depletable resources. Define the dynamically efficient allocation of depletable resources....
Define the statically efficient allocation of depletable resources. Define the dynamically efficient allocation of depletable resources. Use a diagram to explain the difference between the two efficiency criteria. When is the same allocation of depletable resources be achieved under the two efficiency criteria?
Discuss How do markets provide for an efficient allocation of scarce resources? Provide examples
Discuss How do markets provide for an efficient allocation of scarce resources? Provide examples
Why investors will rely on non-financial statement forms of information to facilitate the efficient allocation of...
Why investors will rely on non-financial statement forms of information to facilitate the efficient allocation of resources?
Markets generally lead to efficient use and allocation of resources, but sometimes at the cost of...
Markets generally lead to efficient use and allocation of resources, but sometimes at the cost of equity. Many have observed a trade-off between efficiency and equity, or growth in income and wealth inequality as the economy becomes more efficient. Bill Gates made the following statement: "Yes, some level of inequality is built into capitalism.... It is inherent to the system. The question is, what level of inequality is acceptable? And when does inequality start doing more harm than good?"
How does a company's mission influence the allocation of resources and alignment of operations?
How does a company's mission influence the allocation of resources and alignment of operations?
How does segmentation differ from paging? How does memory management facilitate processor and I/O usage? How...
How does segmentation differ from paging? How does memory management facilitate processor and I/O usage? How does page size affect fault rate? 4. Describe the approach where segmentation is combined paging
1. A Pareto efficient allocation of resources occurs where: a. no individual can be made better...
1. A Pareto efficient allocation of resources occurs where: a. no individual can be made better off without making another worse off. b. there is justice in the distribution of income and wealth MSB>MSC c. MSB>MSC d. all of the above 2. A public good is: a) Any good traded in markets b) A good that is non-excludable and non-rival in consumption c) A good provided only to those who pay for it d) Rarely provided by the government
Public financial management is critical in achieving aggregate fiscal discipline, strategic allocation of resources and efficient...
Public financial management is critical in achieving aggregate fiscal discipline, strategic allocation of resources and efficient service
In an effort to reduce energy costs, a major university has installed more efficient lights as...
In an effort to reduce energy costs, a major university has installed more efficient lights as well as automatic sensors that turn the lights off when no movement is present in a room. Historically, the cost of lighting an average classroom for 1 week has been $265. To determine whether the changes have signficantly reduced costs, the university takes a sample of 50 classrooms. They find that the average cost for 1 week is $247 with a standard deviation of...
Public Financial Management is critical in achieving aggregate fiscal discipline,strategic allocation of resources and efficient service...
Public Financial Management is critical in achieving aggregate fiscal discipline,strategic allocation of resources and efficient service delivery in any economy. In reference to the Public Expenditure and Financial Accountability (PEFA) framework. Discuss the above statement.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT