In: Economics
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.
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.