Since last few years, companies and organizations have been formulating different ways to develop and design different payment methods on the basis of their performance depending on their particular organizational goals. This system, as Jeffery A Mello said, pay for performance programs reward to employees in the form of increase in salary on the basis of merit, bonuses, and stock options as for achieving the acquired performance levels giving due consideration to skills and competencies. Mello, 2006)
These incentives motivate employees to increase their performance level increasing the competition spirit as well overall performance of the organization. Academy of Management Journal as on first February 1998 published an article ‘An empirical analysis of a skill-based pay program and plant performance outcomes’ by Brian Murray and Barry Gerhart. This academic article reported that around 51 per cent of the large companies were making use of the skill or knowledge based pay programs in small portions of their organizations.
It was found that the traditional approach of payment takes into consideration only the main features of the work employees need to complete, whereas the pay programs based on the skills were bestowing rewards on the basis of the performance and work shown by the employees that they termed as “work-related attributes of employees. ” (Murray & Gerhart, 1998, p. 68) By offering incentives to employees on their performance and showing their different traits like skills, capabilities and knowledge, organizations were able to divert the employees towards several opportunities they can avail of for their growth.
By diverting the attention of the workers towards the skill based goals, organizations hoped to give more space to flexibility, reduction in the labor cost and increase in the product quality. Asian Business and Management journal reported performance-related pay systems in their article ‘Paying for Success: Performance-Related Pay Systems and its effects on Firm Performance in Japan’ by Dai Miyamoto and Junpe Higuchi, published in 2007.
The paper showed the effects on the performance of the firm by the introduction of the performance-related pay (PRP) systems introduced at Japanese companies since late 1990s. The central point of the paper was to develop from the previous research process the fairness of the PRP systems instead of the introduction and another focus had been on the way there has been changing in the labor cost management.
In the study, the most important finding has been the way the process of communication between the superiors and subordinates plays a role in bringing in improvement in the performance of the firms. Though at relatively large companies, there was seen reduction in the basic pay yet there has been increase in the correlation between performance and labor costs having a disincentive effect, but there has been much improvement at the performance level of Japanese firms through the process of PRP systems. (Miyamoto & Higuchi, 2007)
Under this system, company’s strategic concept in Japan has been to reverse the traditional system of compensating employees, which takes age as well as the personal attributes as criteria as standard. Companies are now on large account preferring the skills and performance of the employees related to work for defining pay structure. From the provision of promotion, the system has been changed to the remuneration system. Companies aim to provide incentives on the basis of the strict performance appraisals thus intending to create a strong connection between performance and pay. Miyamoto & Higuchi, 2007)
The strategic move by the companies to give the practical shape to the skill based payment system has its basis on two broad theoretical approaches-behavioral approach and operational approach. The skill-based pay system allows the organization to bring in the changes in the nature of the work creating a direct as well as indirect effect on the attitude or behavior of the workers. In the operational approach, the focus is on the process of scheduling in the production jobs and constriction on the flexibility of the labor assignment.
As the main purpose of the skill-oriented pay system is creating an affect on the flexibility in the work force, the process could considerably reduce the effect on the labor constraints and permit for efficiency in production scheduling. (Murray & Gerhart, 1998) If we consider the short period, skill based pay system assumed to have a positive effect on the organizational outcome. To get such results, managers should realize that the payment system based on the skill should be a comprehensive human resource program and the results that could emerge are dependent on the way basic pay is fixed.
The success of any policy is also dependent on the way resources are allotted and managed so as there is a provision for adequate training, certification appraisal and the way scheduling on the production level is managed and the complementary job design is fixed. Without following even any one of the policy or procedure could result in the lack of motivation among employees for upgrading themselves or it could also result in the rise in pay but without rise in productivity or quality. (Murray & Gerhart, 1998)