New forces in the marketplace—including new organizational values, work cultures, and business goals—have reshaped the structures, strategies, and human resource process of most organizations. One change brought about by these marketplace forces is the development of a new set of work standards. These work standards de liver clear and specific goals to employees, so that they understand exactly what is expected of them in order to earn fair and equitable pay for their job performance. These standards also provide employers with a reliable system of performance appraisal. These new compensation processes are referred to as standard-based work performance.
Standard-based work performance has also been termed pay-for-performance, at-risk compensation, and merit pay. It became fashionable in the 1990s, when a large percentage of U.S. organizations began using some form of standard-based work performance. In its purest forms, standard-based work performance also includes selling on commission and piecework, concepts that have been around much longer.
Standard-based pay is a form of compensation known as incentive pay. Under a standard-based pay plan, pay increases are granted to individuals on the basis of their rated performance in a previous time period. Pay increases are granted with the hope of motivating future performance. One philosophy views standard-based work performance compensation as a way to change behavior, while a second philosophy views it as a reward mechanism.
Organizations have moved toward this new form of evaluation related to compensation with the intention of getting the best possible per formance from their employees. The main objective of standard-based work performance is to tie pay to performance. Other objectives include maintaining equitable relationships among jobs, attracting job applicants, and keeping payroll costs competitive.
Standard-Based Work Performance Plan Requirements
A key to making standard-based work performance work for an organization is to have the appraisal system backed by a clear sense of corporate purpose. Therefore implementing a new compensation program or appraisal system requires a great deal of planning when deciding what action management wants to elicit from employees. The organizational culture and management styles will determine how to implement changes in compensation. Higher priority should be given to corporate strategy than to industry standards when developing pay plans. If an organization wants to encourage technological change, then linking pay to these measures conveys to employees that the goals of the organization have changed and rewards will be based on reaching the new goals.
Another issue to consider regarding the organizational culture is whether to promote teamwork or individual competition. The goals of each are very different and must be clearly stated. If compensation rewards are to be based on the effectiveness of the team's work rather than on individual performance, the organization needs to train employees to function as members of a team.
An organization must also decide whether performance-based compensation is practiced at executive, middle-management, or all employee levels. This decision is very important, because it will determine the type of training that will be required. All managers using a new appraisal system must have a thorough explanation of the plan and the phasing in process in order to avoid resistance from those employees being evaluated.
Standard-based performance is based on the assumption that performance can be measured. This is not an easy task; it is difficult to objectively measure job performance in many positions. The availability of accurate performance criteria and the ability to accumulate such information will determine the success of linking pay to performance. The key is designing the plan.
Successful performance-based pay plans have three common qualities. They must be clearly communicated to employees, they must include an annual review of the plan, and they need appropriately ambitious goals. The supervisor and employee should jointly develop specific plans on how to reach the goal and how performance in attaining the goal will be measured. This is a time-consuming but necessary task.
Standard-Based Work Performance Theories
There are four psychological and three economic theories that address how work standards relate to work performance. The psychological expectancy theory suggests that standard-based work performance is likely to motivate increased performance when performance is necessary to attain an increase in pay. The theory states that in order for the performance-based pay plan to be successful, performance must be accurately measured, pay must be a valued outcome, pay must be made contingent on performance, and the employee must have the opportunity to have an impact on performance.
The psychological reinforcement theory suggests that standard-based performance should motivate increased performance when the outcomes of favorable performance are clearly defined to the employee, the rewards are contingent on a desired performance, and compensation is increased in a timely manner when performance improves.
The psychological equity theory suggests that standard-based pay will increase employee motivation when it leads to perceptions of equity by the employee. It requires an organization to shift from valuing seniority to valuing performance inputs and basing compensation on performance rather than on years of employment.
The psychological goal-setting theory suggests that standard-based performance increases motivation when it is the result of setting more difficult goals and demonstrating a commitment to reach these goals. Goals should be weighted by difficulty, and compensation rewards should be given based on degree of difficulty of the goal achieved.
Marginal productivity theory, an economic theory, suggests that an employee is paid on the basis of performance in order to minimize labor costs and keep the company competitive in the labor market. Although research indicates that pay and performance are not always directly related, reducing fixed compensation costs is a goal toward which most employers strive.
Implicit contract theory, another economic theory, holds that standard-based performance is an implicit contract in which performance is measured by the employer rather than assumed by the employee. Under this theory, an employee can then be paid based on actual contributions that minimize labor costs.
Efficiency wage theory, also an economic theory, suggests that standard-based performance pay should be set high to obligate employees to fully perform rather than shirk duties. When employers pay a premium wage, employees realize that they will encounter personal financial hardship if they lose their jobs. Better performance, reduced turnover, and decreased need to train new employees may offset the initial investment in a premium wage.
Research indicates that when an organization plans on implementing a standard-based performance plan, it must view standards in relation to previous employee performance. It is important for management to be aware of and recognize contributions an employee has made to the organization.
It is equally important to examine performance in terms of measurable outcomes or perceptions of work-related performance. An employee must know what will determine the awarding of increased pay—the manner in which work performed is being measured, the work itself, or the factor to be measured?
There are many examples of work standards in business today. Compensation experts say the key is to design a plan that enforces the goals of the organization and to regularly evaluate the effectiveness of the plan.
The Ford Motor Company, which has a standard-based performance pay plan, measures quality using warranty figures expressed as repairs per thousand vehicles and both short-term and long-term customer satisfaction. The company recognizes there is still a lot more to be done, and it continually challenges itself.
In the late 1990s Sun Microsystems started tracking quality of customer loyalty and customer quality. The results are updated regularly on the company's intranet. Employees understand that the corporation's overall success will affect their compensation. The employees know that their annual bonus is based on a reduction in customer dissatisfiers (late delivery, software defects, poor product quality, etc.) and an increase in customer loyalty.
The original idea for the Sun Microsystems plan resulted from quality benchmarking strategy meetings of chief executive officers of Sun Micro-systems, Federal Express, Motorola, and Xerox. The successful standard-based work performance plans of these companies have three main qualities in common: clear communication with employees, annual plan reviews, and appropriately ambitious goals.
Employees must have a clear idea of the organization's specific goals, how their jobs fit into the big picture, and what their rewards will be for doing their part in achieving the goals. The degree to which an employee is accountable for results of the job is the amount of control or opportunity available to the employee. Standard-based performance focuses on the importance of providing accountability for work performance. Goals and compensation should be assessed, re viewed, and updated as part of annual reviews.
Three components in evaluating accountability are the freedom to act, impact, and magnitude. Freedom to act describes the degree to which personal or procedural control exists. Impact is the effect of specific jobs on the objectives of the company. Magnitude is the size of the unit or function affected by the job as related to the big picture of the organization. Magnitude and impact must fit together; neither can be final or meaningful without being related to the other. Accountability is a measurement of the effect of the job on end results.
Bibliography
Grote, Dick. (1996). Painless Performance Appraisals Focus on Results, Behaviors, HR Hay Group. People, Performance, and Pay.
Heneman, Robert L. (1992). Merit Pay—Linking Pay Increases to Performance Ratings.
Larson, Melissa. (1998). "Betting Your Bonus on Quality." Quality Magazine October:
Quaid, Maeve. (1993). Job Evaluation—The Myth of Equitable Assessment.
[Article by: JAMES E. MILES]
