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Performance Management and Performance Based Pay

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Performance Management and Performance Based Pay

Compensation and Benefits

MGT 548

Cardinal Stritch University

Group MSM 3-356

Instructor: Rafael Viscasillas


Table of Contents

Performance based pay is an effective way to adequately distinguish between the best and worse performers within the company structure. Commonly referred to as merit pay or skill based pay, performance based pay is a compensation system designed to reward employees for attaining additional skills or for completion of specific goals.

"The concept is attractive to many employees since there is a direct link between their compensation and the work-related skills they may learn and use - and since service time with the company and job title are relatively less important factors in the pay and/or advancement decision process." (Dantico, 1994)

Performance management is an essential element of performance based pay. Performance management, or "the means through which managers ensure that employees' activities and output are congruent with the organization's goals" (Noe, Hollenbeck, Gerhart and Wright, 2003, 327), is not limited to performance appraisals. Performance management is a broader and more encompassing process than a simple performance appraisal. Performance appraisals cannot stand alone in improving organizational performance. The use of performance based pay as incentive and motivation can increase the rate of improvement.

Noe, Hollenbeck, Gerhart and Wright believe that there are three parts involved in performance management. These three parts are defining performance, measuring performance and feeding back performance information. This concept spells out which portions of performance is pertinent to the organization, measuring them using performance appraisals and allows managers to give employees feedback so the employees can adjust their performance based on the goals and desired outcomes of the organization. Adding a performance based pay structure or merit increases to this formula creates an additional tool for management.

When these three aspects of performance management are set into place, organizations can determine what training is necessary to help employees reach the desired goals and pay employees based on whether or not these goals are met (Mello, 2002, 279).

Performance management and performance based pay can be used to increase the performance of employees within an organization to maximize the utilization of human, technological and financial resources. From the employee perspective, a related outcome of these improvements is increased job satisfaction and morale. "From the employer's perspective, SBP (skill based pay) offers an alternative means for managing individual performance, advancing the competency of employees and enhancing the flexibility with which personnel can be used within and between one or more units of the organization." (Dantico, 1994)

The measurement of activities/actions taken to produce results, accomplishments or results of employee activity and outcomes/final results of all activity/accomplishment is the fundamental basis of performance management. These measures are the building blocks of information on which management of performance is structured. "The fundamental unit of SBP is the skill block. It is a predefined set of skills, knowledge, tasks and/or competencies which prescribes an internally agreed upon unit of expertise an individual is expected to master or may strive to attain. Successive skill blocks may represent increasingly more difficult skills and a greater depth of knowledge..." (Dantico, 1994)

The Evangelical Lutheran Church of America Board of Pensions (ELCABOP) is an agency that manages and distributes retirement benefits, health insurance and disability claims for Lutheran ministers and lay employees. ELCABOP employs approximately 200 people, most of whom work in the Customer Service Unit which is divided up into three different departments (pension, health and disability). The employees who work in customer service have contact with the Lutheran ministers and lay employees on a constant basis. ELCABOP is judged based on how these employees handle their job when working with the Lutheran ministers and lay employees. Because of this it is important to record and measure the performance of the employees to make sure customer satisfaction is achieved. Until recently, this was difficult to do because the ELCABOP did not have a formal evaluation policy in place.

In the past, the ELCABOP conducted performance appraisals annually at the end of their fiscal year. Managers would meet with their employees on an individual basis, write up a summary of the employee's performance for the previous year, and submitted it to the Human Resource Department to keep in the employee's file.

Employees did not have specific standards to meet and had no real sense of their own accomplishments or shortcomings. Without an understanding of how individual performance influences the organization's contribution to the company's mission, employees have no feeling of connection to the organization. This lack of connection decreased both employee loyalty to the organization and employee morale. "Department goals, which support the corporate goals, are set by managers and their teams. Individual goals, which support company and department goals, are set by each employee together with their manager. All goals must be achievable, measurable and aligned with the corporate strategy." (Wells, HR Magazine, 2005, p. 79-80)

Additionally, ELCABOP previously had no documented criteria or standards on which to base the evaluation of employee competency. Subsequently, ELCABOP had no way to measure productivity and or progress of employees. With no measure of employee productivity and progress, there is no way to reward achievement or implement a performance based pay system. Lack of reward kills motivation and ambition. As a result of these factors, a symptomatic problem is a general lack of optimal productivity and low morale.

Little ongoing feedback took place throughout the year. This lack of feedback had the potential to cause an employee who was a poor performer to regress into an even worse performer by the time the employee was evaluated provided the employee had not already been dismissed from the organization for his meager performance. In addition, recognition for an employee performing at an above average level was not being given



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