Process 4

N02
Olalo, Louis
Salamat, Joannah
Date of Submission: July 15, 2014
Topic: Does the link of pay to performance really make employees loyal?
Thesis Statement: Even though it serves as an incentive to perform more, the
use of a Pay to Performance system does not actually make Employees more
loyal.
OUTLINE
I. Introduction
A. Definition of Pay to Performance System
II. Advantages of Pay to Performance System
A. Employee Motivation
B. Employee Recruitment and Retention
III. Disadvantages of Pay to Performance System
A. Labor Intensive and Challenging to Manage
B. Creates Competition Amongst Employees
IV. Other Factors That Ensure Employee Loyalty
A. Good Workplace Environment
B. Advancement or Promotion Opportunities
C. Satisfaction in Work they do
V. Conclusion
BODY
Pay for Performance (PFP) or merit based pay is one of the most effective
compensation methods. One of the most cited reasons stated by
organizations that use this is its positive effect on employee motivation.
Caruth and Handlogten (2001) state, employees are motivated when there
are financial rewards directly tied to their performance. (as cited in Wunder,
2009). There are three basic theories that explain the increased motivation
provided by PFP . First is the equity theory where employees compare the
rewards or pay they receive for their labor to the rewards received by their
colleagues (Fay, Perry and Risher, 1997). One of the driving forces behind the
equity theory is the increased competition amongst the employees.
Competition motivates and helps people to give their best in their assigned
tasks resulting in increased production or improved performance level in the
organization.(Wunder, 2009). Next is the expectancy theory where the
employee faces a behavioral choice of effort at work (for example stay late for
a project or leave the office early) and considers the probable outcomes of the
effort. Ultimately, the employee will choose the outcome that will give him his
preferred returns (Fay, Perry and Risher, 1997). PFP motivate employees to

work harder in reaching organizational goals to get his perceived rewards.

Finally, there is the reinforcement theory which states that when a behavior is
positively reinforced it is more likely to be repeated. Various researchers
consider money as a general reinforcer as most employees view it favorably.
Money also gives the feeling of satisfaction, a symbol of recognition and
status. (Reilly, 2003).
Besides using PFP as a tool for motivation, it can also be used as a tool for
recruitment and retention. Most employees are attracted to organizations that
recognize and reward their abilities. According to Risher, employers that do
not choose a pay for performance plan are at a definite recruitment
disadvantage because employees place a high value on being recognized for
their efforts. (as cited in Wunder, 2009). A study by Khuong and Tien (2013)
showed that fringe benefits (a form of pay for performance) is one of the main
factors that contribute to employee retention. Similar to employee recruitment,
fringe benefits or rewards made employees feel recognized prompting them to
stay in the organization.
Despite all of the advantages that PFP can bring to an organization, it can
also yield serious consequences if not implemented properly. Designing and
implementing a PFP system is labor intensive and difficult to manage. Without
proper training or leadership, PFP can do more harm than good. Managers
will need to undergo proper training in order to conduct successful employee
performance appraisals and counseling. Managers must also show dedication
to the system and they must be able to set out clearly the objectives of the
program. If the PFP system is not managed correctly, it can lead to the
employees loss of trust to the organization (Wunder, 2009). They must work
hard in relaying the purpose of the system to the employees that way they
don't feel stress due to unmet expectations and perceived unfairness.
(Choi and Whitfurd, 2013).Solmon and Podgursky (2010) also states that PFP
is difficult to manage because determining the basis of differentiated pay of
the different employees can be very complicated. An organization that uses
the PFP system must have competent managers because the basis of pay
changes frequently.
Although competition amongst employees was previously cited as an
advantage of PFP, it can also be a serious disadvantage. Incentives that are
focused on individuals can create vicious competition leading the employees
to become less motivated. (Wunder, 2009). In most cases PFP encourages
unhealthy competition rather than collaboration because the employees will
go against each other to get a more lucrative pay check (Solmon and
Podgursky, 2010). This unhealthy competition will demotivate employees and
cause stress resulting in low performance. Competition can also result in a
loss of trust between the employees and their colleagues leading them to lose
trust in the organization completely.
Besides PFP There are other factors and methods to consider when it
comes to retaining employees or ensuring employee loyalty. This factors
provide less consequences and various researches state that this factors
weigh more than bonus and incentives. One of these is creating a good
workplace environment. The results of a study conducted by Khuong and Tien

(2013) revealed that when a good workplace environment is paired with other
factors like supervisor support, training, and satisfaction, employees stayed
with their employers longer compared to when these factors are lacking. A
good workplace environment facilitates an improved workflow that leads to
more productivity and job satisfaction among employees that makes them
want to continue working for their employers even without a performance
bonus to their salaries.
Another factor that ensures employee loyalty, is advancement or
promotion opportunity within the organization. A study published in the Human
Resource Management Journal surveyed close to 25,000 employees from the
leisure and hospitality industry. The results showed that both high performing
and non-hourly workers cited advancement opportunities together with
organizational prestige as reasons for staying with their current employer. This
was mainly attributed to employees wanting to build their careers at reputable
or prestigious organizations (Hausknecht, Rodda, Howard, 2009). A career in
a prestigious organization commands more respect and adds more value to
your reputation as working for bigger companies and climbing the ranks in
them is a testament that you can handle more pressure and have
considerable skill. This is so because big multinational companies are often
more challenging to work under as compared to smaller and lesser known
businesses or firms. Nonetheless, an opportunity promotion is always a great
incentive for people to stay in whatever organization they currently work for as
naturally, it also comes with a higher salary. It is important to note that this
may also cause competition among employees who, instead of competing for
a bonus to their salaries, are now competing for a higher position and
paygrade. In spite of that, giving more opportunities for promotion or
advancement can still serve to increase employee loyalty just as much or
even better than a performance bonus to be given to employees.
The last factor that can serve as an alternative to a pay-to-performance
scheme in ensuring employee loyalty is improving employee satisfaction in
the work they do. According to a thesis study conducted by Cruz, Jose, &
Reyes (2012), satisfaction along with motivation for the jobs hospital
employees are assigned are key driving factors for employees to produce and
perform and ultimately stay at the same hospital. The thesis states that the
key to instilling a sense of satisfaction and purpose was the training
employees received. Mainly because training is where they develop a sense
of purpose and grasp or understand the reason they do the work that their job
requires them to do and also where they come to develop an appreciation for
what they do for the employer or organization as a whole. So implementing a
stronger training program designed to help instill in them a sense of purpose
and appreciation for the job that they do can also help increase employee
loyalty.
References
Wunder, C.J. (2009, August). Evaluation of Pay For Performance and Step
Based Compensation Systems For The Green Valley Fire District. Retrieved:
July 2, 2014, from http://www.usfa.fema.gov/pdf/efop/efo44061.pdf

Fay, C.H., Perry, J.L., Risher, H. (1997). Merit Pay: Motivating and Rewarding
Individual Performance Retrieved July 14, 2014 from,
http://www.indiana.edu/~jlpweb/papers/Merit%20Pay_Risher_Fay_Perry_New
%20Strategies%20for%20Public%20Pay_1997.pdf
Khuong, M.N., Tien, B.D. (2013). Factors influencing employee loyalty
directly and indirectly through job satisfaction - A study of banking
sector in Ho Chi Minh City. International Journal of Current Research and
Academic Review, 1(4), 81-95.
Solmon, L., Podgursky, M. (2000). The Pros and Cons of Performance-Based
Compensation. Retrieved July 2, 2014 from:
http://web.missouri.edu/~podgurskym/articles/files/Pros_cons.pdf
Choi S., Whitford, A. (2013). Merit-based Pay and Employee Motivation in
Federal Agencies. Issues in Governance Studies. Retrieved July 2, 2014
from:
http://www.brookings.edu/~/media/research/files/papers/2013/11/26%20merit
%20based%20pay%20choi%20whitford/choi%20and%20whitford_merit
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Hausknecht J.P. Rodda J. Howard M.J. (2009). Targeted Employee Retention:
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Reilly, P. (2003). The Link Between Pay and Performance. Institute Of
Employment Studies. Retrieved June 9, 2014, from
http://www.employment-studies.co.uk/pdflibrary/mp18.pdf
Cruz, M.D., Jose, J., Reyes, E. (2012). Employee Satisfaction and Motivating
Factors Across Job Classification and Years of Service at FEU-NRMF
(Undergraduate Thesis). De La Salle University, Manila, Philippines.