Pay-for-Performance

PERFORMANCE EVALUATION METHODS

Evaluating performance is a necessary part of the management process within an organization. Regular, effective communications between a manager and an employee is an important part of the performance management process.

For some companies, the cumbersome performance appraisal process and ratings have been eliminated and replaced with forward thinking programs with regular performance check-ins between a boss and subordinate.

For the majority of companies, the evaluation process is systematized. Performance appraisals should be specific, and the ratings should be recorded in such a way that top performers can be identified from average and below average performers.

Many Uses for Performance Evaluation

Performance evaluation is an integral part of human resources management in an organization. As such, performance evaluation has a number of functions. As expected, these functions are not necessarily congruent with one another, so it can be difficult to develop a performance evaluation system that is equally useful for all purposes.

Differential performance

Many managers will tell you that differential performance is not just an ideal; it is a fact. Some people are capable of producing 2 to 3 times what others are; the best workers can produce as much as 5 or 6 times what the worst performers can.

The reward system of organizations could create much higher levels of performance, and therefore productivity in employees, if it were clear to the employees that they would be rewarded for the increased productivity. But it should be kept in mind that not all jobs permit differences in performance and not all organizations require or desire them.

Assembly-line jobs. Assembly-line jobs are often designed so that variation in performance is impossible or irrelevant to the desired outcomes. Variation in performance where tight coordination of activities is necessary creates trouble, not increased productivity.

Sales, engineering, managerial jobs. Jobs such as sales, engineering, and managerial jobs have a great deal of latitude in their effects on outcomes.

Middle performers. Middle performers represent an intermediate position between the two extremes (discussed above) and may be extremely common in organizations.

Most raters can identify the few employees who are doing an outstanding job and the few doing a poor job. But most performance appraisal systems ask that performance distinctions be made among all employees. Making distinctions in the middle of the performance scale is difficult, because the differences may be so small as to not warrant differentiation.

How to define good performance

Many assume that good performance means higher output. While higher output is certainly an important definition of good performance, it is not the only one. How the job is done may also be important. In addition, an organization may wish to reward a series of behaviors, as well as the productivity of the employee.

Incentive pay plans. Incentive pay plans focus strictly on the outcomes of work, such as sales volume. Incentive pay plans allow the organization to pay directly for those outcomes. This type of payment system is the topic of DLC Course 75: Creating a Variable Pay Plan.

Pay-for-Performance plans. If the organization wishes to focus on more than just outcomes, or finds it difficult to measure the outcomes, then it will need a pay-for-performance program, as described in this course.