Compensation and Performance

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The organization’s goal is to maximize the profit of the shareholders. The goal of HRM is to design, develop and implement tools for proper management of human capital of an organization. An organization becomes successful when the goal of an employee and goal of the organization intersects. Organizations need a high level of performance from employees on a consistent basis to survive in a highly competitive global environment. Performance management and compensation is a key function of Human resource management. Many researchers have found discrepancies in the relation to Performance and pay or compensation so non-financial advantages have got immense attention from the scholars. Monetary benefits or compensation is not the only critical factor that shapes the performance on employees. This essay cast light on various theories arguments relevant on compensation and performance.

Performance Concerns: Based on A case

The purpose of this essay is to find out the performance factors based on the case of Joe who is a well-paid web designer. Joe works in a web design company. The company pays Joe a pretty good amount of salary (23$ per hour). Joe also enjoys some nonfinancial benefits such as 10 days paid vacation and free transportation pass. Indeed Joe admits that pays and benefits of the organization are fine. Nevertheless recently Joe is inattentive to his job. He is coming late to office, taking more time to take lunch.

The management needs to find out the reasons for which Joe has been struggling lately. Even Joe is facing difficulties to socialize with the colleagues so he wants to do some period job in his home. Some possible reasons the management have found which might have been affecting the performance of Joe such as lack of intrinsic motivation, lack of interpersonal skills. The management has found the relevance of Alderfer’s ERG model. In motivation literature, it is a very popular theory. Alderfer (1969) categorizes the human needs in parts. Existence needs Relatedness needs and growth needs. Existential needs are the first step where people seek physical and psychological security. Basic pay, bonus and other benefits meet an employee’s existential need. Then comes relatedness need. It involves being understood and accepted by people around work and outside work (Alderfer, 1969). The performance management team thinks it as a critical issue.

Organization’s culture implicitly affects the employee’s attitude on his work. The culture of an organization clearly depends on the organization’s industry, goals, and nature of the competition. The members of the organization must at least accept the cultural practice of the organization. Taylor (2014) has found that there is a positive relationship between certain organizational culture and the performance. A popular organization culture is fun work environment. Supervisors initiate and support a variety of playful and humorous activities. Hosting special events, public celebration, games and friendly competition are necessary to reduce workload and stress.

Theories and concepts that has impact on compensation and performance

It is necessary to find out that whether other employees of the organization are suffering from same symptoms like Joe. An important component of good work environment is employee’s job satisfaction. Job satisfaction is a feeling toward the work. The important elements of job satisfaction are pay, the behavior of supervisors, nature of the task and the co-workers. So if the overall ratings on the elements are good the employee is somewhat satisfied.  Managers should be cautious on not to allow higher satisfaction to offset other dissatisfaction.

Job satisfaction is a part of life satisfaction. It indirectly influences his or her feelings on the job. The result is termed as spillover effect that may occur in both directions. Either satisfaction on life brings satisfaction on the job and the other way around. Job involvement is the degree which shows the level of job satisfaction of an employee. For job involvement employees immerse themselves in their job and invest their time and energy in the work since they view their work as the central part of their overall life (Temminck, Mearns and Fruhen 2013).  

There is a myth in the workplace that is higher satisfaction leads to higher performance. It may not be true always. The satisfaction and performance relationship is complex. So the simplified version is not effective in work-life. It is mainly the performance-Satisfaction-Effort loop. Better performance is supposed to lead to higher economic, physiological and social rewards. Improved satisfaction develops if the employees perceive the rewards as fair and equitable. If the reward is inadequate satisfaction drops and leads to lower level of performance. Dissatisfaction in rewards increases absenteeism in work as we see it in Joe. Absenteeism and tardiness result in employee turnover.

As appraising and rewarding performance have been considered one of the main critical factors behind poor performance the management has taken the step to review the critical components of performance management to identify the issues. A company pays an employee after doing the job analysis, analyzing survey rate jobs, comparing one job with another. The economic reward of an employee includes three items-base pay, profit sharing, and performance rewards. Since many researchers have shown that a lack of relationship between high pay and high performance it has been a million dollar question that how important is money to employees. Money acts as strong motivation it has a value as a medium of exchange. Social status is also related to it so no one can ignore its role and importance.

Appraisal and compensation factors

But in Herzberg two factor model the pay is viewed as a hygiene factor or short-term motivational item. In the need-based model, it is considered that it has the capacity to meet the lower needs such as Alderfer’s existential needs and Maslow’s physiological needs. According to Expectancy theory Motivation = Valence × Expectancy × Instrumentality money work as valence which is contingent upon the employee’s experience and personal values. Expectancy is the desired performance and instrumentality is the trust that monetary reward will follow the performance. When the instrumentality is low the performance is low because the employee is not sure that the performance will follow reward. Hickman (2002) states Cost-reward comparison, similar to cost-benefit analysis is used as a financial assessment for the employee through whom he identifies and compares personal costs and rewards to determine the intersection point.

Many firms use the effective result-oriented control system. Management by objectives is a popular performance appraisal process. This cyclical process includes four steps: Objective setting, Action planning, periodic reviews and annual evaluation. Reward system is mainly based on the performance appraisal. The purpose of an appraisal is to motivate employees through reward, allocate resources, give the feedback and maintain relationships. There are many problems in appraising the performance. The confrontational view of trying to convince the employee is the boss is always right. The judgmental issues put employee always in subordinate position. (Lefton, 1985).

Attribution theory suggests that people always assign causes for their behaviors. Future behavior of the employees is the product of attribution. For example, a supervisor can rate the performance of an employee because of low ability. An employee who fails to perform better might blame the environment for preventing the success. Management may assume the reason behind the high performance is the luck or easy tasks. Eventually, appraisal works as feedback and psychic reward while economic incentives are still needed to motivation.

The full process of designing the compensation is out of the scope of this writing. A simple process is mentioned before. The employers traditionally base their job pay according to the relative worth of the job evaluation, salary survey, creating pay grade or wage curve and fine tuning it belongs to the function of designing compensation of a job. The practice of basing the job’s pay on the level of competency the job demands is called the competency-based pay. Competency-based pay doesn’t account the position the employee hold rather it accounts the skills and knowledge the employee has. It is also called skill-based pay. A clear requirement is set for competency-based pay. The pay rate increases with more skills and knowledge added. The high tech companies are using this compensation system mainly. Other manufacturing companies are also adopting this pay system because of its qualitative nature and value-adding elements.

Coaching and Training concerns

Training and coaching are needed to give new or current employees the skills needed to perform their jobs. The training and development program must be aligned with company’s goals and objectives. For example, the motor mechanics of automobile company must be trained for the relevant technique for efficiency focusing inter-personal communication development is irrelevant and has a little contribution to them for higher efficiency and accuracy. To design appropriate coaching the management pursues performance analysis which enables them to verify the reasons for performance deficiency whether it is for lack of skills or other factors. According to Hickman (2002) the ways of verifying it are performance appraisals, supervisors’ observations and peer evaluation. After completing the analysis training objectives are set such as increasing skills of web design, increasing socializing with people, balancing work-life etc. When it comes to implementing the program many types of programs are practices. The on-the-job training programs are called coaching or understudy method. Experience employees supervise the new employee. It includes job rotation, special assignments etc. other types of training are apprentice training, informal learning, job instruction training, lectures etc.


Lack of performance and attentiveness can be caused by many factors. The management’s role is to find the critical factors which are more influential. Internal and external factors are involved. If the case of Joe is considered it must be determined whether the cause of absenteeism in work comes from internal motivation or the external environment. As Joe is facing problem in socializing it is to be investigated that whether there is any conflict among the team workers. The conflict can be resolved by meeting and social gathering. If Joe has a personal deficiency in inter-personal communication coaching and development program can be prescribed for him. Since Joe has admitted his pay is a good monetary incentive is not a critical issue in this case. The organizational environment may cause a problem. But the organizational environment can’t be changed overnight. If the role of his job is not matching with his lifestyle job rotation can be a problem solver. A flexible working hour and paid vacation can revive the energy and reduce the work-load.


Alderfer, C. (1969). An empirical test of a new theory of human needs. Organizational Behavior And Human Performance, 4(2), 142-175. (69)90004-x

Hickman, S. (2002). Pay the Person, Not the Job. Training And Development, 4(October), 52-60.

Lefton, R. (1985). Performance appraisals: Why they go wrong and how to do them right. National Productivity Review, 5(1), 54-63.

Taylor, J. (2014). Organizational Culture and the Paradox of Performance Management. Public Performance & Management Review, 38(1), 7-22.

Temminck, E., Mearns, K., & Fruhen, L. (2013). Motivating Employees towards Sustainable Behaviour. Business Strategy And The Environment, 24(6), 402-412.

October 30, 2023
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Performance Compensation

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