Analyzing Performance-Based Pay and Its Influence on Organizations

This report examines the impact of performance-based pay on organizational effectiveness. It begins by defining performance-based pay and its role in motivating employees and improving organizational outcomes. The report explores various performance-based pay systems, including merit-based rewards, one-time payments, and long-term incentives, and discusses their effects on employee performance, job satisfaction, and organizational productivity. It highlights the importance of aligning pay systems with organizational policies and practices. The report provides a case study of Domino's, illustrating how performance-based compensation can enhance employee motivation, attract talent, and improve overall performance. The report also addresses potential drawbacks, such as measurement issues, and emphasizes the need for a balanced approach. The conclusion underscores the significance of performance-based pay in today's competitive business environment, emphasizing that a well-designed system fosters a strong link between work and pay, which in turn boosts organizational effectiveness. The report references several academic sources to support its findings.

Student Name
INSTITUTIONAL AFFILIATION(S)
THE EFFECT OF PERFORMANCE-
BASED PAY ON ORGANIZATION
EFFECTIVENESS

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The effect of Performance-based pay on Organization effectiveness
Introduction
Performance-based pay is the term which demonstrates a tendency which indulges
organizations to seek new ways that can strengthen the bridge between employee's
performance and the receivable pay. Pay based performance can also be taken as a notion that
rewards individual performance in a way to impact organizational performance positively and
henceforth, stems from the base level to increased competitive experiences in the firms
(Aljumah, 2015). Organizational literature, on the other hand, emphasises more on a wider
range of theories that explain human work and motivation behind it. For instance,
reinforcement theory states that employee's behaviour can get motivated through appraisals
and rewards and when these are experienced constantly, they tend to behave in a positive way
(Bajorek & Bevan, 2015). With this believe that rewards based on employee performance can
lead employee’s morale to work effectively for their firm, it can be said that organizations
effectiveness will also get boosted from potentially high-performing individuals.
Critical Discussions
Organizations usually employ various kinds of performance-based pay systems with
the combination of the group-based and individual-based rewards such as lump-sum bonuses,
profit sharing and individual incentives. Every reward given consist of certain characteristics
and specific forms. Performance-based pay can be further categorised as a merit-based
reward, one-time payments and long-term incentives. The merit-based reward is the most
commonly used performance-based plans and is used to rewards individuals' salaries based
on their performance. One-time payments can be determined on special performances made
and do not increase base salaries whereas long term incentives involve pay in the form of

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stock options and stock grants (Park, 2018). Rewards and bonuses not only impact
employee’s efficiency values but also increases performance metrics., job-satisfaction and
organizational productivity. “Organization pay directly influences on employee voluntary
turnover and compare their pay with other organization” (Nagaraju & J, 2017). Therefore, if
employees feel that their organizations make good effort to value their performance, they
tend to perform effectively and in turn, overall work quality and quantity increases.
In organizations, employee performance is measured regularly to see that every
individual contributes to the organizations success. Performance is the ultimate result of job
execution, both material and non-material ones. It can be said that performance is directly
related to individual ability and motivation to complete a work out of willingness. Based on
such assumptions, it can be said that individual can be motivated to work more if their pay is
calculated according to the efforts made rather than ranking experiences only. Taylor's theory
states that individuals work for compensation. According to his theory, people will work
harder than ones who do not receive the desired compensations and increase in their pay
( Siramiati, Surachman, Hadiwidjojo, & Rohman, 2016). Domino's is a firm which runs on
high-performance policies based on pay and incentives for their senior leaders' team as well
as employees working for the firm. The firm initiated 'Domino's Way' in the year 2017 which
manages people performance and maintain core skills. This tool not only helps the firm in
determining employee performance and that culture is maintained throughout the
organization but also talented skills are retained within the organization (Domino's, n.d.). It
can be noted that performance-based compensation plays a very significant role in the firm’s
reward management plans as it helps in maintaining and developing employee motivation,
attracting and retaining talented employees along with inspiring employees to work
effectively.

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When an organization introduces performance-based pay schemes, it does so to
increase organizational effectiveness and people performance in terms of increased sales, and
profits. The effect on people performance contributes directly upon pay incentives of
employee’s motivation and effort along with an indirect effect on workforce composition.
However, Lucifora (2015) argues that when performance or output becomes difficult to
measure, performance-based pay can produce unintended consequences on employee’s
morale. Measurement related issues start arising from multitasking, teamwork or multiple
objectives in a way that compensations and benefits can be reduced and management can
become too conscious in pay schemes. This makes it essential that every task in an
organization must be organized as per the expected costs or rewarding and measuring
performance. For example, most of the public sector organizations like US ESOP follows a
universal scheme where the firms can buy a subsidised loan to get some shares to its
employees and gradually release them after evaluating their performance.
Motivation is considered as one of the strong concerns of today’s organizations as it
has been observed as a critical part in fulfilling organizational goals and objectives.
Motivated employees not only tend to perform well but also impacts greatly on productivity
which in turn enhances an organization's profitability. According to Suri (2016), “A
motivated workforce is a vital component for a company's survival" (p. 103). Indeed,
employees act as a valuable asset that contributes towards organizational effectiveness in
several ways and helps organizations in identifying suitable opportunities. To motivate
employees, compensation plays a very important role which determines job satisfaction
among employees. This is due to two key reasons, money being the instrument material that
helps individual in fulfilling basic needs and secondly, pay that reflects an individual's
recognition in the firm. Hence, in the globalised workforce scenario, the organizations need
to build strategies that initiate performance-based pay and benefit plans that attract and retain

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skilled and talented employees, maximise human resource capital and foster employee’s job
satisfaction.
Conclusion
In today's competitive business environment, performance-based pay serves as a powerful
communicator to reward employees for their efforts and individual performance. Humans are
always inclined towards better performance if they get what they perceive. Satisfactory
compensation plans help human resources in returning employees efforts in the form of direct
and indirect incentives. The above research paper identified that performance-based pay
affects organizational effectiveness strongly and impacts employee's motivation, satisfaction
and performance. Any biases seen in performance-based pay can hinder the entire
performance measurement system and hence, pay systems must be aligned with other
organizational policies and practices to attain organizational objectives. The paper concludes
on the notion that a good performance-based pay system makes a fine balance between work
and pay which results in increased organizational effectiveness.

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References
Aljumah, A. (2015). The effect of the Performance Related Pay system on the performance of
the employees in Saudi national firms: Three case studies. Retrieved from
https://core.ac.uk/download/pdf/42606606.pdf
Bajorek, Z. M., & Bevan, S. M. (2015). "Performance-related-pay in the UK public sector.
Journal of Organizational Effectiveness: People and Performance, 2(2), 94-109.
Domino's. (n.d.). Performance and Development. Retrieved from
https://corporate.dominos.co.uk/Performance-development
Lucifora, C. (2015). Performance-related pay and labour productivity. IZA World of Labor,
152, 1-10.
Nagaraju, B., & J, P. (2017). Impact of salary on employee performance: Empirical evidence
from Public and Private Secor Banks of Karnataka. International Journal of
Marketing and Human Resource Management, 8(4), 43-51.
Park, R. S. (2018). Pay for Performance in Modern Compensation Practices. Compensation
& Benefits Review, 50(1), 21-35.
Siramiati, N. W., Surachman, Hadiwidjojo, D., & Rohman, F. (2016). Performance-Based
Compensation Effect on Employee Motivation, Satisfaction of Employees and
Performance of Employees. International Journal of Business, Economics and Law,
11(2), 62-70.
Suri, S. (2016). Impact of Employee Compensation on Organizational Effectiveness.
International Journal of Research in Management, 6(6), 99-108.

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