Engineering Management:

Appraising and Rewarding

Performance
Submitted by:
Baoas, Christine
Fulugan, Ceazar Justin
Madrial, Andrea Coleen
BSChE 4-1
Submitted to:
Engr. Milagros R. Cabangon
November 24, 2016

TABLE OF CONTENTS

Rewarding
Reward System

Rewards Purpose and Roles

Reward Program

Extrinsic and Intrinsic Rewards

Money as Form of Reward

Money as Social Value

11

Application of Money to Motivating Models

11

Organizational Behavior and Performance Appraisal

Management by Objectives (MBO)

13

Appraisal Philosophy

14

Functions of Performance Appraisal

14

Criteria for Performance Appraisal

14

Process of Performance Appraisal

15

Methods of Performance Appraisal

16

Errors in Performance Appraisal

22

Economic Incentive Systems

Four Types of Linking Pay with Performance
Wage Incentives

24

Profit Sharing

27

Gain Sharing

28

Skill Based Pay

29

References

31

OBJECTIVES

23

General Objective

To define appraising and rewarding performance on human behavioral organization and

to come up with examples that relate to real life situations

Specific Objectives

To identify reward system and its purpose and roles

To enumerate and define variety of reward programs
To compare extrinsic and intrinsic rewards
To evaluate money as a form of reward and satisfaction to drives, needs, and equity
To identify the steps in Management by Objectives (MBO)
To define the appraisal philosophy
To define what is performance appraisal and identify its functions
To identify the criteria for performance appraisal
To enumerate the process, methods, and errors of performance appraisal
To enumerate and differentiate the types of economic incentive systems

REWARDING
It is providing satisfaction and gratifying.
Rewarding gives you a good feeling that you have
done something valuable, important, etc. It may refer
to something abstract or concrete.
Reward is benefits provided by the
employers, usually money, promotion or benefits and
satisfaction derived from the job itself such as pride in
ones work, a feeling of accomplishment or being part
of a team. - DeCenzo and Robbins
Reward is basically a token of appreciation, given by the employer to the employee for
his/her service to the company. A well-designed reward system motivates employees and helps in
building positive emotional response towards the job. It also leads to higher and better
performance of employees which has direct impact on the productivity of the company.

Reward System
It consists of all organizational components involved in allocating compensation and
benefits to employees in exchange for their contribution to
the organization including:
People
Processes
Rules
Procedures
Decision-making activities

Every company needs a strategic reward system for employees that addresses these four
areas: compensation, benefits, recognition and appreciation.

Compensation - a systematic approach to providing monetary

value to employees in exchange for work performed

Benefit - include various types of non-wage compensation

provided to employees in addition to their normal wages or salaries

Recognition - means acknowledging someone before their

peers for specific accomplishments achieved, actions taken or
attitudes exemplified through their behavior

Appreciation - centers on expressing gratitude to someone for

his or her actions.

The problem with reward systems in many businesses today is twofold: They're missing
one or more of these elements (usually recognition and/or appreciation), and the elements that
are addressed aren't properly aligned with the company's other corporate strategies.

Rewards Purpose and Roles

Purpose: To attract, retain, and motivate qualified employees
Roles of Compensation Structures

To be equitable and consistent

To be a fair reward for the individuals contribution
To be competitive in the external labor market

Reward Programs

I.

Incentive
a. Base Pay - the base rate of pay for a job or
activity, excluding additional payments such as
overtime or bonuses. An employee's base
pay can be expressed as an hourly rate or as a
weekly, monthly or annual salary.
b. Performance Rewards - Performance appraisal and
incentives rate employees on their performance and
reward their contribution
c. Profit Sharing - also known as a
deferred profit-sharing plan or DPSP, is a plan
that gives employees a share in the profits of a
company. Under this type of plan, an employee
receives
a
percentage
of
a
company's profits based on its quarterly or
annual earnings.
According to an article in Philippine Star (Feb, 2013), MANILA,
Philippines - The House Committee on Labor and Employment recently
approved a measure mandating private companies to give five percent of
their net profit to their employees.) The author of this act is Rep. Emil Ong
of 2nd District, Northern Samar.

II.

Non-Incentive
a. Seniority Pay the based pay systems are those in
which the primary basis for pay increases is the
employee's tenure. It should be noted that senioritybased pay systems can take into account performance,
but the main factor is tenure.
b. Overtime - An employer who requires or permits an
employee to work overtime is generally required to
pay the employee premium pay for such overtime
work.
According to Department of Labor and Employment,
under Art. 87. Overtime work.
Work may be performed beyond eight (8) hours a day
provided that the employee is paid for the overtime work, an additional
compensation equivalent to his regular wage plus at least twenty-five percent

(25%) thereof. Work performed beyond eight hours on a holiday or rest day
shall be paid an additional compensation equivalent to the rate of the first
eight hours on a holiday or rest day plus at least thirty percent (30%) thereof.
c. Vacation Pay - gives employees a five days leave with
pay
According to Department of Labor and Employment,
under Art. 95. Right to service incentive leave.
Every employee who has rendered at least one year of
service shall be entitled to a yearly service incentive
leave of five days with pay.

Hierarchy of Reward Program

Differential Pay It is also known as Night-Shift Differential Pay. According to Department of

Labor and Employment under Art. 86. Night shift differential.
Every employee shall be paid a night shift differential of not less than ten percent (10%) of his
regular wage for each hour of work performed between ten oclock in the evening and six
oclock in the morning.
Pension - a fund into which a sum of money is added during an employee's employment years,
and from which payments are drawn to support the person's retirement from work in the form of
periodic payments.

Compensatory time off refers to employees being given time off in lieu of extra compensation
or overtime pay

Extrinsic and Intrinsic Rewards

I.

Extrinsic Rewards
These are the physical ones that
come from an external source
(employers) only.
A properly
designed extrinsic reward can also be
emotionally attached with the
employees as employees value such
rewards.
An extrinsic reward is also
directly related to job performance of
the employees but it is necessary that
employees receive reward every time they accomplish the task. It depends upon the
policy of the company.
There are various ways a company can choose to reward its employees. Some
examples of extrinsic rewards are:

Pay
A company can design good
payment for the employees as the
reward for contributing their precious
time and energy in achieving the
organizations goal. A good payment is
motivational and is a major factor that
affects job satisfaction.

Bonus or commission
When a company earns profit
due to the effort of an individual or
group of employees, the company
should appreciate their contribution
by giving them additional payment as
a bonus or commission. Financial
rewards are always known to have
received more value from the
employees.

Fringe benefits

Fringe benefits are extra facility

provided to the employees in addition to
their salary. Fringe benefits can be a
companys car, free life/health insurance,
employee discount scheme, pension plan,
etc.

II.

Improved working condition

An employee spends a lot of time at
the workplace, completing tasks of the
company and for the company. A company
must acknowledge such attribution and
reward its employees by providing a
comfortable
workspace.
Comfortable
furniture, air conditioned rooms, latest
models of computers, etc. are some factors that contribute for an improved
workspace.

Promotion
Some employees are average
performing, while some others are intensely
hard working, as a result of which they
make huge difference on the companys
status. Such employees can be rewarded by
handing them over new responsibilities and
duties. Promotion is directly related with
increment in status, payment and power.

Profit sharing
Employees
are
equally
creditable for the organizations
progress or success as much as the
employers
are.
Therefore,
a
responsible company rewards its
employees by sharing the profit with it
employees.

Intrinsic Rewards
These are the non-physical rewards. They cannot be seen or touched but are
emotionally connected with the employees. In other words, intrinsic rewards can be
defined as the feeling of contentment one finds in completion of any task.

Intrinsic reward is directly related to job

performance as a successful task
automatically produces it. Higher the
success rate, higher will be the rate of
intrinsic rewards one receives.
Different
people
have
different
perception and therefore, there are various
forms of intrinsic rewards, some of which
are:

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Sense of Achievement
It takes lots of efforts, skills and courage
to perform any task and there is no better feeling
than the joy one feels seeing his hard work pay
off.

Words of praise from the seniors

Employees become more than happy
when their seniors or supervisors speak few
words of appreciation for them in front of
peers or co-workers.

Recognition
Everyone wants to be renowned at the
place where they work. It is rewarding for
employees when they are recognized by the coworkers and other members of the company for
the work theyve done.

Taking pride from the job

People try to avoid the credit when
the jobs are wrongly done. But they feel
proud of themselves when the work is
perfectly done. Such feeling of pride plays
vital role in motivating them to give
continuity to make even better outputs.

Work freedom or autonomy

When employees continue to make better output, supervisors may
bother less to manage them. The freedom that employees receive to make

their own decision and work as per their

schedule is also a form of intrinsic reward.

MONEY AS A FORM OF REWARD

Money is an economic value as a medium of exchange. The economic
value of money as measured by its purchasing power is a subject of economic
theory. Money is a form of payment used and accepted to pay for goods and
services.
It has become a source of self-confidence and self-esteem. Each
individual conceives the value of money for success, perceives the value of
money for social status, and senses the value of money as a means to fulfill
physical needs. Money became a symbol for the success and fulfillment of the
individual as a member of the collective. Other factors such as education,
occupation and competence in work also acquire this symbolic value, but none
of them are as tangible and quantifiable as money, so none has been as universally accepted as a
symbol of personal worth as money.
When many people produced and converted the results of their work into money, society
discovered that the greater exchange of energies made possible by money made the collective
stronger, more secure, more productive and more prosperous. Money encouraged people to
work harder, cooperate and coordinate their efforts. Like the use of a common language,
money helped forge a sense of community among people who had no personal knowledge of one
another. It bound larger populations together in cooperative enterprise and exchange, forging
separate individuals into an organized social collective.

Application of Money to Motivational Models

a. Drives
Achievement oriented employees monitor their total pay and
compare it with others
b. Needs
Pay is viewed as a maintenance factor in Herzbergs Model

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Pay is
capacity to satisfy lower-order needs in Maslows Hierarchy of Needs

seen as in its

Maslows
Hierarchy of
Needs

c. Equity
Employees identify and compares personal costs and rewards
to determine equality

ORGANIZATIONAL BEHAVIOR AND PERFORMANCE APPRAISAL

Organizations require consistent levels of high performance from their employees in
order to survive in a highly competitive environment. Many firms use some form of results-

12

oriented planning and control systems. Management By Objectives (MBO) is a cyclical process
that often consists of four steps as a way to attain desired performance:
1. Objective setting joint determination by manager and employee of
appropriate levels of future performance for the employee, within the
context of overall unit goals and resources. These objectives are often set
for the next calendar year.
2. Action planning participative or even independent planning by the
employee as to how to reach those objectives. Providing some autonomy
to employees is invaluable; they are more likely to use their integrity, as
well as feel more committed to the plans success.
3. Periodic reviews joint assessment of progress toward objectives by
manager and employee, performed informally and sometimes
spontaneously.
4. Annual evaluation more formal assessment of success in achieving
the employees annual objectives, coupled with a renewal of the
planning cycle. Some MBO systems also use performance appraisal to
tie rewards for employees to the level of results attained.

Appraisal Philosophy
A generation ago, appraisal programs tended to emphasize employee traits, deficiencies
and abilities, but modern appraisal philosophy emphasizes present performance and future goals.
Modern philosophy also stresses employee participation in mutually setting goals with the
supervisor and knowledge of results. Thus the hallmarks of modern appraisal philosophy are as
follows:
1. Performance Orientation it is not enough for employees to put forth effort; that effort
must result in the attainment of desired outcomes (products or services).
2. Focus on goals or objectives as the discussion of MBO shows, employees need to
have a clear idea of what they are supposed to be doing and the priorities among their
tasks; as the saying goes, If you know where you want to go, you are more likely to get
there.
3. Mutual goal setting between supervisor and employee this is the belief that people
will work harder for goals or objectives that they have participated in setting. Among
their desires are to perform a worthwhile task, share in a group effort, share in setting
their objectives, share in the rewards of their efforts, and continue personal growth. The

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Theory Y assumption is that people want to satisfy some of their needs through work
and they will do so if management will provide them with a supportive environment.
4. Clarification of behavioral expectations this is often done via a behaviorally
anchored rating scale (BARS), which provides the employee and manager with
concrete examples of various levels of behaviors. Brief descriptions of outstanding, very
good, acceptable, below average, and unacceptable behaviors are specified for each major
dimension of a job, thus cueing the employee in advance regarding the organizations
expectations. BARS help reduce a managers tendency to focus on attitudes, personality
and quirks of an employee and shift the emphasis toward productive behaviors.
5. Extensive feedback systems employees can fine-tune their performance better if they
know how they are doing in the eyes of the organization

PERFORMANCE APPRAISAL
Performance appraisal is a key aspect of performance management. It may be defined as
the process of evaluating the performance of employees, sharing that information with them, and
searching for ways to improve their performance.
Functions of Performance Appraisal
Performance appraisal is undertaken for the following reasons:
1.
2.
3.
4.
5.

To give employees feedback on performance;

To identify the employees developmental needs;
To make promotion and reward decisions;
To make demotion and termination decisions; and
To develop information about the organizations selection and placement decisions.

Criteria for Performance Appraisal

In performance appraisal, there are certain criteria that are used. The three most popular
sets of criteria are;
1. individual task outcomes;
2. behaviors; and
3. traits.
Individual Task Outcomes. One way of appraising performance is evaluating the
employees task outcomes. For instance, the manager of a bank could be judged on criteria such
as deposit generation and loans collected. In the same light, a credit investigator could be judged
on the number of good accounts that turned out from the credit applications he investigated and
recommended for approval.

14

Behavior. There are instances when it is difficult to measure an individuals task

outcomes. This is so on advisory jobs or support positions and those who are assigned to work in
a group. Examples of jobs encountering this difficulty are those of teachers, nurses, and filing
clerks. In such cases, management tend to evaluate the employees behavior. Teachers, for
instance, are evaluated according to how well they manage classroom activities, the quantity and
quality of professional training attend, research output, community service, and the like.
Traits. Many organizations use traits as criteria in appraising employee performance. This
is true even if it is a very weak means. It is weak because it has little connection with the actual
performance of the job. The traits commonly used as basis for performance appraisal include:
1.
2.
3.
4.
5.

good attitude
showing confidence
being dependable
looking busy
possessing a wealth of experience

The Process of Performance Appraisal

Performance appraisal is a process in an organization whereby each employee is
evaluated to determine how he or she is performing. It consists of the following steps:
1.
2.
3.
4.
5.
6.

establishment of performance standards

mutually set measurable goals
measure actual performance
compare actual performance with standards
discuss the appraisal with the employee
if necessary, initiate corrective action

Performance standards are those by which performance is to be evaluated. It should be

clearly defined and communicated to the employee. These standards should be based on jobrelated requirements derived from job analysis and reflected in the job descriptions and job
specifications. An example of performance standard is: all customer orders will be filled in 4
hours with a 98 percent accuracy rate.
When goals are set with the active participation of the employees, appraising employee
performance will be an easy task.
Measuring performance is the third step in the appraisal process. To determine what
actual performance is, it is necessary to acquire information about it. Information may be derived
from the following sources.
1. Personal Observation
2. Statistical Reports
3. Oral Reports

15

4. Written Reports

Methods of Performance Appraisal

There are three different approaches which can be used for appraising employees:
1. Absolute standards;
2. Relative standards; and
3. Objectives

Absolute Standards
Under this approach, the subjects of appraisal are not compared with other persons. This
approach consists of the following methods: the essay appraisal, the critical incident appraisal,
the checklist, the adjective rating scale, forced choice, and behaviorally anchored rating scales.
Essay Appraisal
The Essay Appraisal is a performance appraisal method whereby an appraiser
writes a narrative about the employee. The employees strengths and weaknesses are
described and recommendations for development are indicated.
The essay method provides an excellent opportunity to point out the unique
characteristic of the employee being appraised. The disadvantages, however, are the
following:
1. It is very time consuming;
2. The quality of the appraisal may be influenced by the appraisers writing skill
and composition style;
3. It tends to be subjective and may not focus on relevant aspects of job
performance.
Critical Incident Appraisal
The Critical Incident Appraisal is a performance appraisal method which
requires effective or ineffective performance for each employee being appraised. These
incidents are critical incidents.
An example of a good critical incident is:
June 7 Pedro arrived thirty minutes early for work and there were five
customers who were already waiting to be served. Pedro promptly fixed
his wares and started serving the customers. He was polite and smiling.
An example of a bad critical incident is:

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July 1 Pedro took a ten minute personal call on his cellphone. Three of
the waiting customers could not afford to wait and left without being
served by Pedro.
The critical incident appraisal can be very useful if the appraiser is given enough
time to observe the subject employee.
Checklist
The checklist is a performance appraisal method wherein the
evaluator uses a list of behavioral descriptions and checks off those
behaviors that apply to the employee.
Example:
A checklist developed for motorcycle salespersons might include a number of
statements like the following:
_________ Is able to explain motorcycle products clearly
_________ Keeps abreast of new developments in motorcycle technology
_________ Tends to be a steady worker
_________ Reacts quickly to customer needs
_________ Processes orders correctly
The advantage of the checklist method is that it reduces some bias since the rater
and the scorer are different. The disadvantage is when there are many job categories, a
checklist of items must be prepared for each job categories and that is costly in terms of
materials and time consumed.
Adjective Rating Scale
The adjective rating scale, also known as graphic rating scale, is a performance
appraisal method that lists a number of traits and a range of performance for each. The
traits listed are assumed to be necessary to successful job performance. Examples of traits
are quality of work, job knowledge and dependability. Each trait is accompanied by a five
or seven-point rating scale.
Example:

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The advantages of adjective rating scale is that it is practical and cost little to
develop. The disadvantages, however, are as follows:
1. It does not clearly indicate what a person must do to achieve a given rating.
2. It does not provide a good mechanism for providing specific, nonthreatening
feedback.
3. Accurate ratings are not likely to be achieved because the points on the rating
scale are not clearly defined.
Forced-choice Appraisal
The forced-choice appraisal is a type of performance appraisal in which the rater
must choose between two or more specific statements about an employees work
behavior. The supervisor or others familiar with the ratees performance evaluate how
applicable each statement is. Oftentimes, the statements are ranked from most to least
descriptive.
Forced-choice appraisal can be used by superiors, peers, subordinates, or a
combination of these in evaluating employees.

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Example:

Behaviorally Anchored Rating Scale (BARS)

Behaviorally anchored rating scale (BARS) is a rating instrument comprised of
traits anchored by job behaviors. Appraisers select the behavior that best describes the
workers performance level. The typical BARS includes seven or eight traits called
dimension each anchored by a seven or nine-point scale.
A BARS anchors each trait with examples of specific behaviors that reflect
varying levels of performance.
Example:

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The greatest advantage of BARS is its ability to direct and monitor behavior. The
behavioral anchors let employees know what types of behavior are expected of them
which gives appraisers the opportunity to provide behaviorally based feedback.
The weakness of BARS is the difficulty of selecting the one behavior on the scale
that is most indicative of the employees performance level. Sometimes, an employee
may exhibit behaviors at both ends of the scale, so the rather would not know which
rating to assign.

Relative Standards
This category of appraisal methods compare individuals against other individuals. The
most popular in this category are:
1. group order ranking
2. individual ranking
3. paired comparison

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Group order ranking

Group order ranking is a relative standard of performance characterized as
placing employees into a particular classification such as top one-fifth. Under this
method, the evaluators are asked to rank the employees as follows: top 5 percent, second
5 percent, third 5 percent, and the like. This evaluation method prevents evaluators from
inflating their evaluations of from homogenizing the evaluations. The disadvantage of
this method is its inapplicability when the number of subjects is small.
Individual ranking
The individual ranking method requires the evaluator merely to list the
employees in order from highest to lowest. This method does not show the difference
between the first and second, or between the second and third.
Paired Comparison
Paired comparison is an appraisal method whereby subordinates are placed in all
possible pair and the supervisor must choose which of the two in each pair is the better
performer. An example is provided as follows:

The best performer in this example is Pedro, followed by Juan, then Josefa, and
the last of all, Maria.
This method ensures that each employee is compared against each other, but the
method can become unwieldy when large numbers of employees are being compared.
Objectives
The third approach to appraisal makes use of objectives. This approach, also known as
management by objectives (MBO), is a process of joint goal setting between a supervisor and a
subordinate. It is also a process of converting organizational objectives into individual
objectives.
The advantages of MBO are the following:

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1. it improves job performance by monitoring and directing behavior;

2. it is practical and inexpensive; and
3. it fosters better communication between employees and supervisors.
The disadvantages of MBO are the following:
1. it does not specify the behavior required to reach goals;
2. it tends to focus on short-term goals;
3. the successful achievement of MBO goals may be partly a function of factors
outside the workers controls;
4. MBO does not provide a common basis for comparison of performance standards;
and
5. It often fails to gain acceptance.

Errors in Performance Appraisal

A perfect performance appraisal is an ideal goal and to make it happen, errors should be
prevented from happening. To eliminate the possibility of errors, they must first be identified.
The following are brief descriptions of errors in performance appraisal.
Halo Error. This is a rating error that occurs when a rater assigns ratings on the basis of
an overall impression (positive or negative) of the person being rated. For example, a teacher
who topped the board examination for electrical engineers is regarded as outstanding in the
aspect of professional qualification. If that impression spills over the other aspects of evaluation,
a halo error is committed.
Leniency Error. This is a raters tendency to give relatively high ratings to virtually
everyone. The opposite of this is strictness error where the raters tend to give everyone a low
rating. Most often, leniency errors happen when peers asses one another.
Central Tendency Error. This occurs when a rater lump everyone together around the
average, or middle, category. The idea is that there are no very good or very poor performers on
the dimension being rated. As a result, no true performance discrimination is made.
Recency Error. This is a biased rating that develops by allowing the individuals most
recent behavior to speak for his or her overall performance on a particular dimension. The result
is a false picture of the individuals job performance during the entire period.
Personal Biased Error. This occurs when a rater allows specific biases, such as racial,
age, and gender, to enter into performance appraisals. For example, a rater may intentionally give
higher rating to a member of a certain fraternity than to a non-member.

ECONOMIC INCENTIVE SYSTEMS

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An economic incentive system of some type can be applied to almost any job. The basic
idea of such systems is to induce a high level of individual, group, or organizational performance
by making an employees pay contingent on one or more of those dimensions. Additional
objectives include making it easier to recruit and retain good employees, stimulating desirable
role behaviors such as creativity, encouraging the development of valued skills, and satisfying
key employee needs. The criteria for these incentives could include employee output, company
profit, cost savings, units shipped, level of customer service, or the ratio of labor cost to total
sales. Evaluation of performance may be individual or collective, and the payment may be
immediate or delayed, as in profit-sharing plan.
The discussion of economic incentives focuses on their overall nature, purpose, and
behavior implications. Only the major types of incentives will be discussed as there are so many
types of incentives. The wage incentives, which are a widely used individual incentive, and profit
sharing and gain sharing, which are popular group incentives. Skills-based pay systems are
increasing in popularity, especially in new industrial operations.
Incentives Linking Pay with Performance
There are several broad types of incentives that link pay with performance. Major ones
are shown in Figure 1. Perhaps the most popular measure is for the amount of output to
determine pay, as illustrated by a sales commission or a piece rate. It provides a simple, direct
connection between performance and reward. Those workers who produce more are rewarded
more. Often pay is determined by a combination quantity-quality measure in order to ensure that
a high quality product or service is maintained.
Incentive Measure
Amount of output

Example
Piece rate; sales commission
Piece rate only for pieces meeting the standard;
Quality of output
commission only for sales that are without bad
debts
Bonus for selling an established number of
Success in reaching goals
items during a predetermined time span
Amount of profit
Profit sharing
Cost efficiency
Gain sharing
Employee skills
Skill-based pay
Figure 1. Major incentive measures to link pay with performance.
In other instances an incentive bonus is given only to those employees who reach the
established goals. Rewards may also be given on the basis of profit success, as in profit-sharing
plan. Another measure is to link pay with cost efficiency, as in gain sharing plan. Skill-based pay
systems reward individuals for their capabilities. Regardless of the type of incentive that is used,
its objective is to link a portion of a workers pay to some measure of employee or organizational
performance.
Advantages of Linking Pay with Performance

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1. Incentives increase employee beliefs (instrumentality) that reward will follow high
performance. If we assume that money has valence to an employee, then motivation
should increase.
2. Incentives appear favorable from the point of view of equity theory. Those who perform
better are rewarded more. This kind of input-outcome balance is perceived by many
people to be equitable. Further, if more pay is a valued reward, then incentive systems are
favorable from the point of view of behavior modification. They provide desirable
consequence (pay) that should reinforce behavior. Rewards, such as sales commissions,
are often rather immediate and frequent, which is consistent with the philosophy of
behavior modification
3. Incentives are comparatively objective. From the employees point of view, incentives
can be computed from the number of pieces, dollars, or similar objective criteria.
Compared with a supervisors subjective performance ratings, the objective approach
tends to have higher acceptance by employees.
Disadvantages of Linking Pay with Performance
1. Potential equity is offset by other developments that are perceived as inequities.
2. In behavior modification terms, certain unfavorable consequences exist alongside the
favorable consequences of more pay, so they tend to reduce potential advantages of
consequences of incentive pay.
3. The cost-reward analyses of workers may result to that of costs has risen along with the
rewards.
4. Incentive may offset much of the economic gain expected.
5. As for the organization, it Is difficult to establish a fair basis for incentive payone that
motivates higher performance across a broad range of employees without producing
undesirable side effects.
6. Some incentive systems are also costly to monitor, requiring extensive record-keeping
procedures.

Wage Incentives
Wage incentives provide more pay for more production. The main reason for use of wage
incentives is clear: They nearly always increase productivity while decreasing unit labor costs.
Workers under normal conditions without wage incentives have the capacity to produce more,
and wage incentives are one way to release that potential. The increased productivity often is
substantial.
In order to be successful, a wage incentive needs to be simple enough for employees to
have a strong belief that reward will follow performance. If the plan is so complex that workers
have difficulty relating performance to reward, then higher motivation is less likely to develop.
The objectives, eligibility requirements, performance criteria, and payment system all need to be
established and understood by the participants.

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When incentive systems operate successfully, they are evaluated favorably by

participants, probably because they provide psychological as well as economic rewards.
Employees receive satisfaction from a job well done, which fulfills their achievement drive.
Their self-image may improve because of greater feelings of competence. They may even feel
they are making a contribution to society by helping in the attempt to regain a productivity
leadership position among nations. Some incentives may encourage cooperation between
workers because of the need for employees to work together to earn incentive awards.
Disadvantages of Wage Incentives
1. Wage incentives normally require establishment of performance standards. Rate setting is
the process of determining the standard output for each job, which becomes the fair days
work for the operator.
2. Wage incentives may make the supervisors job more complex. Supervisors must be
familiar with the system, so that they can explain it to employees. Paperwork increases,
resulting in greater chance of error and more employee dissatisfaction.
3. Wage incentives involve loose rates. A rate is loose when employees are able to reach
standard output with less than normal effort. When management adjusts the rate to a
higher standard, employees predictably experience a feeling in inequity.
4. Wage incentives may cause disharmony between incentive works and hourly workers.
When the two groups perform work in a sequence, hourly workers may feel discriminated
against because they earn less. If the incentive workers increase output, hourly workers
farther along the process must work faster to prevent a bottleneck.
5. Wage incentives may result in output restriction, by which workers limit their production
and thus defeat the purpose of the incentive.

Example:

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Profit Sharing
Profit sharing is a system that distributes to employees some portion of the profits of
business, either immediately (in the form of cash bonus) or deferred until a later date (held in
trust in the form of employee-owned shares). The growth of profit sharing has been encouraged
by federal tax laws that allow employee income taxes to be deferred on funds placed in profitsharing pension plans.
Basic pay rates, performance pay increases, and most other incentive systems recognize
individual differences, whereas profit sharing recognizes mutual interests. Employees become
interested in the economic success of their employer when they see that their own rewards are
affected by it. Greater institutional teamwork tends to develop.
Smaller organizations in competitive industries that demand high commitment from
employees in order to make technological breakthrough or bring new products to the market
faster are prime candidates for profit-sharing programs. If the firms are successful, the rewards
are great. This possibly builds strong motivation among employees to see the big picture and
allows the organization to forge ahead of its competitors.
In general, profit sharing tends to work better for fast-growing, profitable organizations in
which there are opportunities for substantial employee rewards. It also works better, of course,
when general economic conditions are favorable. It is less likely to be useful in stable and
declining organizations with low profit margins and intense competition. Profit sharing generally
is well received and understood by managers and high-level professional people, because their
decisions and actions are more likely to have a significant effect on their firms profits. Since
operating workers, especially in large firms, have more difficulty connecting their individual
actions with the firms profitability, profit sharing may have less initial appeal to them. In
situations where it has worked effectively, managers have openly shared financial reports with all
levels of workers, actively trained employees to understand financial statements, and provided
on-site computer terminals for immediate access to relevant information whenever employees
want it.

Disadvantages of Profit Sharing

1. Profits are not directly related to an employees effort on the job. Poor market conditions
may nullify an employees hard work.
2. Employees must wait for their reward, and this lengthy delay diminishes its impact.
3. Since profits are somewhat unpredictable, total worker income may vary from year to
year. Some workers may prefer the security of a more stable wage or salary.
4. Some union leaders have historically been suspicious of profit sharing. They fear that it
would undermine union loyalty, result in varied total earnings from company to company,
and weaken their organizing company.

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Example:

Gain Sharing
Gain sharing is another type of group incentive which is also called production sharing. A
gain-sharing plan is a program that established a historical base period of organizational
performance, measures improvements, and shares the gains with employees on some formula
basis. Examples of performance factors measured include inventory levels, labor hours per unit
of product, usage of materials and supplies, and quality of finished goods. The idea is to pinpoint
areas that are controllable by employees and then give them an incentive for identifying and
implementing ideas that will result in cost savings.
Behavioral Basis
Gain-sharing plans use several fundamental ideas from organizational behavior
and are much more than pay systems. They encourage employee suggestions, provide an
incentive for coordination and teamwork, and promote improved communication. Unionmanagement relations often improve, since the union gains status because it takes
responsibility for the benefits gained. Attitudes toward technological change improve
because workers are aware that greater efficiency leads to larger bonuses. Gain sharing
broadens the understanding of employees as they see a larger picture of the system
through their participation rather than confining their outlook to the narrow specialty of
their job.
Contingency Factors
The success of gain sharing is contingent upon a number of key factors such as
moderately small size of the unit, sufficient operating history to allow creation of

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standards, existence of controllable cost areas, and relative stability of the business. In
addition, management must be receptive to employee participation, the organization must
be willing to share the benefits of the production increases with employees, and the union
should be favorable to such cooperative effort. Managers need to be receptive to ideas
and tolerant of criticism from employees.

Example:

Skill-Based Pay
In contrast to salaries (which pay someone to hold a job) and wage incentives (which pay
for the level of performance), skill-based pay (also called knowledge-based pay or multi-skill
pay) rewards individuals for what they know how to do. Employees are paid for the range, depth,
and type of skills in which they demonstrate capabilities. They start working at a flat hourly rate
and receive increases for either developing skills within their primary job or learning how to
perform other jobs within their work unit. Some companies provide increases for each new job
learned; most others require employees to acquire blocks of related new skills, which may take
several years to learn. Substantial amounts of training must be made available for the system to
work, and methods for fairly pricing jobs and certifying employee skill levels need to be
established. Some skill-based pay systems have supervisors evaluate the knowledge and skill of
the employees; others allow work teams to assess the progress of each trainee.
Advantages of Skill-Based Pay
1. Provide strong motivation for employees to develop their work-related skills, they
reinforce an employees sense of self-esteem, and provide the organization with a highly
flexible workforce that can fill in when someone is absent.
2. Boredom is reduced since workers rotate among jobs to learn them.

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3. The employees hourly rate received is often higher than the rate that would be paid for
the task being performed, since only in a perfect system would all employees be
constantly using their highest skill.
4. Workers perceived the system as equitable both in the sense of their costs and rewards
being matched and in the knowledge that all employees with the same skills earn the
same pay.
Disadvantages of Skill-Based Pay
1. The average hourly pay rate will be greater than normal since most employees will
voluntarily learn higher-level jobs.
2. A substantial investment in employee training must be made, especially in the time spent
coaching by supervisors and peers.
3. Not all employees like skill-based pay because it places pressure on them to move up the
skill ladder. The subsequent dissatisfaction may lead to a variety of consequences,
including employee turnover.
4. Some employees will qualify themselves for skill areas that they will be unlikely to use,
causing the organization to pay them higher rates than they deserve from a performance
standpoint.
Skill-based pay, like other incentive programs, works best when the organizational culture of the
firm is generally supportive and trusting. The system should be understood by employees, they
must have realistic expectations about their prospects for higher pay levels, it must be possible
for them to learn new skills and to have these skills promptly evaluated, and there must be some
limits on which skills they can qualify for. Under these conditions, the program is consistent with
the other incentives discussed, since it links employee pay with the potential for increased
performance.

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Best

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Reward

Employees.

(2016).

Retrieved

November

22,

2016

from

https://www.entrepreneur.com/article/75340
Department of Labor and Employment. (2009). Book Three: Conditions of Employment.
Republic of the Philippines
Gupta, A. K. (2007). Engineering Management. New Delhi: S Chand & Co.
Maharjan, P. (2015). Intrinsic and Extrinsic Rewards with Examples. Retrieved November 22,
2016 from https://www.businesstopia.net/human-resource/intrinsic-and-extrinsic-rewards
Medina, R.G. (2011). Human Behavior in Organization. Rex Bookstore Publishing Inc., Sta.
Mesa, Quezon City
Philippine Star. (2013). House body OKs profit-sharing for workers. News article

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