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Evaluation and Literature Review of Performance-based Pay

Paper Type: Free Essay Subject: Business
Wordcount: 4729 words Published: 1st Jan 2015

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Performance-based pay is introduced at the late of 1980s. It is defined as the compensation (money) paid to the worker based on his or her performance in the work. This system is viewed by most of the managers as a way to motivate their employees to develop the high performance. The most common type of performance-based pay is commission and piecework. People who work as salesperson, production line workers may receive they pay under this system.

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In traditional, wages have been negotiated and determined through government regulation. Performance measures such as productivity or profit related to the performance are less importance in determining pay increase. As improve of technology and standard of living, the competitive among industry are higher. High technology, productivity and low earnings cannot be combined and sustained over a period of time. Hence, many employers are sustain their competitiveness through pay increases based on performance as a way of cut down the labor costs, while at the same time rewarding and motivating employees.

This assignment’s objective is to understand the performance-based pay system and its advantage and disadvantage. The company used in this assignment is Lincoln Electric. We will talk about Lincoln Electric which use performance-based pay system as their compensation system. Lastly, we can know about how this system brings effects to the company.

Literature review

The title of the journal is Pay for performance and work attitudes: The mediating role of employee-organization service value congruence. The author of the journal is Flora F.T. Chiang. This journal research models are examined the job satisfaction, organizational commitment, and turnover intent would affect on pay for performance. For the research method, the tourism industry and Hong Kong hotels are selected as sample. Questionnaires were then distributed to a random sample of service employees with the assistance of various departments at the hotels. A total of 258 valid responses were received from seven hotels located in Hong Kong. Descriptive statistics and correlation coefficients are used for all study variables are presented. Hierarchical regressions method is use for the analysis. The result shows that the sample drawn from the hotel industry, research found that when employees perceived a high PFP link they tended to exhibit more positive work attitudes. Besides that the relationship between PFP link and work attitudes was mediated by P-O fit. Reward practices, such as PFP, play a critical role in the alignment of employee-organization service quality values. In addition to establishing a visible connection between reward and performance, PFP can enhance job satisfaction and commitment and reduce turnover intent, all of which may further enhance service quality.

The second journal was Evaluating the impact of performance-related pay for teachers in England and the author is Adele Atkinson and Deborah Wilson. The research model was to test whether the introduction of a payment scheme based on pupil attainment increased teacher effort. To do the data collection, the first wave comprised a pilot group, 40 schools were selected as a convenience sample from a group of about 200 schools who had previously participated in a Department for Education and Skills. The second wave comprised the remaining schools from the DfEE pilot group. The first and second wave was all telephoned. After agreeing to participate, the head teachers of schools were interviewed or were asked to fill in a questionnaire. Multiples Regression analysis is used as research methods. As a result, by using teacher level data, matched with pupil test scores and value-added, research find out that the scheme did improve test score gains, on average by about 40% of a grade per pupil. However, heterogeneity across subject teachers, with math’s teachers showing no improvement. Results suggest that teacher-based performance pay is a policy tool that education authorities should consider as part of their drive to raise educational performance.

For the third journal, the title was A few bad apples: An analysis of CEO performance pay and firm productivity which written by Laarni Bulan. The research model is about investigate the relationship between productivity and the sensitivity of CEO wealth to share value (delta) and relationship between productivity and the sensitivity of CEO option wealth to stock return volatility (vega). To do the data collection, the researcher use data that obtain from annual CEO compensation data from ExecuComp for the period 1992-2003 also obtain from firm characteristics from Compustat. The research sample comprises all 917 of the manufacturing firms represented in both ExecuComp and Compustat. Their primary sample consists of 6,636 firm-year observations. pooled ordinary least-squares (OLS) and firm fixed effects estimation are used in the research methods. As a result, research find out that a CEO’s delta and vega positively impact productivity for the vast majority of firms in their sample, but that this relationship is non-linear and quite complex. These results imply that appropriate combinations of delta and vega must be chosen in order to align CEO incentives with the goal of productivity improvement.

The journal title performance pay and productivity of low and high-ability workers. This research model was desired level of productivity under hourly wages and the workers level of ability would affect Performance pay. The analysis is based on data from Orion, anArgentine textile firm. They used longitudinal data on worker productivity in the two plants before and after each plant changed its payment scheme in order to estimate the effect of performance-based payment on worker productivity. The research methods used are empirical model and robustness checks. As a result, it shows a similar effect of the change in the incentive scheme for both low and high-ability workers. Result shows the effect over high-ability workers with the incentive effect of the piece-rate component. However, it is not straightforward the reason why low-ability workers increased their level of production after the implementation of the piece-rate scheme with a basic wage.

For the journal “Is the pay-performance relationship always positive? Evidence from the Netherlands” which is research about Firm performance, firm size, leverage, industry and time to test the relationship between the pay-performance. The researcher collect data from 750 annual reports which are manually collected for the years 1998-2001 and search for information on executive pay. Annual data on various firm performance measures and key control variables like firm size and leverage also collected that required collection of balance sheet and income statement data. The result shows that the robust empirical analysis fails to detect a positive pay-performance relationship. The results of the study suggest that other means of resolving agency problems and novel explanations of executive compensation may provide useful insights. The research findings are the finding questions the conventional wisdom that executive pay helps to align shareholder interests with those of managers. It is consistent with the view that powerful managers can influence their own pay.

For the journal Pay-for-performance in nursing house which is written by Becky A. Briesacher was relate with the Information on the impact of pay-for-performance programs is lacking in the nursing home setting. To collect the data, author conducted searches of the electronic database MEDLINE and the Internet using Google U.S. Government Search for empirical data describing pay-for-performance programs in nursing homes. In addition, he also interviewed key stakeholders to supplement the search. The result show that 13 pay-for-performance programs in the nursing home setting between 1980 and 2007: 7 programs were currently active as of 2007, while 6 had been terminated. All of the current programs were relatively new, with the oldest program dating back to 2002 (Iowa’s Accountability Measures Incentive Program). From the result, author found that found little empirical evidence that pay-for-performance programs increase the quality of care of residents or the efficiency of that care in nursing homes.

For the journal “The impact of firm size on pay-performance sensitivities”, the research models are relationship between compensation of high-ranking employees and the performance of their respective companies is of central importance to the theory of the firm. The researcher the data for this paper come from two main sources. Executive compensation figures are taken from the ExecuComp7 data set, a Standard and Poor’s supplement to its Compustat data set, while stock return data, which is used to construct measures of firm performance and its variance, is taken from the CRSP data set. As a result, researcher estimate pay-performance sensitivities using several different specifications and find that when firm size is controlled for using total assets, sales or number of employees, the effect of the variance in stock returns on estimated pay-performance sensitivities is greatly reduced.

Besides that, the journal “Individual pay for performance and commitment HR practices in South Korea” have examine about the examines whether the new compensation system influences Korean employees’ organizational commitment and work effort and how these effects are moderated by HR practices. The researcher collect data from collected data from two sources: companies’ HR practices were measured from a human resource manager and 30 employees from commitment and work effort were assessed from individual employees working in the company among 42 companies. As a result, employees tend to show higher levels of organizational commitment and work effort as they stay in the company for a longer time


Lincoln Electric was founded by John C. Lincoln in 1895 in Cleveland, Ohio. Today, Lincoln Electric is the world leader in the designs, manufactures, and markets arc welding products, and integral horsepower industrial electric motors. It has 39 manufacturing locations, including operations and joint ventures in 19 countries and a worldwide network of distributors and sales offices covering more than 160 countries. Besides, Lincoln has more than 9,000 employees in the whole world.

Lincoln Electric’s explicit mission is to serve customers, employees, and stockholders. Lincoln Electric’s objective is to serve the major needs of the users of welding equipment, and provide users with the highest quality products at reasonable prices. Lincoln Electric was recognized as the welding experts, it provides leading technology products and solutions. Lincoln Electric initiates advancement and improvement in technology of arc welding consumables and equipment. Besides, Lincoln Electric sustains the industry’s most dynamic and comprehensive research and product development program. This effort is supported by the David C. Lincoln Technology Center, the most advanced facility of its kind.

Lincoln Electric is famous for its high productive and highly-skilled work force, as well as its unique compensation system, incentive management which is also known as performance based pay. Incentive management is widely studied in business schools and industrial management circles. This system compensates and encourages individual and team initiative and responsibility at all levels of employment. Lincoln Electric’s other global operations have their own systems, where appropriate and practical. Thus, Lincoln Electric has never experienced a work stoppage in its 100-plus year history.

Lincoln Electric is famous for its Lincoln Incentive Management Philosophy that it is the most profitable and cost-effective way of achieving their goals. In other words, Lincoln Electric is a successful company that is using performance-based pay as their salary system. Through performance based pay system, Lincoln Electric encourages and compensates individual initiative and responsibility. Employees work together to improve quality and efforts to create a profitable company.

In the early 1900s, James Lincoln, CEO of Lincoln Electric was initiated performance-based pay system. James Lincoln said: “believed that employees could work efficiently, enthusiastically, have fun at their jobs, and be loyal and secure” (Hastings, 1996). Since that time, Lincoln’s performance based pay system has been a “basis key” of the organization’s culture. Under this objective measurement of individual performance, organization seems to have paid off, even in times of economic recession and business downsizing.

By using performance-based pay system, employees in Lincoln Electric have a base pay rate; they are not paid for sick time or holiday pay. The employees are paid two dollars per hour. This is encouraging and as a motivational to employees because it is similar work for more money. The evaluations of employee’s performance are conducted every month and it is include topics like quality, dependability, ideas, cooperation and output. Employees are evaluated on these criteria by their supervisor, which will be converted to a numerical score. These numerical scores are then computed into the percentage of employee’s salary that becomes their year-end bonus. (Buller/ Schuler, 2006) .These all criteria are to make sure it can fully evaluate employees concerning all aspects of the organization. Evaluation process is fair because the bonus that an employee receives is based on his or her own work performance. In years past, these bonuses could result in workers receiving 100 percent of their salary as bonus. In fact, it can lead to a low turnover rate for Lincoln Electric organization. With the performance based- pay system, Lincoln Electric’s employees will be working hard so they can take advantage of the financial incentives being offers to them.

Advantages of performance based pay

The advantages of performance based pay is it can motivate and retaining key talent. Lincoln Electric setting their goals for employee with a clear reward can motivate employee to work harder toward reaching their goals because employees perceives that they rewards is direct relationship with the performance or productivity. When employees want more of profit, they will become harder and harder to work to increase their job performance or productivity, for get more pay. The benefit of this to the Lincoln Electric is clear; a workforce that is more motivated towards achieving the goals of the organization will make the organization more dynamic and efficient.

Performance based pay helps in improving the knowledge of the employees and insists them to improve their knowledge. When enlargement of skills lead employees to develop a better perspective of operations as a whole, it become motivation for self-development. Employees are more likely to focus on what they need to do to improve if this is directly linked to pay. In order to get higher pay, employees will continuous training and contribute to job enlargement, it also tend to reduce staff turnover. Furthermore, employees are able to faster adaptation to changes in technology. For instance, when an employee cannot adopt the changes in technology and unable to control the machine well, it might cause employees have bad performance and also affect the productivity. To get good pay, the employee must learn how to adopt the new technology which had been introduced.

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Besides, by implementing the performance based pay system, Lincoln Electric able to increase their speed of work and productivity. Fast speed of productivity enables Lincoln Electric for rapid respond to changing customer demand. Furthermore, speed of product development will affect the time that needed by an organization to introduce and distribute their product to the market. Lincoln Electric will gain the competitive advantage through the time of introduce and distribute product to market is shorter than competitors.

Disadvantages of performance based pay

Performance based pay is focus on the employees individual work and individual focus solely on their own goals and not on cooperating with any groups that they may be involved in. Besides, it can lead to mistrust and lack of collaboration. On the other hand, Lincoln Electric’s goal that has set for the group will not be carried out effectively. For an organization that requires a group of employee toward the goals, performance based pay system can reducing the organizations effectiveness and competitive advantages. When employees in Lincoln Electric are lack of cooperation, it also can affect the organization productivity and its customer services.

In addition, performance based pay system caused the production process be affected because employees focus on financial reward rather than quality of process. When an employee seek earn compensation for his work, he will done his work quickly without concern about the quality of the process. At the same time, the production process will only have good result in quantity rather than quality. It can seriously damage the Lincoln Electric’s reputation and its product name. Besides, consumer may no longer have confident with the Lincoln Electric’s product and services.

Performance based pay less concern on employee’s benefits and welfare. For example, if employees in Lincoln Electric fall in sick or inability to perform in best condition, it can affect the employee’s incomes and compensation. Performance based pay system is also unfair for older and expert employees. When they getting old, their working speed also getting slow, so their performance are cannot compare with the younger employees. For expert employees, they only focus on quality of the product and services, and they need take time to complete the task, so their effort cannot be evaluate with fair if compare with the employees who only finish his job faster but not quality. It can make the older or expert employees have the feel that they are threat inequity. Once the inequity feel is appear, the employees may do not satisfied with the payment method and they will reduce their work to balance it.

As we know that the performance based pay for employees is based on their job performance in the organization via rewards and compensations. And performance based pay method is divided into 2 systems that is merit based and goal based.

In the merit based, the workers will be evaluating their achievement over the year and this is depending on level of award that will be pay. Unfortunately this system is just will be efficient in the recently achievement but is not longer use which is inefficient in focus on the whole year. For example, if an employee works hard with a lot of effort and to get into a high level of the standard performance for the first quarter and second quarter of a year, this will cause their work level to reduce the focus of appraiser on the future performance and this will be affect their personal life in a suffering level.

However, goal based is difference from merit based. Goal based is based on the employee achievement in their objectives, and evaluate a score to them which is based on a pay level that had been setup and provided by the organization. Moreover, a negative aspect that will be face is that the employee may focus only on what he or she believes that will allow give them to achieve the objective, then this will fail to work in another areas of their job. One major benefit of goal-based of this method is that any organizational goals and objectives will become the priority of the individual. This will allow the companies to communicate with clarify and clear their strategy in the appropriate way. Therefore, to achieve an effective performance based pay on their company to employees to achieve high level of organization’s goal, main influence to affect the performance of the organization is the perceptions and performance of the employees.

On the other hand, the performance of the organization must be in a same direction and link with each other which to form the optimum performance level of the workers and organization. In addition, the organizations have been fill up pay-for-performance planning because there are evidences to show that pay incentives increase employee efficiency and productivity . Therefore, reward and compensation system that setup by the organization should be fair, reasonable, consistence and logically. Moreover, the organization have to focus and concern on the acquisition and utilization of the human resources which is the main factor to support the organization’s policies and regulations in forming of an effective compensation system.

Since reward systems have been consider as an very important to organizational effectiveness, is have to put a lot of effort to redesign the most effective reward systems but there is a backward for the performance based pay. This is because the performance based pay is more focus on the employees effort with their performance due to the inherent pay method against the performance much effort has gone into attempting to design the most effective reward systems therefore, this is the fact that the organization lost to create an effective performance of the organization which is they too much of effort on the performance based pay system.


By implementing performance based pay system will benefits to Lincoln Electric. Nevertheless, it also has a lot of shortages on this system. One of the problem that faced by Lincoln Electric is their employees are more focus on individual works. Most of the employees have not collaborated with each other and lack of teamwork among them. To deal with this problem, Lincoln Electric can create rewards for teams of workers. Furthermore, Lincoln Electric can set some team goals as a target for teams of workers. By using this system, it helps the employees to build up cooperation among them indirectly. In addition, employees will help each other when they are facing in any problems or disturbances and try to achieve the organization’s goal together. Once they archive the team goal, all of employees who are in the same team will share the rewards together. When teamwork thrives, it enables to motivate the production team to do well. To encourage teamwork among the employees, Lincoln Electric also can provide some training programs that encourage employee to cooperate with their colleagues such as communication skill. In addition, well communication skill enables employees to maintain the relationship and avoid conflict with their colleagues. On the other hand, Lincoln Electric needs offer training and development courses to those employees who had bad attitudes and behaviors.

Performance based pay will cause the managers less concern or bias in their employee’s benefits and needs which have to satisfy their basic needs and wants to ensure that they perform their job or tasks well. Lincoln Electric need to find a friendly and approachable leader that can make a close relationship between leader and employees. A leader that has a friendly and approachable characteristics leadership can lead the employees to accomplish task and achieving organization’s goals. Furthermore, Lincoln Electric also needs to provide more non-financial compensation. The non-financial compensation such as paid for vacations, sick leave, holiday and medical insurance as the reward that Lincoln Electric provide to their employees which can satisfy employee’s benefits and welfare. For example, Lincoln Electric can add more value on the insurance payment of their employees especially for the high-risks job like construction builder workers because the work place have high level of dangerous that can cause accidents. Additionally, Lincoln Electric also has to provide a safety work environment to ensure their employees avoid any accidents and damages occur.

In addition, performance based pay system is unfair for older and expert employees. Expert employees are focus on quality but not quantity of the products. So their performance cannot be fairly evaluate if compare to employees who concern for products quantity. Therefore, Lincoln Electric should evaluate and measure the results mindfully. In addition, the key to measuring performance should be flexibility. The compensation and salary that given by Lincoln Electric have to take into account the individual’s personal limitations and ability. To effectively measure the employee’s performance, we suggest Lincoln Electric use the progress review to observe the employees performance during the work. Through this, we can measure the employees overall working performance with fairly.

Last but not least, organization implement performance based pay system will cause their employees focus on financial reward more than quality of products. Besides, too much of an emphasis on cash incentives can be detrimental, as their employees may end up like seals in a circus who only do tricks when there is a fish to be had. In this circumstance, we suggest Lincoln Electric to instilling the concept of cash isn’t always king to their employee’s mindset. In addition to this, Lincoln Electric can offer non-cash incentives for their workers. For example, Lincoln Electric provides free vouchers at a nice restaurant for the employees during their birthday. Moreover, Lincoln Electric also can give employees opportunities go for training when the employees get good result in performance and archive the organizations goals. The employees will more appreciate and satisfies with their job when they were received unexpectedly rewards.


Performance based pay is a compensation system where the payment for employees will be make based on their performance. This system is used by many companies to motivate their employees to increase their performance. For example, car salesperson and insurance agency are paid under this system.

In this assignment, Lincoln Electric Sdn Bhd is chosen to describe the performance based pay system. Lincoln Electric Sdn Bhd is a company that produces arc welding products, and integral horsepower industrial electric motors. The company had implement this system in compensate their workers. Workers are compensated based on their productivity. This system had encouraged the workers to increase their performance and hence, increase the speed of the production.

However, there is some problem come with this system. Workers tend to too emphasize on the production rather than the relationship with others. This may lead to a mistrust and lack of collaboration. On the other hand, the workers will focus more on the quantity but not the quality of the product because they want to increase their productivity. Besides, this system will less concern on the workers’ benefit. The workers cannot get compensation if they had absent for the productivity even though they are sick.

The company is recommending setting goal for the product to avoid the low quality products. The company is advised to check the progress review to observe the employees performance during the work to control the quality of their performance. Last, the company is advised to some non-cash incentives to their workers to install the concept of “cash is not always king” to their employee’s mindset.

As a conclusion, performance based pay system is an effective way to encourage the workers, however, if the company cannot control their system, it will cost the company highly. Thus, the company should try to manage and control the system to enhance its productivity and give the highest benefit for their workers.


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