Payment by results schemes in HRM

1. PAYMENT BY RESULTS SCHEMES

Historically, the most widely used incentive schemes have been those which reward employees according to the number of items or units of work they produce or the time they take to produce them. This approach is associated with F.W. Taylor and the phase in the development of personnel management described in Chapter 1 under the heading ‘Humane bureaucracy’. Little attention has been paid to the operation of piecework schemes in recent years and there is some evidence to show that they are in decline, both in terms of the proportion of total pay which is determined according to PBR principles and in terms of the number of employees paid in this way. However, PBR is still widely used in some shape or form by employers of manual workers, and it is apparent that new schemes are commonly introduced in manufacturing organisations (Cox 2006).

1.1. Individual time saving

It is rare for a scheme to be based on the purest form of piecework, a payment of X pence per piece produced, as this provides no security against external influences which depress output such as machine failure or delays in the delivery of raw materials. The most common type of scheme in use, therefore, is one where the incentive is paid for time saved in performing a specified operation. A standard time is derived for a work sequence and the employee receives an additional payment for the time saved in com­pleting a number of such operations. If it is not possible to work due to shortage of materials or some other reason, the time involved is not counted when the sums are done at the end of the day.

Standard times are derived by the twin techniques of method study and work mea­surement, which are the skills of the work study engineer. By study of the operation, the work study engineer decides what is the most efficient way to carry it out and then times an operator actually doing the job over a period, so as to measure the ‘standard time’. Work- measured schemes of this kind have, however, been subject to a great deal of criticism and are only effective where people are employed on short-cycle manual operations with the volume of output varying between individuals depending on their skill or application.

The main difficulty, from the employee’s point of view, is the fluctuation in earnings that occurs as a consequence of a varying level of demand for the product. If the fluc­tuations are considerable then the employees will be encouraged to try to stabilise them, either by pressing for the guaranteed element to be increased, or by storing output in the good times to prevent the worst effects of the bad, or by social control of high- performing individuals to share out the benefits of the scheme as equally as possible.

1.2. Measured daywork

To some people the idea of measured daywork provides the answer to the shortcomings of individual incentive schemes. Instead of employees receiving a variable payment in accordance with the output achieved, they are paid a fixed sum as long as they maintain a predetermined and agreed level of working. Employees thus have far less discretion over the amount of effort they expend. Theoretically, this deals with the key problem of other schemes by providing for both stable earnings and stable output instead of ‘as much as you can, if you can’.

The advantage of measured daywork over time-saving schemes, from the management point of view, is the greater level of management control that is exercised. The principal disadvantage is the tendency for the agreed level of working to become a readily achiev­able norm which can only be increased after negotiation with workforce representatives.

1.3. Group and plant-wide incentives

Sometimes the principles of individual time saving are applied to group rather than indi­vidual output to improve group performance and to promote the development of team­working. Where jobs are interdependent, group incentives can be appropriate, but it may also put great pressure on the group members, aggravating any interpersonal animosity that exists and increasing the likelihood of stoppages for industrial action. Group schemes can also severely reduce the level of management control by allowing the production group to determine output according to the financial needs of individual group members.

A variant on the group incentive is the plant-wide bonus scheme, under which all employees in a plant or other organisation share in a pool bonus that is linked to the level of output, the value added by the employees collectively or some similar formula. The attraction of these methods lies in the fact that the benefit to the management of the organisation is ‘real’ because the measurement is made at the end of the system, com­pared with the measurements most usually made at different points within the system, whereby wages and labour costs can go up while output and profitability both come down. Theoretically, employees are also more likely to identify with the organisation as a whole, they will cooperate more readily with the management and each other, and there is even an element of workers’ control. The difficulties lie in the fact that there is no tangible link between individual effort and individual reward, so that those who are working effectively can have their efforts nullified by others working less effectively or by misfortunes elsewhere.

1.4. Commission

The payment of commission on sales is a widespread practice about which surprisingly little is known as these schemes have not come under the same close scrutiny as incen­tive schemes for manual employees. They suffer from most of the same drawbacks as manual incentives, except that they are linked to business won rather than to output achieved.

2. DISADVANTAGES OF PBR SCHEMES

The whole concept of payment by results was set up to cope with a stable and pre­dictable situation, within the boundaries of the workplace. External demands from customers were irritations for others – such as sales representatives – to worry about. The factory was the arena, the juxtaposed parties were the management on the one hand and the people doing the work on the other, and the deal was output in exchange for cash. The dramatic changes of the past twenty years, which have swept away stability, dismantled the organisational boundary and enthroned the customer as arbiter of almost everything have also made PBR almost obsolete.

According to the New Earnings Survey the proportion of manual workers receiving PBR payments steadily declined between 1983 and 2003, and there is every reason to believe that this decline has continued in the years since. This trend can be explained, in part, by changing technologies and changes in working practices. A payment system that puts the greatest emphasis on the number of items produced or on the time taken to produce them is inappropriate in industries where product quality is of greater signific­ance than product quantity. Similarly a manufacturing company operating a just-in-time system will rely too heavily on overall plant performance to benefit from a payment scheme that primarily rewards individual effort.

In addition to the problem of fluctuating earnings, described above, there are a number of further inherent disadvantages which explain the decline of PBR-based remuneration arrangements.

2.1. Operational inefficiencies

For incentives to work to the mutual satisfaction of both parties, there has to be a smooth operational flow, with materials, job cards, equipment and storage space all readily available exactly when they are needed, and an insatiable demand for the output. Seldom can these conditions be guaranteed and when they do exist they seldom last without snags. Raw materials run out, job cards are not available, tools are faulty, the stores are full, customer demand is fluctuating or there is trouble with the computer. As soon as this sort of thing happens the incentive-paid worker has an incentive either to fiddle the scheme or to negotiate its alteration for protection against operational vagaries.

2.2. Quality of work

The stimulus to increase volume of output can adversely affect the quality of output, as there is an incentive to do things as quickly as possible. If the payment scheme is organised so that only output meeting quality standards is paid for, there may still be the tendency to produce expensive scrap. Operatives filling jars with marmalade may break the jars if they work too hurriedly. This means that the jar is lost and the marmalade as well, for fear of glass splinters.

Renewed emphasis on quality and customer satisfaction means that employers increasingly need to reward individuals with the most highly developed skills or those who are most readily adaptable to the operation of new methods and technologies. PBR, with its emphasis on the quantity of items produced or sold, may be judged inappro­priate for organisations competing in markets in which the quality of production is of greater significance than previously.

2.3. The quality of working life

There is also a danger that PBR schemes may demotivate the workforce and so impair the quality of working life for individual employees. In our industrial consciousness PBR is associated with the worst aspects of rationalised work: routine, tight control, hyper­specialisation and mechanistic practices. The worker is characterised as an adjunct to the machine, or as an alternative to a machine. Although this may not necessarily be the case, it is usually so, and generally expected. Payment by results in this way reinforces the mechanical element in the control of working relationships by failing to reward employee initiative, skills acquisition or flexibility. There is also evidence to suggest that achieving high levels of productivity by requiring individuals to undertake the same repetitive tasks again and again during the working day increases stress levels and can make some employees susceptible to repetitive strain injuries.

2.4. The selective nature of the incentive

Seldom do incentive arrangements cover all employees. Typically, groups of employees are working on a payment basis which permits their earnings to be geared to their out­put, while their performance depends on the before or after processes of employees not so rewarded, such as craftsmen making tools and fixtures, labourers bringing materials in and out, fork-lift truck drivers, storekeepers and so forth.

The conventional way round the problem is to pay the ‘others’ a bonus linked to the incentive earned by those receiving it. The reasoning for this is that those who expect to earn more (such as the craftspeople) have a favourable differential guaranteed as well as an interest in high levels of output, while that same interest in sustaining output is gen­erated in the other employees (such as the labourers and the storekeepers) without whom the incentive earners cannot maintain their output levels. The drawbacks are obvious. The labour costs are increased by making additional payments to employees on a non-discriminating basis, so that the storekeeper who is a hindrance to output will still derive benefit from the efforts of others, and the employees whose efforts are directly rewarded by incentives feel that the fruits of their labour are being shared by those whose labours are not so directly controlled.

2.5. Obscurity of payment arrangements

Because of these difficulties, incentive schemes are constantly modified or refined in an attempt to circumvent fiddling or to get a fresh stimulus to output, or in response to employee demands for some other type of change. This leads to a situation in which the employees find it hard to understand what behaviour by them leads to particular results in payment terms. This same obscurity is often found in the latest fashion in PRP. In a recent unpublished study comparing performance management in two blue-chip com­panies, less than half the people in management posts claimed to understand how the payments were calculated. Many of those actually misunderstood their schemes!

Source: Torrington Derek, Hall Laura, Taylor Stephen (2008), Human Resource Management, Ft Pr; 7th edition.

2 thoughts on “Payment by results schemes in HRM

  1. zoritoler imol says:

    Excellent read, I just passed this onto a colleague who was doing some research on that. And he just bought me lunch since I found it for him smile Therefore let me rephrase that: Thanks for lunch!

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