Pay For Performance Is Most Effective When Its Perceived As Fair

When it comes to eliciting the best from their employees, companies are increasingly moving toward pay for performance reward strategies, which focus on rewarding employees’ job skills, knowledge, competencies and productivity. A recent Malaysian study sought to understand factors influencing perceived unfairness of such reward practices and found that elements such as effective communication, participation, and performance appraisals can have a significant impact on perceived fairness by employees.
 
Key Topics: Job satisfaction, Performance appraisal, Performance based reward

Title of Reviewed Article: Performance-Based Reward Administration Enhancing Employees’ Feelings Of Interactional Justice
 
Researchers: Ismail Azman and Abd Razak Mohd Ridwan (University Kebangsaan).
 
Publication: Studies in Business and Economics, 2017, Vol. 12 No. 1, pp. 5-18.
 
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Setting the Scene

Reward is a key strategic human resource management policy, aiming to recognise the contributions made by employees to the organization (Milkovich et al., 2014). Most companies now determine employee rewards based on performance-based methods, rewarding employees job skills, knowledge, competencies and/or productivity (Ismail et al., 2015). Such performance based reward is typically based on individual performance and/or group performance, with various reward mechanisms being used in conjunction with these performance measures, such as merit pay, lump sum bonuses, and team based pay (Martocchio, 2014).
 
Performance-based rewards are seen as an effective way to attract, retain and motivate good employees (Ismail et al., 2014), with research indicating that effective performance-based reward contains three primary aspects: communication, participation and performance appraisal (Anuar et al., 2014). These factors have been shown to support more open and transparent pay for performance, giving employees a voice in determining reward decisions, and facilitating systematic and fair appraisal of performance and its relationship to reward.
 
Recent research has suggested that the effectiveness of communication, participation and performance appraisal in performance-based reward procedures can significantly impact employee perceptions of interactional justice (Lira et al., 2016), which relates to employees’ perception of fairness in performance-based reward decisions and processes. The present study sought to further examine this relationship between performance-based reward policy effectiveness and interactional justice, through the relationship between the primary aspects of performance based reward administration (communication, participation and performance appraisal) and interactional justice.
 
How The Research Was Conducted
 
This study was carried out with organizations in Malaysia, with 113 employees at rescue services organizations taking part. Participants completed a survey questionnaire consisting of four parts: performance based reward related communication, participation, and performance appraisal, and compensation management related interactional justice.
 
Key Findings and Practical Implications
 
The results of this study confirmed that performance-based reward administration is a key factor in determining employees’ feelings of interactional justice. The study found communication, participation, and performance appraisal were key factors in determining employees’ feelings of interactional justice in respect to performance-based reward practices.
 
The results highlight the importance of incorporating open communication, participative decision-making and fair performance appraisals in performance-based reward policies and procedures in order for them to be most effective. The results further indicate that effectively designing and administering performance-based reward elicits positive employee reactions such as satisfaction, commitment, and performance, which can in turn maintain and enhance organizational goals.
 
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Source Article: Azman, I., & Mohd Ridwan, A. R. (2017). Performance-Based Reward Administration Enhancing Employees’ Feelings Of Interactional Justice. Studies in Business and Economics, 12(1), 5-18.
 
Published by: Walter de Gruyter GmbH
 
For further details and access to the full journal article Click Here (subscription or payment may be required).
 
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References:

Anuar, A., Ismail, A., & Abdin, F. (2014). Administrator’s role in performance pay system as a
determinant of job satisfaction. Sains Humanika, 2(2), 11–17.
 
Ismail, A., Anuar, A., Haron, M. S., & Muhamat Kawangit, R. (2015). Reward Administration
System Enhancing Organizational Commitment: An Islamic Viewpoint. International Letters of Social and Humanistic Sciences, 49, 155-167.
 
Ismail, A., Zaidi, M. & Anuar., A. (2014). Administrator’s role in performance based reward as a determinant of employee outcomes. Management and Marketing Journal, XIII(1), 92-110.
 
Lira, M., Da Silva, V. P. G., & Viseu, C. (2016). Performance Appraisal as a Motivational Tool in the Portuguese Public Administration. Portuguese Journal of Finance, Management and
Accounting, 2(3), 91-118.
 
Martocchio, J. J. (2014). Strategic Compensation: A Human Resource Management Approach. Boston, US: Pearson Education Limited.
 
Milkovich, G. T., Newman, J. M., & Gerhart, B. (2014). Compensation. New York: McGraw-HillIrwin.