Business — Banking — Management — Marketing & Sales

Differentiation between wages and motivation: the different types of salaries linked to performance

Category: Staff’s Motivation

In most western European banks’ remuneration policies, flexibilisation and performance related pay are more and more widely introduced, to increase employees’ stake in the business. They favoured some kind of variable system and performance related pay plans. Merit (or productivity) pay shares are increasing, at least for managers and for marketing, branches and financial markets staff.

But such compensation, set up to encourage the type of performance desired by bank owners, is often more difficult to achieve.

Why is it useful to establish such a link between pay and performance

There is, first, a basic assumption that incentives generate motivation for high, or, at least, higher performances and for improvement of one’s individual performance. It is supposed necessary to stimulate or to maintain continuous efforts. We have already noticed that this not always true.

But, the contrary appears to be true, also. There should, thus, be, at least, room to acknowledge outstanding performances. And taking into consideration efforts and performances is also useful to attract and to retain the best performers.

And rewarding the efforts and sharing the results is also a matter of equity. People should be paid according to what they deserve.

But, equity is a subtle notion, highly depending on both cultural, institutional and organisational factors. For some people, it is obvious that recognition of individual contributions and merits, by rewarding people in accordance with their individual performance, is clearly a matter of equity. But some others consider, for instance, that equity relies much more on providing help to the weaker performers.

Amount of the variable part

The ideal amount of the variable or the fixed pay (between full fixed salary and wages depending completely on business results) is not easy to determine, as it depends on the type of jobs.

Nevertheless, it is commonly considered that, ideally, at least for managers, pay for performance and performance bonuses should represent a significant part (over 10 %) of the overall salary.

Individual vs collective distribution

Another point that should be considered is whether the bonuses are attributed to the individuals, considering their own personal performances, or to the group. One can distinguish, here, at least three levels:

— individually-based (personal reward function of own results, performances and merits),

— unit (or group)-based, equally shared among the members of each team: it encourages cohesion, maintains group harmony, decreases internal conflicts and induces interpersonal co-operation (ensures that people would help the others) and peer pressure that stimulate the performance of the weaker members of the group,

— company-based bonus or collective profit-sharing, function of the overall profitability of the firm, shared equally among the staff, every one being paid the same reward.

Such collective distributions are criticised because potential non-performance is not being accounted for in the remuneration. Poor performers and “free riders” (people who benefit from a group’s work although they contribute less than the other members of the group) should not benefit from others’ efforts.

Emphasis on individual or collective performance?

It would not be fair to « give » the same thing to everyone (egalitarism is inequitable)

Individual contributions

Not everyone makes the same : quantitative and qualitative contribution because aptitudes, skills and efforts may all differ, because posts are complementary the differences observed do not mean « obscure » posts may not play a vital role.

Not everyone cooperates to the same degree.

So, emphasis must not be placed solely on individual « production » targets which might encourage sterile or even harmful interpersonal competition or even sow the seeds of dissension

The diversified forms of compensation linked to efforts or performances

Pay supplements attributed according to performance can take various forms: introduction of premiums, bonuses, profit sharing, fringe benefits, stock options, etc.

They are sometimes criticised because of their negative effects:

— high pressure leading to stress,

— excess of internal competition, with the danger of overburdening,

— risk of opportunistic behaviours… which could result in a lack of attention to customer service,

— etc.

Table 2, here after summarises these critics. It shows also that the answer is mainly in the choice of the types of link established between the pay and the efforts or the performances.

For instance, there should be:

— a clear reference to an objective appraisal of result indicators, based on really desirable objectives. Previously setting specific targets (concerning financial results, such as productivity, quality,…) that have to be met, is necessary.

— a choice of criterion over which individuals have effective control (compensation that considers the activity for which the manager is responsible),

— no dependence on too complex variables,

— no too large distance in time between the contributions and the incentives,

— etc.

Table 2 How to avoid the pitfalls of profit sharing?

Pitfalls : Precautions :
Encourage overwork Salary progression as a function of results following an «S» curve
Favours the most gifted (excessive elitism) Limitation of the profit-sharing component as a function of the total earnings (10 % to 50 %, depending on position held)
Sharp variations in earnings from one period to another (depending on the vagaries of the economic situation) If necessary, controlled distribution (in terms of percentages of the population awarded)
Feeling of anxiety (loss of security) Wide range of reference objectives (by distributing performance criteria and discussing the evaluation of results)
Arbitrary distribution (a priori assessment made by superiors) Criteria formulated in terms of results to be achieved (observable, measurable)

Negotiation of objectives and discussion of the evaluation of the results

Employees will tend to concentrate on the easiest (fast-selling) products and the highest short bonus payments (customers centres of interest) Choice of performance criteria corresponding to the aims the posts are expected to achieve and over which the incumbents have control
Encourages rivalry which divides the team Strike a balance between the individual and collective profit shares
Inhibits mobility because good results cannot be achieved by beginners Guarantee to maintain remuneration (for a specified period) after a change of job

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