LESSON 06

Employee performance
Contents Pages
6.1 Introduction 132
6.2 E-resources 133
6.3 Key concepts 133
6.4 Exploring pay-for-performance 134
6.5 Establishing a pay-for-performance culture 142
6.6 Types of pay-for-performance plans 143
6.7 Competency- and skill-based pay 147
6.8 Self-assessment 149
6.9 Summary 149
6.10 References 149

The mind map below will be repeated at the beginning of each lesson. The aim of
this mind map is to give you an indication of where you are in the process of working
through the study material. As indicated below, you are now busy with lesson 06.

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In this lesson I refer to chapter 6 of the prescribed book. You will also have to study some sections of
this lesson which are not available in the prescribed book. Use the lesson and the relevant chapters in
conjunction with each other. The study material for lesson 06 is illustrated as follows:

6.1 INTRODUCTION
In lesson 01 you learnt about how remuneration has evolved from a general to a strategic approach. The
strategic approach to remuneration is a focus on individual effort, contribution, motivation and individual
performance – the focus is therefore on individual achievement. This is what pay-for-performance is all
about – paying employees according to their individual contributions, paying for the contributions of a
group or the entire organisation.

Remuneration is not a “one-size-fits-all” approach. Employees have different needs and organisations
require different types of behaviour from employees, depending on the nature of the work. Therefore, the
aim of remuneration is to satisfy the different needs of employees, in order for them to stay productive
and motivated, without having a negative effect on the organisation’s profitability. This is where pay-for-
performance comes in. Pay-for-performance (PFP) enables organisations to incentivise employees to
behave in ways that will promote organisational goals (Maloney & McCarthy, 2013).

In the previous lessons you learnt about the first two building blocks of remuneration, namely, internal
alignment and external competitiveness. I am now moving on to the next building block, namely,
employee performance.

In chapter 6 of the prescribed book, read the introduction section.

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6.2 E-RESOURCES
Internet search/sources
The following additional sources are available should you wish to use them to
broaden your knowledge:

https://www.salary.com/blog/what-is-pay-for-performance-compensation/
https://courses.lumenlearning.com/principlesmanagement/chapter/16-5-the-
roles-of-pay-structure-and-pay-for-performance/
https://www.businessnewsdaily.com/9712-performance-based-pay.html
https://open.lib.umn.edu/principlesmanagement/chapter/16-6-the-roles-of-pay-
structure-and-pay-for-performance/
https://hiring.workopolis.com/article/how-pay-for-performance-can-help-you-
attract-top-talent/

If you have found other useful electronic sources that are not listed here, please
post the link on the appropriate discussion forum on the myUnisa page. In this way
we can all increase our learning scope.

6.3 KEY CONCEPTS

The key concepts in this lesson are as follows:
• pay-for-performance • line of sight • individual pay-for-performance
plans
• merit pay • piece-rate • commission
plans
• standard-hour plans • individual • competency-based pay
bonuses
• group-pay-for- • gainsharing • team-based pay-for-
performance plans plans performance plans
• profit-sharing plans • skill-based pay • organisation-wide pay-for-
performance plans
• employee stock • suggestion
options system

We will by examining the concept of pay-for-performance in more detail to enable you to gain a better
understanding of what it means and what it comprises. You will also learn how to design a pay-for-
performance plan and the benefits it holds for organisations and employees. Before we continue,
complete activity 6.1

Activity 6.1
Think about the position you are currently in. If you are not employed, ask your own
family or a friend the following questions:

(1) How is your performance rewarded?

(2) Is it important to you for your performance to be rewarded? Indicate why you
say so.
(3) If your performance is not rewarded, would you put less effort into your work?

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 (4) If your performance is not rewarded, what type of remuneration would
motivate you to work harder? Substantiate why you say so by motivating your
answer.

In order to do this activity, go to the Discussion Forum tool on the HRM3705

myUnisa module site and access Forum 6: Lesson 06, Activity 6.1. Complete this
activity by sharing your answers with your fellow students online.

Although no formal marks will be allocated for your participation in this

activity, you should reap the benefits of participating by gaining a deeper
understanding of this aspect.

In the next section, we explore PFP and how it can be used as a motivator.

6.4 EXPLORING PAY-FOR-PERFORMANCE

You might have been exposed to the term “pay-for-performance” or “incentive pay” or “variable pay”.
Incentive remuneration is categorised as variable pay because the payment of such incentives does not
vest in the total labour costs such as across-the-board adjustments (Erasmus et al, 2019). Variable pay
essentially has to be “re-earned” by employees for each period (Newman et al, 2017). In chapter 1 of
your prescribed book you learnt about the different components of remuneration. If you have a look at
figure 1.1 in your prescribed book, you will notice that PFP forms part of direct remuneration.

In the study guide, study section 6.4, exploring pay-for-performance.

In chapter 6 of the prescribed book, study the following sections:

6.2 What is performance within the remuneration context?
6.3 Pay-for-performance

6.4.1 Pay-for-performance within the remuneration context

Pay-for-performance (PFP) is an incentive scheme in which employees receive extra, performance-

dependent remuneration for their work if they reach certain performance targets. PFP can be
incorporated into an employee’s basic salary, which would lead to an increase in the basic salary, or it
can be variable.

Incentive remuneration schemes are devised as an attempt to link rewards to superior performance in a
direct and prompt way. They usually function in addition to basic pay and are specifically aimed at the
achievement of specified results, outputs or productivity targets (Erasmus et al, 2019:494). This means
that employees will receive an additional payment which is added to their basic salary when
predetermined objectives have been met (Maloney & McCarthy, 2013). That is why the word “variable”
is used – PFP is not guaranteed and will only be paid out if certain objectives of the individual, group or
organisation are met. Organisations use PFP plans to incentivise employees to achieve organisational
objectives. The concept of PFP is illustrated in figure 6.1.

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Basic salary

Fixed Pension
remuneration

Total Various benefits

remuneration

Annual bonus
Variable
remuneration
Profit sharing

Figure 6.1: Total remuneration package

As you can see from the above figure, a certain portion of an employee’s remuneration is fixed – this
remuneration is therefore guaranteed, and an employee will receive his/her basic salary, pension and
various benefits allocated to them monthly. An annual bonus and profit sharing are variable remuneration
– it is not guaranteed, and employees will only receive these incentives if they achieve individual, group
or organisation-wide objectives. PFP is tied to the aspect of strategic remuneration which you learnt
about in lesson 01. Organisations use various PFP plans strategically to motivate employees to achieve
organisation objectives. Through PFP, organisations incentivise employees to achieve goals.

6.4.2 Pay-for-performance as motivator

One of the key debates in the HRM field and specifically remuneration management, is the link between
pay and motivation. Before we continue, it is important to understand what is meant with motivation.

Motivation is the process that initiates, guides, and maintains goal-oriented behaviours. In every day
usage, the term “motivation” is used to describe why a person does something.

(Roberts, 2020)

Based on the above definition, motivation is the reason that drives someone to do something, thus, a
behaviour or an activity. Generally, there is an assumption that the higher the employees’ motivation
levels, the higher their performance (Carberry & Cross, 2019). When building a PFP model/plan,
organisations should consider both extrinsic and intrinsic employee motivation to ensure an engaged and
productive workforce. For PFP plans to be successful, employees must be able to see the link between
the work they are doing and the reward they are receiving. If they cannot see this link, pay-for-
performance plans will fail to motivate them.

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 Activity 6.2
Kevin and Bongani work in a soap factory. They are responsible for packing soap
into boxes. They are both expected to pack at least 12 boxes of soap with 100 bars
of soap daily in each box. They are paid R75 per box of soap that they pack.

(1) Do you think it is easy for Kevin and Bongani to see the link between their
performance and their pay-out?
(2) Based on your answer in question 1, do you think Kevin and Bongani will be
motivated to work harder and pack as many boxes of soap that they are able
to?
(3) If Bongani packs 14 boxes of soap per day, and Kevin packs only 10 boxes
per day, would it be fair if Kevin were upset because his pay-out is less than
Bongani’s?

Feedback on activity 6.2

(1) You will have realised that it is easy for Kevin and Bongani to see the link
between their performance (which is the amount of boxes they pack) and their
pay-out (they get paid per box that they pack).
(2) Yes, they will be motivated to work harder because they get paid for each box
they pack, so the more boxes they pack, the more money they receive.
(3) No, it would not be fair for Kevin to be upset if his pay-out were less than
Bongani’s, because Bongani put more effort into his work and was remunerated
accordingly. Kevin will see that his pay-out would increase if he were to pack
more boxes; therefore, he would be more motivated to work harder to receive a
bigger pay-out.

It is evident from this exercise that employees must see the link between pay-for-
performance plans and the pay-out they receive to be motivated. If employees do
not see this link, they will not be motivated to work harder.

It is important to distinguish between motivation and reward. A simplistic way to look at the difference
between motivation and reward is that motivation generally comes from the behaviour, but rewards come
after the behaviour (MikeW, 2014). This is illustrated in figure 6.2.

Motivation
Action - behavior Reward after the
before the
action
action
What drives you to take the What you get from taking
action the action
Figure 6.2: Rewards vs motivation

Source: Adapted from MikeW (2014)

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It is also important to distinguish between intrinsic and extrinsic rewards.

An intrinsic reward is an intangible award of recognition, a sense of
achievement, or a conscious satisfaction. It is, for example, the knowledge
that you did something right, or you helped someone and made their day
better. Because intrinsic rewards are intangible, they usually arise from
within the person who is doing the activity or behaviour. So “intrinsic” in this
case means the reward is intrinsic to the person doing the activity or
behaviour (MikeW, 2014).

An extrinsic reward is an award that is tangible or physically given to you for

accomplishing something. It is a tangible recognition of one’s endeavour. For
example, it is a certificate of accomplishment, a trophy or medal for winning
the race, a badge or points for doing something right, or even a monetary reward for doing your job.
Because extrinsic rewards are tangible, they are usually given to the person doing the activity; as such,
they are typically not from within the person. Therefore, extrinsic rewards mean the reward is extrinsic to
the performer of the activity or behaviour (MikeW, 2014).

Thus, when talking about motivation, intrinsic and extrinsic have nothing to do with whether the motivation
originates from within the person or outside the person. Instead, it means whether motivation is intrinsic
to the activity or not. You may ask the question, why then are people confused about reward vs
motivation? The fact is that there are people that are driven by rewards. Thus, rewards can sometimes
be the reason that drives people to do things. The rewards that they get, can sometimes be a motivation.
However, people may do things for many reasons
beyond rewards – there are therefore many motivations
that are not rewards. The tricky part is that since
rewards can sometimes be a motivation, the question is
whether it is an intrinsic or extrinsic motivation? It is not
difficult to see that doing something for the rewards is
just the opposite – at least in spirit – of doing something
simply for the love of doing it (i.e. intrinsic motivation).
So, when an activity or behaviour is motivated by
rewards, it is always extrinsically motivated. In other
words, when rewards become the reason that drives
someone to do some activity or behaviour, they will not
be doing it purely for its own sake anymore. Therefore,
all rewards – both intrinsic rewards and extrinsic rewards – are by definition extrinsic motivations (i.e.,
extrinsic to the activity or behaviour).

In the prescribed book, the concept of “line of sight” is discussed. The concept “line of sight” refers to
the degree to which employees can see a clear connection between their behaviour and the pay-out from
an incentive system. For example, rewards for corporate performance (profit sharing or share options)
may have a weak line of sight. Employees at lower levels of a large organisation may find it difficult to
believe that they can influence the incentive pay-outs because they do not see how they can affect overall
company performance (Erasmus et al, 2019:496). On the other hand, individual- or team-based
incentives, such as sales commissions or production bonuses, have a clear line of sight and therefore
often have stronger motivational effects (Erasmus et al, 2019:496).

Now that you have studied the relevant sections in your lesson and prescribed book, make sure that you
can define and explain what pay-for-performance is. You will now have an opportunity to apply what you
have learnt in activities 6.3 and 6.4.

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 Activity 6.3
You are a salesperson working for an organisation that sells vacuum cleaners. One
of your objectives is to sell as many vacuum cleaners as possible in your area. You
are however only paid a basic salary. How can pay-for-performance be used to
motivate you to work harder?

Feedback on activity 6.3

You will not be motivated to work harder with only a basic salary. The organisation’s
goal is to sell as many vacuum cleaners as possible; therefore, you need to be
incentivised according to the number of vacuum cleaners you sell. Pay-for-
performance can be used to motivate you to sell as many vacuum cleaners as you
can by incentivising you for each vacuum cleaner that you sell. This is called a
commission scheme, which you will learn about later in this lesson.

Activity 6.4
Discuss the importance of pay as a motivator. In your answer, you should comment
on the difference between motivation and rewards. Your answer should include a
discussion on intrinsic and extrinsic reward.

In order to do this activity, go to the Discussion Forum tool on the HRM3705

myUnisa module site and access Forum 6: Lesson 06, Activity 6.4. Complete this
activity by sharing your answers with your fellow students online.

Although no formal marks will be allocated for your participation in this

activity, you should reap the benefits of participating by gaining a deeper
understanding of this aspect.

6.4.3 How to strengthen the pay-for-performance link

Because of the diverse ways in which different employees are motivated, it is important for employees
to be able to see how the actions they carry out correspond to the reward they are receiving. Failure to
see this link will lead to employees becoming demotivated. After studying this section in your prescribed
book, apply what you have learnt in the following activity.

Activity 6.5
Read the case study below and answer the questions that follow.

XYZ Security is an organisation that strives to be one of the best in the security
industry. It is very mindful of its public image, and it wants its clients to put their
trust in the organisation to keep them safe. At this stage they only employ
guards at security estates, but they hope to expand their business to include
security drivers for VIPs and bodyguards for international travellers in the future.
XYZ Security gives every employee a performance bonus at the end of each

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month, provided that they performed in a way that was acceptable to the
organisation.

Katlego is a guard at a security estate. He is always on time for his shift, never
misses a day of work, and is always friendly and helpful towards the residents
of the estate. Bryan works with Katlego at the same estate, but certain residents
have complained that Bryan is not at his post when he should be, and that he
is not friendly and helpful. Bryan has also been late for work on three
consecutive days. XYZ Security then decides to withhold Bryan’s performance
bonus because of all the complaints they received about him. They inform
Bryan of this. Katlego, however, receives his full performance bonus. All XYZ’s
employees know what is expected of them, and it is clearly communicated to
them that they will lose their performance bonus if they fail to meet the expected
standards. XYZ Security has a clear code of conduct.

(1) Why do you think XYZ Security gives employees performance bonuses?
(Think about the goals of the organisation and their public image.)
(2) Do you think Bryan has the right to be upset that his performance bonus was
withheld? Why do you say so?
(3) Do you think Bryan’s performance will improve after his performance bonus
was withheld? Why do you say so?
(4) How can XYZ Security ensure that their employees stay motivated?
(5) How could Bryan’s behaviour influence XYZ Security’s public image?

Feedback on activity 6.5

(1) XYZ Security gives employees performance bonuses in order for employees to
achieve the standard of performance that the organisation expects of them. The
organisation hopes that the performance bonus will motivate employees to give
their best. This helps the organisation to maintain a good public image and to
obtain future contracts for its services, which in turn will enable it to expand its
business and achieve its business goals.

(2) No, Bryan does not have the right to be upset because he did not receive his
performance bonus. All employees are aware of the organisation’s code of
conduct and the penalty that will be imposed if they fail to meet their performance
standards.

(3) Yes, Bryan knows that for him to receive his performance bonus, he must conduct
himself in line with the organisation’s code of conduct. This should motivate him
to adjust his behaviour accordingly.

(4) XYZ Security needs to ensure that its performance bonus plan is fair towards all
employees, and that employees always know when they are behaving in ways
that are not acceptable to the organisation (communication). For example, XYZ
Security cannot just withhold an employee’s performance bonus without informing
the employee of the reason it was withheld. If an employee knows what he/she
did wrong, it will help them to correct their behaviour in order to receive the
performance bonus in future. If an employee can see the link between their

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 behaviour and their performance bonus, they will be more motivated to behave in
the correct manner.

(5) Bryan’s behaviour may result in the organisation losing its contract with the
security estate, which would be bad for their public image because people would
feel they cannot trust XYZ Security to do its job.

6.4.4 Designing a pay-for-performance plan

When designing a PFP plan, the following objectives need to be included: efficiency, fairness and
compliance. After you have studied this section in your prescribed book, complete activity 6.6.

Activity 6.6
Read the case study below and answer the questions that follow.

Letaba Inc is a car parts manufacturing business. Thabo Letaba, the CEO of
Letaba Inc, has big plans for his business and wants to make sure he can
become an employer of choice. In doing so, he knows that he must offer his
employees a competitive salary and benefits.

Lately Thabo has seen that his employees are less motivated and they do not
complete tasks on time, even though clear goals are set and the employees
have a competitive remuneration package. Thabo has decided to implement a
pay-for-performance plan to motivate his employees to work harder.

Letaba Inc employs about 250 line workers who are responsible for
manufacturing car parts and ensuring these parts meet quality standards. For
every 50 line workers, there is one manager; in total there are five line worker
managers. There are also 50 administrative positions. Thabo believes that
linking pay to performance will help the business to achieve both short- and
long-term goals. Thabo subsequently issues a press statement, declaring that
short-term remuneration in 2018 will be tied to performance measures that
include an increase in earnings, quality and national market share.

Thabo states that the changes are designed to

• make explicit the link between individual and business performance and
stockholders’ interests
• maintain a critical line of sight between organisational performance and
individual rewards
• support good corporate governance objectives and remuneration best
practices
• mitigate business risk
• enhance Letaba Inc’s efforts to attract, retain and reward critical talent

In 2020, a sparkplug manufactured by Letaba Inc was subject to numerous

recalls because it was defective. This resulted in a massive loss of profit for the
business since more than 30 000 sparkplugs had to be recalled. Thabo hopes

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that the implementation of this pay-for-performance plan will help to avoid such
mistakes.

Thabo wants this pay-for-performance plan to be specifically aimed at the line

workers and their managers. At the end of the financial year, every manager
will be rewarded according to the quality of the products that his/her line workers
completed – the aim is that there should be no recalls in that specific year. The
line workers will also be rewarded for the quality of work they do – after parts
are inspected and approved, they will receive a monthly bonus depending on
that month’s target.

Rigid performance measures will be in place, which will take into account the
number of car parts manufactured, as well as the quality of the parts. At the end
of each month, every manager has to evaluate the performance of his/her team
of line workers.

Thabo believes this will help his employees to be more motivated and to work
harder, since they can earn more money for doing their jobs effectively. At this
stage, pay-for-performance is only a short-term plan. Thabo wants to evaluate
the effect it has on the line workers and managers before trying to implement it
further in the business.

(1) An effective pay-for-performance plan should be based on specific standards.

Use the standards in section 6.3.4 in your prescribed book to evaluate the
incentive plan in the case study.

In order to do this activity, go to the Discussion Forum tool on the HRM3705

myUnisa module site and access Forum 6: Lesson 06, Activity 6.6. Complete this
activity by sharing your answers with your fellow students online.

Although no formal marks will be allocated for your participation in this

activity, you should reap the benefits of participating by gaining a deeper
understanding of this aspect.

REFLECTION

After studying the above section, how do you think organisations can ensure that
their employees see this link? Should it be communicated to the employees and
should employees be given a way to track their performance?

Now that you have learnt how to design a PFP plan, it is important for you to know how to establish a
pay-for-performance culture within an organisation.

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6.5 ESTABLISHING A PAY-FOR-PERFORMANCE CULTURE
The efficiency of remuneration systems is linked to the degree to which such systems are correctly
matched to their organisational context. Given that so many South African efforts at wide-ranging
performance management systems are constrained by the lack of a work culture of productivity and
quality, this requirement undoubtedly presents the biggest challenge to South African managers and
remuneration specialists (Erasmus et al, 2019:496). A performance culture means that an organisation’s
incentives and overall remuneration are based on the organisation’s performance (Community for Human
Resource Management, 2021). Experts believe that fostering a PFP culture in an organisation will help
improve productivity, while also having a positive impact on collaboration and team work.

In the study guide, study section 6.5, establishing a pay-for-performance

culture.

In chapter 6 of the prescribed book, study the following section:

6.4 Establishing a pay-for-performance culture

For an organisation to have a PFP culture, it is important for remuneration specialists to understand the
benefits of adopting such a strategy (Community for Human Resource Management, 2021):

• It allows organisations to recruit and retain the best employees.

• It allows and enables easy communication of the goals, vision, values and objectives of the
organisation with employees.
• It ensures that employees take pride in the accomplishments of the organisation, as if it were their
own.
• It allows for proper remuneration of the efforts and contributions made by different employees.

When developing a PFP culture, it is important to know the basic elements that such a culture must have
to ensure its success in implementation. These elements consist of the following (Community of Human
Resource Management, 2021):

• Remuneration for performance should be tied to the overall financial objectives of the organisation.
Understanding and appreciating the fact that performance-based incentives will improve the overall
financial outlook of the company will ensure that the culture is successful.
• A PFP culture should include both short-term as well as long-term remuneration incentives. An ideal
balance of short- and long-term incentives in any organisation will improve productivity, employee
loyalty, and ensure satisfaction amongst its employees.
• The PFP implemented within the organisation should be motivating enough for employees to desire
it. Thus, the PFP plan should enable smooth and seamless changes in performance.
• Employees should be able to see the link between their performance and remuneration.
Performance should be such that an employee can see the change while relating it to the growth in
their incentives.
• Communication is important in the successful implementation of a PFP culture. It is important that
the employees know what they are striving for and how they will benefit.

Enforcing a successful PFP culture in an organisation will ensure employee motivation.

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You will have noticed in figure 6.1 in your prescribed book that there are different types of pay-for-
performance plans. You will now be learning about the various PFP plans organisations can use to
incentivise and reward employees.

6.6 TYPES OF PAY-FOR-PERFORMANCE PLANS

Because organisations require different types of behaviour from employees depending on the nature of
the work, there are different types of PFP plans organisations can use to incentivise and reward
employees. PFP plans can be classified into three categories as indicated in table 6.1.

Table 6.1: Categories of pay-for-performance plans

Type of plan Example

Individual pay-for-performance Merit pay, piece-rate plans, standard hour plans,
plans commission, individual bonuses
Group pay-for-performance plans Focuses on different teams, gainsharing plans
Organisational-wide pay-for- Profit-sharing plans, employee stock options, suggestion
performance plans system

In the study guide, study section 6.6, types of pay-for-performance plans.

In chapter 6 of the prescribed book, study the following section:

6.5 Types of pay-for-performance plans

6.6.1 Individual pay-for-performance plans

Individual pay-for-performance plans are intended to reward employees for meeting work-related
performance standards, such as quality, productivity, customer satisfaction, safety and attendance.

(Martocchio, 2011:85)

Individual PFP plans can help focus the employee on the desired results or behaviours, but they are only
likely to work where those results or behaviours can easily be measured. These plans are therefore more
commonly found where hard financial or output targets can be set, such as in sales, production,
manufacturing and logistics. They are sometimes seen as inappropriate for professional or more
knowledge-based occupations where the sharing of information is key. There may also be, in line with
the expectancy theory, an issue about the size of the reward, with a clear link between the desired results
and the amount of the bonus paid. Lastly, such schemes have been found to work best where individuals
or groups are able to control their own work and hence are able to vary performance or levels of output
(Perkins & White, 2009).

Individual pay-for-performance plans are most appropriate under three conditions. These conditions and
examples of these are illustrated in table 6.2.

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Table 6.2: Conditions under which individual pay-for-performance plans are appropriate

Condition Example
Performance can be measured objectively • Number of units produced – in car parts
production, the number of units a worker
assembles on an indicator light production line.
• Reduction in error rate – a reduction in typing
errors resulting from use of a word processor.
• Sales figures – a cosmetic salesperson’s monthly
sales revenue.
Employees have sufficient control over work • Factors like frequent equipment breakdowns and
outcomes delays in receiving raw materials are not under
employees’ control.
• Employees are not likely to be diligent when they
encounter this type of obstacle.
Such plans are appropriate if the incentives A company limits awards to 10% of employees who
do not create a level of unhealthy competition have demonstrated high levels of performance. If
among workers performance is judged on quantity and not quality,
quality might suffer. High performers might be
intimidated by low performers. Unions may use these
intimidation tactics to prevent standards from being
raised as planned.

Source: Adapted from Martocchio (2011)

As you have read in your prescribed book, there are five types of individual PFP plans. These plans are
illustrated in figure 6.3. Make sure you can distinguish between them and understand the advantages
and disadvantages of individual PFP plans.

Merit pay

Individual Piece-rate
bonuses Individual pay- plans
for-
performance
plans

Standard-
Commission hour plans

Figure 6.3: Types of individual pay-for-performance plans

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6.6.2 Group pay-for-performance plans

Group pay-for-performance plans reward employees for their collective performance.

(Martocchio, 2011)

In group PFP plans, the group might be a work team, or a department, or even a division or the whole
organisation. The basic concept is still the same, though. A standard is established against which worker
performance (in this case, team performance) is compared to determine the magnitude of the incentive
pay. With the focus on groups, we are now concerned about group performance measured against some
standard, or level, of expected performance. The standard might be an expected level of operating
income for a division. Figure 6.4 illustrates the different types of teams that can be incentivised.

Work/process
team

Types
of
teams
Project Parallel
team team

Figure 6.4: Different types of teams

After studying the above section, make sure you can differentiate between the different group PFP plans.
You should also be able to discuss the advantages and disadvantages of group PFP plans.

6.6.3 Organisation-wide pay-for-performance plans

Organisation-wide pay-for-performance plans can be defined as incentive plans that reward

employees when the company exceeds minimum acceptable performance standards.

(Martocchio, 2011)

This type of incentive advocates the belief that well-designed programmes make employees’ and
management’s goals more compatible because employees strive to increase organisational profits or
values (Martocchio, 2011). As you have read in your prescribed book, there are three types of
organisation-wide PFP plans. These plans are illustrated in figure 6.5. Make sure you can distinguish
between them.

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 Profit-sharing
plans

Organisation-
wide pay-for-
performance
plans
Employee
Suggestion stock options
system (ESOP)
Figure 6.5: Different types of organisation-wide pay-for-performance plans

Now that you have a good understanding of the various types of PFP plans, please complete the following
activity.

Activity 6.7

Read the scenario below and answer the question that follows.

Mary and Naledi work for the Walt Disney Company. Mary is working in the
candy shop and her responsibility is to make candy floss. She also needs to
ensure that the shop never runs out of candy floss as there is a constant stream
of customers on a daily basis. Naledi is responsible for selling the candy floss
that Mary makes. Naledi has to ensure that she sells all the candy floss that
Mary has made.

Identify and discuss the individual PFP plans that could be used to incentivise the
employees in the scenario. Substantiate your answer using information from the
scenario.

Feedback on activity 6.7

Based on the scenario, the best way to motivate the various employees is to use the
different types of individual PFP plans in the following ways:

Mary could be incentivised by means of a piece-rate plan because she needs to

make sure that the shop never runs out of candy floss. She could be rewarded for
every packet of candy floss she makes. Piece-rate plans entail employees being
paid based on individual output.

Naledi could be incentivised by means of commission which would motivate her to

sell all the candy floss that Mary has made. Naledi could be given a certain
percentage of each packet of candy floss she sells. Commission remunerates sales
staff by giving them a percentage of what they sell.

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You have just learnt about the various PFP plans, which are based on the job an employee performs.
However, employees can also be rewarded on the basis of their skills and competencies. In the next
section, you will learn about employee-based PFP plans. Employee-based structures refer to skill-based
pay and competency-based pay.

6.7 COMPETENCY- AND SKILL-BASED PAY

In the study guide, study section 6.6, competency- and skill-based pay.

In chapter 6 of the prescribed book, study the following sections:

6.6 Competency-based pay
6.7 Skill-based pay

Before you continue with any activities, it is important that you understand the difference between a skill
and a competency.

Skills are specific learned abilities that an individual

will need to successfully perform a job. Skills tell
employers what abilities are needed to perform a job
well. Examples of skills are handling documents,
writing tenders and coding. Skills are better for
transformation and ability – they are quantifiable,

standardised and create a structure for internal mobility.

On the other hand, competencies are a combination of
skills, knowledge and behaviour which enables an
individual to be successful in their jobs. Examples of
competencies are analytical ability, strategic planning,
and negotiation. Competencies tell employers how an
individual performs a job successfully. Competencies tend to be limited to individual behaviours in
specific roles.

The advantages and disadvantages of competency-based pay (CBP) are reflected in table 6.3.

Table 6.3: Advantages and disadvantages of competency-based pay

Advantage Disadvantage

• It motivates employees to perform better • It can result in a perception of favouritism. If an

and to contribute to the company. employee perceives him/herself more valuable
• It improves employee loyalty since they than another, but receives a lesser incentive, the
are rewarded for something they feel they employee may feel unfairly treated.
deserve. • There is a possibility of subjectivity. Because CBP
rates employees according to general criteria

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 • It helps push employees beyond their instead of specific accomplishments, there may be
comfort zone as they feel they can earn subjectivity in the evaluation process.
more based on their competencies. • Sometimes competition within an organisation can
• It creates a culture of improvement. lead to a disjoint in a team, affecting overall output.
Because CBP is based on improvement in
a chosen competency, a large emphasis is
placed on self-development.

Source: Adapted from MBASchool.com (2020); TalentLyft (2021)

If you are still unsure about the difference between competencies and skills, use the following links to
assist you to understand these concepts:

https://www.youtube.com/watch?v=bB7yoQDQndY

https://www.youtube.com/watch?v=1i0ByTi0nRE

Now that you have studied the relevant sections, you can apply what you have learnt to activity 6.8.

Activity 6.8

(1) Distinguish between CBP and SBP.

(2) Explain the macro-economic movements that call for the recognition of
competency development and implementation of CBP in organisations.
(3) Discuss the advantages and disadvantages of both CBP and SBP.

In order to do this activity, go to the Discussion Forum tool on the HRM3705

myUnisa module site and access Forum 6: Lesson 06, Activity 6.8. Complete this
activity by sharing your answers with your fellow students online.

Although no formal marks will be allocated for your participation in this

activity, you should reap the benefits of participating by gaining a deeper
understanding of this aspect.

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6.8 SELF-ASSESSMENT
You will recall that in the preface I mentioned that I will be following a different
approach in this module. Self-assessment questions will therefore appear at the end
of each topic and not at the end of each lesson. The purpose of this is to facilitate
an integrated assessment approach which will enable you to gain a better
understanding of how the theory in all the topics fits together. Self-assessment
questions on topic 2 will appear after lesson 07. The self-assessment questions will
cover the theory you have learnt in lessons 03, 04, 05, 06 and 07.

Reflection activity
Reflect on what you have learnt from this lesson.

(1) Make a list of at least five key terms in this lesson that you think are essential
to remember.
(2) Describe the most interesting knowledge that you acquired from this lesson.
Why was this so interesting?
(3) Describe the most difficult knowledge you acquired from this lesson. What
did you do to ensure that you understood what you had learnt?

In order to do this reflection activity, go to the Discussion Forum tool on the

HRM3705 myUnisa module site and access Forum 6: Lesson 06, Activities. Share
your answers with your fellow students online and comment on the answers of other
students. You need to comment on the answer of at least one of your fellow students.
Was there anyone else who struggled with the same material? What did that student
do to help himself/herself to understand the work? Was the same information
interesting to other students?

6.9 SUMMARY
In this lesson you were introduced to the concept of PFP plans, the different types of PFP plans and how
they affect organisations and employees. The criteria for PFP plans as a tool for motivation were also
discussed. You also learnt how to design a PFP plan and hopefully gained some insight in the way these
plans function in the South African context. In the next lesson, you will be learning about employee
benefits.

6.10 REFERENCES
Carbery, R & Cross, C. 2019. Human resource management. 2nd edition. United Kingdom: Red Globe
Press.

ClearCompany. 2021. How to transform your organisation through strategic goal alignment [online].
Available from https://blog.clearcompany.com/transform-through-strategic-goal-alignment#:~:text=
Goal%20alignment%2C%20or%20strategic%20alignment,be%20working%20on%20and%20why
[accessed 21 April 2021].

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Community for Human Resource Management. 2021. Pay for performance culture [online]. Available
from https://www.chrmglobal.com/Articles/758/1/Pay-for-Performance-Culture.html [accessed 22 April
2021].

Erasmus, B, Schenk, H, Mulaudzi, M & Grobler, A. 2019. South African human resource management.
Theory and practice. 6th Edition. Cape Town: Juta and Company.

Mackenzie, A. 2018. Pay-for-performance and the science behind what motivate us [online]. Available
from https://www.forbes.com/sites/workday/2018/05/31/pay-for-performance-and-the-science-behind-
what-motivates-us/?sh=6e874aa3e438 [accessed 19 April 2021].

Maloney, M & McCarthy, A. 2013. Introducing human resource management. In R Carbery & C Cross
(eds). Human resource management. New York, NY: Palgrave MacMillan.

Martocchio, JJ. 2011. Strategic compensation: a human resource management approach. 6th edition.
New Jersey: Pearson Education.

MBASchool.com. 2020. Competency based pay [online]. Available form Competency Based Pay
Definition & Importance | Human Resources (HR) Dictionary | MBA Skool-Study.Learn.Share. [accessed
22 April 2021].

MikeW. 2014. Intrinsic vs. extrinsic rewards (and their difference from motivations) [online]. Available
from file:///D:/HRM3705/Re-
development/2021%20redevelopment/Ideas/Lesson%206/Intrinsic%20vs.%20Extrinsic%20Rewards%
20(and%20Their%20Differences%20from%20Motivations)%20-%20Lithium%20Community.html
[accessed 21 April 2021].

Perkins, SJ & White, G. 2009. Employee reward: alternatives, consequences and contexts. London:
Chartered Institute of Personnel and Development.
Roberts, C. 2020. What is motivation? Verywellmind, April 27, 2020 [online]. Available from
https://www.verywellmind.com/what-is-motivation-2795378 [accessed 21 April 2021].

TalentLyft. 2020. What is competency-based pay? [online]. Available from What is Competency-Based
Pay? | TalentLyft [accessed 22 April 2021].

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