Performance-related compensation schemes are commonly used by organizations to reward improved productivity through increased salary or benefits. Often this scheme is misconstrued as indirect management control systems. Auto Pak, a leading manufacturer of automobile spares, recently adopted a bonus scheme, with the basic intention to reap the benefits of increased productivity. This significantly called for alteration of existing compensation systems, making employees more accountable or responsible for results. Some of the high achievers of the company, in the succeeding months of new bonus scheme, could significantly increase their compensation level, while a large number of employees, on the contrary, faced significant reduction in their compensation package. The company, before introduction of a new bonus scheme, explained to all its stakeholders the genesis and operational nitty-gritties. Individually, all the line managers were trained to understand how it works and helps in achieving the business goals. The company is 100 per cent unionized with representation from two major registered and recognized unions. One of the union leaders collected payroll information for 6 successive months after the introduction of the new bonus schemes; its analysis indicated actual compensation costs have decreased over the period. Both the union leaders jointly issued a notice to the management, explaining their understanding of the systems, an extract of which is reproduced below: Performance-related pay is defined as a variety of systems linking pay to performance. It is based on the assumptions that organizations are able to measure individuals, team/unit, and organizational outputs, as all these contribute to organizational performance.

Also it should be administered in such a

way that organizations can capitalize the expected value from the employees who are recipients of performance- related pay. Any performance-related pay initiatives should match with the organizational performance budgeting, duly considering the economic constraints of the organization. Thus, performance related pay should attempt a trade-off between various options, taking into account the background and culture of the organizations. While designing new performance-related pay schemes, organizations should ensure its acceptability to all cross-sections of employees. In the heart of the systems, we have the right fi t performance appraisal tools. It should balance individual and team performance, bring changes in human resource management practices, understand the impact on employees’ motivation, develop a culture of mutual trust, and leverage organizational change. Organizations, after introduction, should also ensure its periodic evaluation to understand its success or otherwise.

We feel that our organization has failed to account for all these issues, leading employees to survive in uncertainty and suffer from extreme financial hardships. Hence, we oppose the newly introduced performance-related pay and appeal before the management to revert to the old compensation system, which follows more the principles of equity, respect seniority, and also assigns some weight on seniority without harming the collective interests of the employees. While explaining the genesis of the new bonus scheme, the company did make it clear to both unions that the company wants to reward high achievers and differentiate them from others who fail to achieve. This will enable the company to relate the compensation to market rates and at the same time to motivate those who deliver their best.

As a compensation expert, critically analyze the case and suggest, where the company went wrong to introduce performance-related pay?