Compensation 267
Pay - for - performance systems fall victim to much of the same criticism
made about performance evaluations noted in Chapter Eight, as well as
additional criticism. Critics claim that the pay - for - performance evalua-
tion process is subjective, that employees are rated by instruments that
do not refl ect their actual job competencies, that supervisors lack skills to
develop performance standards and provide feedback, and that comparing
individuals to one another sets up a competitive environment that can be
destructive to department or unit cohesion. An additional criticism is that
adequate fi nancial resources are not always allocated (U.S. Merit Systems
Protection Board, 2006). Even when pay rewards are not restricted, the
small percentage of difference between high and low performers typi-
cally found in merit systems does not encourage improved performance
or reward outstanding employees (Heneman, 1992).
Merit pay systems have been condemned for focusing on compensation
rather than improved performance. Research has found that when pay and
performance are discussed, employees fail to address the developmental
issues and instead focus on not receiving a pay increase or on receiving an
increase lower than expected. When provided with constructive feedback in
a training - and - development context, employees are likely to accept the
information. When feedback is tied to pay increases, however, employees
process the information differently. They tend to get defensive, believing
that the rater is taking something away from them by not granting a pay
increase. Other research indicates that when performance appraisal results
determine pay, employees often set lower goals so that they can achieve
them (Cascio, 1991; Lawler, 1989).
The concepts of procedural justice and distributive justice must be con-
sidered when developing and administering pay - for - performance systems.
Procedural justice focuses on the perceived fairness of the evaluation procedures
used to determine performance ratings or merit increases. For example, what
procedures or instruments are used to guarantee a link between pay and per-
formance? Distributive justice focuses on the perceived fairness of the rating or
increases received relative to the work performed (Greenberg, 1986, 1996).
For example, is the rating or increase congruent to the performance inputs?
Merit systems that are not developed with these principles in mind will lack
the integrity and credibility necessary for employees to perceive that the
system can discern and will reward differences in performance.
Heneman (1992) found that for employees to perceive the process as
just, fi ve components must exist: performance must be clearly defi ned,
rewards must be communicated to employees, rewards must be made
contingent on desired performance, opportunities to improve performance