Question 1:  Effectiveness of incentive provision in firms and organizations

It is the obligation of the management in the organization to ensure that maximum results and expectations of firms are achieved. This can only be achieved if the firm is able to motivate its workers to improve their performance. In order to improve productivity in firms and organizations, it is essential for the firm’s management to offer incentive s to the workers in that organization. Incentives refer to something that stimulates greater production through rewarding of hard work. The incentives are mainly classified into four main categories that include; financial incentives, coercive incentives, remunerative incentives and moral incentives.

In most cases, incentives are considered to be the main link between people and change. It is therefore important to have the right incentives in place since positive change can only be sustained through rewarding of improved performance. It should be understood that incentives can only be relevant if the firms or organization within which they are used get the desired results. Incentives in most cases are considered at the individual level and which can either be financial or non-financial(Laffont&Martimort, 2002). The incentives program in the organization can be internal or external but it should always be in accordance with the organizational objectives.

It is important for the organization and the firm in question to have the necessary conditions through which incentives programs works best. Incentives are aimed at improving results in an organization. It is for this reason that the current performance in the firm should be inadequate and wanting. This provides the basis upon which the program can be initiated. Another vital condition upon which incentive should be carried out is that the inadequacy in the performance is due to deficiencies in motivation. Lack of motivation among the employees in an organization can be a major cause of inadequacy in level of performance and thus making it essential to initiate an incentive program.

In order to have a successful incentive program, the desired performance type and level must be quantified. This means that the organization can determine its set goals and objectives and the level of inadequacy should be predetermined. Quantifiable level of performance makes it possible to implement a successful incentive programs.  Another very vital condition which should be fulfilled is that the intended goal is challenging but achievable. This is very important condition as it enables the firm to determine the kind of incentives to adopt. The last condition for successful incentive program should ensure that the promotion of a certain objective of the goal does not override the overall organizational objectives (Laffont&Martimort, 2002).

In order to make viable incentive programs, it is important to have a proper analysis to understand the in the inadequacy of the performance. After realizing the shortfall in the organizational results and determine the type of incentive contract to be employed. In most cases, incentives in firms are awarded through compensation practices of the firm. The process involves monitoring, evaluation and contracting. However, it is important for the firms and organization may use different mechanisms in the incentives programs that will align the interest of the company. For example, some employees’ efforts are predominantly rewarded through explicit contracts that relates to their performance. The more productive the worker is, the more rewards he/she gets for the hard work. This is the most common form of contract since it puts the firm under less risk.

There are other forms of incentive program contracts that go beyond the individual measure of performance. For instance, there are more aggregate contract measures where the performance is not measured on individual performance only. Under such contracts, profit–sharing contracts may be reached at whereby a certain percentage of profits realized are rewarded to the employees. These are employed with an aim of mitigating risks involved in other reward systems. Failure to design appropriate incentive programs may be detrimental to the overall success and purpose of the organization (Laffont&Martimort, 2002).

In an attempt to enhance performance through incentives, sometimes it unintended consequences are realized. This is because incentive programs can have positive and negative impacts in the organization. It is for this reason that a choice of which contracts should entail incentives and where incentives are not recommended should be handled with care. For example, while it is true that incentives motivate staff, those who are not motivated are demotivated thus affecting negatively the performance in the organization. There are also few cases of perverse incentives where people are motivated to doing the wrong things and they should be avoided. Contracts which involve provision of very essential services especially in non-profit making organization should not encourage incentives as this would have negative impact to the growth of the firm.

Question 2: Pay for performance

Pay for performance system is a situation where employees or workers in an organization are compensated for achieving pre-determined goals and objectives in terms of quality and efficiency. It is a special form of incentive program aimed at ensuring that the set target is always realized. Under such circumstances, a financial gain is promised if the said worker meets the set standards. These incentive schemes are rewarded through individual payment by results, piece work and bonuses. However, the pay-for-performance is faced with numerous challenges the major one being the ability to determine the appropriate benchmark to satisfy the set standards to guarantee payment (Laffont&Martimort, 2002).

The main challenge faced in implementing the pay for performance incentive contract is the measurement of output. Sometimes it becomes very difficult to measure the level of output especially when the firm deals with provision of services. For instance, when providing medical services, it becomes very difficult to determine the level of output by the medical officers.  In essence, the major problem in the pay for performance incentive is to identify the level of output that meets the level of performance to be recognized. The level of performance acceptable in the different level of organization has never been accorded a definite definition.

According to the Government Accountability office, performance measurement is determined through productivity and effectiveness of the work done. For instance, productivity quantifies the output and input of an organization which are expressed as output to input ratio. This is very difficult process since to get reliable data to calcite this poses a great challenge. On the other hand, effectiveness is another critical measure of performance used in the pay for performance contracts. Effectiveness of the performance determines the relationship of an organizations output to what the organization is intended to accomplish.

The other major problem faced in the pay for performance incentive is to measure the quality of the performance.  Under this, one is concerned with the process of examining how output is produced. The level of quality is indicated by many attributes such as accuracy, thoroughness and complexity(Laffont&Martimort, 2002). It is has been a great challenge to collect all this information to satisfy that the level of performance carried out deserves recognition.

Another problem experienced in determining the level of output is concerned with the timeliness of the performance. This involves evaluating the time factor involved in producing the required level of output. The major problem that arises in this case is the kind of data that should be used. It has always been a major concern on whether to use quantitative or qualitative assessment in determining the desired levels of performance to guarantee recognition. The public sector pay for performance incentive is faced with a major challenge of linking the inputs to the outputs.

In order to fulfill the pay for performance incentive contracts, caution should be taken to ensure that the objectives of the organization are not compromised. There must be well placed standards to ensure that the organization does not suffer losses. Proper performance measuring procedures and tools should be put in place (Laffont&Martimort, 2002). Example of this tool include a balanced score card. These tools should be aimed at ensuring that there are measures of customer satisfaction, internal processes are effectively carried out and there is noted improvement in the overall development of the organization.

In some pay for performance contracts, wages are determined before the performance while in some other cases; the compensation is paid after performance. For instance, the sales men who are compensated through commissions are already aware of their wages even before they have performed. A person who sells vehicles at a commission of 10% of the total value of the car is aware of what he expects to earn after the performance.

On the other hand, pay for performance wages are determined after the performance is completed. For instance, where the incentives to the employees are in terms of bonuses, the level of wages is not known to the worker. This is because the employer has the sole right to determine the amount of bonuses that will be given to the employees (Laffont&Martimort, 2002). This can be more applicable in service production industry. Another situation under which wages are not pre-determined is when the form of incentive is market based since no one is aware of what the market hold in as single day.

Reference

Laffont, J., &Martimort, D., 2002. The theory of incentives the principal-agent model. Princeton, N.J.: Princeton University Press.

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