How To Improve Employee Performance

1022 Words5 Pages
Productive and motivated employees are the backbone to any successful organisation. While there are many recommendations for firms to utilise intrinsic and extrinsic rewards to motivate and improve employees performance, this paper will only examine the relationship between pay-for-performance and employee performance. This paper will first examine the underlying economic framework, efficiency wage model, for pay-for performance or incentive pay. Next, this paper will review empirical evidences that support the use of efficiency wages and the recommendations on the monitoring of employee’s performance. As Fair Work Commission Australia, it is crucial that policy recommendations aim to improve productivity of the firms while minimising involuntary…show more content…
The efficiency wage, w*, is derived after firms minimize the wage cost per efficiency unit. The 45 degree line is the effort demand curve and by paying w*, firm can optimal effort from employees. The basic premise of this model is that by paying employees more or to certain level, we can directly increase their productivity. There are currently five different efficiency wage models. Nutritional efficiency model which states that higher income would lead to higher productivity because employees can afford more nutrients (Carmichael, 1990). The shirking model which assumes that because it is inefficient and costly to monitor employees performance, therefore paying them above market wages is the only way to incentivizes them not to shirk and work harder. Yellen (1984) pointed out that people who quit usually do so because of personal reasons and retrenchments and not because they were caught shirking. Imperfect monitoring is the main problem why firms need to pay efficiency wages and if perfect monitoring is possible in the real world, there would be no need to pay efficiency wages and no involuntary…show more content…
Relational signalling assumes that higher wages change the perception of the relationship between employees and firms. By giving higher wages, firms change the frame of thinking to cooperation where employees perceive firms to be fairer. Employees on their side can shift the firm’s perception from neutral to positive by not shirking and be committed to their work. Therefore, higher wages led to positive solidarity relationship between firm and employees. Muhlau and Lindenberg (2003) argued that empirical evidences supporting shirk model has been mixed but their study of manufacturing plans in the United States and Japan showed support for relational signalling approach or the gift exchange
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