Pay-For-Performance Theory

Pay has an important role both on an employee and an employer. This could be an employees’ expectation to fulfill their needs and a concern for the employers to achieve labor costs efficiently, and together it will be a continuous exchange process in compensation system. Mathis and Jackson (2010) state that most compensation systems divided into two main principles which organisations tend to follow one of them. These principles are entitlement and performance. In the public sector, a pay-for-performance system which is also called merit pay or performance based pay has been introduced to compensate the public servants. Mogultay (2007) claims that the pay-for-performance system is an alternative approach to improve productivity and to decline

McCoy, Campbell and Cuedeck as cited in Milkovich and Newman (2004, p.258) states that the employee performance depends on three conventional factors which are skills, knowledge and motivation. The latter factor, motivation has an important role in increasing the individual performance because of linking pay with performance. Perry, Engbers and Jun (2009) state that the employees would work harder because their financial rewards could result from their rising efforts. This argument is based on several motivational theories which agree that increasing salaries or bonuses are one instrument to encourage each employees performing well. This is also supported by Huselid as cited in Milkovich and Newman (2004, p.277) who found that there are a credible evidence of increasing performance from the implementation of pay-for-performance system in 3,000 companies. That is an increasing per-workers sales at $100,000 during a five-year period. According to this calculation, the pay-for-performance tends has positive impacts to individual performance. Even this happens in private sector, there also will be a tendency to reach similar positive evidence in increasing the public servant

This is because public organisations often do not have an established culture of management by goal settings and result orientation (Dente, 2003). According to this opinion, the government might face this as challenges both on employees and managers when the pay-for-performance is used as a tool for significant reform in order to change the culture management. But this objection could be countered by training well in developing the viable pay-for-performance practices, and focusing on set the objectives and evaluate the employees’ performance carefully. Because in the the introduction of this system will add much critical value from these attempts in public sector, it is also need a consistency and commitment for all its components to keep the result of cultural