Monday, March 21, 2011

Performance pay

Performance Pay is all the rage right now.  Many cash strapped companies are moving away from standard annual pay raises and opting to pay quarterly bonuses based on performance. It will in effect save some of them millions of dollars, and allow them to keep and reward their best performing employees. So, How does it work?

Performance pay requires a measurement system to determine the performance of an individual or group.  This is  a difficult thing to do in certain conditions.  For instance, if a company makes widgets..and the number of widgets produced equals profit...then performance is tied to the number of widgets made.  However, if the employee's widget maker breaks..then the number of widgets they could have made is reduced.  How does a company account for this?

Since this can get complicated I will try to keep it as simple as possible...a company can create metrics that are used to measure an employee's projected production.  For instance, is an employee has created 100 widgets on everyday they worked during a quarter, and their widget maker was down for 2 days...they can just say that had the widget maker not broken they would have made 100 on those days as well.

The second element in Performance Pay is..well..the pay.  Every product made has a cost to manufacture..and a profit margin.  Both cost and profit are variable.  To keep this discussion simple we will say that the company only looks at profit for each widget when determining the Performance Pay.  The company allocates a certain percentage of profit for regular pay..and a certain percentage for Performance Pay.  Employee's that meet a certain level of production then qualify for the Performance Pay.

I know what you are thinking...Making an actual physical product is different than providing a service. Actually there is no difference.  Services are products...they are widgets...the only difference is how you measure the profit from the service...and how the employee generates the service.

Is Performance Pay fair?  No, it is not intended to be fair.  It is intended to get the most productivity out of your production line as you can.  Hard work is rewarded.  It is smart business.

Now for the difficult part of the discussion.  How does Performance Pay translate into government services?  At first it may appear that government is a special case....well it isn't.  Each year government begins with a finite amount of funds.  Those funds are based on Taxes and fees (which are also taxes) collected.  How those taxes and fees are collected is for another discussion.

Merit Pay is Performance Pay.  Our Educational system is a business. Each year a certain amount of funds are allocated to the education system.  Gauging the performance of that system is a complex and dynamic task.  Our educational system must remain dynamic to meet the ever changing world in which we live.  There is no difference between education and making widgets...it is just the widgets are alive....and they are an investment in the future.  The return on that investment is variable...but it is measurable.

What will Merit Pay cost?  It will cost what we budget to the effort.  What return can we as taxpayers expect from Merit Pay?  We can expect Teachers who are competent and dedicated to doing their absolute best in creating valuable widgets.

Government has been working on failed budgeting.  Money is often lost due to poor performance of those who have been trusted to use the money wisely.  I support any effort to bring cost in line with the return on investment.  It is long past time that our children received an education from the best teachers...not just those who have a teaching certificate.

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