Case Study: Side Effects in Pay for Performance in China

Introduction

Pay for performance system change

In some Chinese companies, the pay for performance system is shown as following. In most of the cases, the total project value is equal to the contract value. Project managers distribute the total project value to different functional groups based on contribution to the project. Then the functional leader distributes the group value to individual engineers.

Figure Initial version of pay-for-performance

Challenges

Value distribution dilemma to group or individual

In the pay-for-performance system, the total value is easy to measure since it is linked to contract. Not every technical leader holds the same opinion on value distribution proportion.  Some functional leaders distributed more value to the team member to show their care to the team, and gain more trust and loyalty. Some functional leaders value more on the high-performance engineer.

Overwhelming competition

The pay-for-performance system introduced more pressure to contribute more value. As there is a common belief in China that the more time employees spend on work, the more value they will contribute. Overtime work is regarded as a virtue rather than a problem.

Analysis

Different attitude toward individual or group contribution

Those dilemma in value distribution phenomena shows that the collective and individual culture preference respectively. It is hard for project manager to determine the true value, since technical leader holds more authority in his/her technical domain.  

The managers’ motivations to support the low-performance employees

There are motivations for managers to improve the low-performance employees.

The pay-for performance encourages the high-performance individuals and punish the low-performance employees. It is very frustrated for some engineers to be evaluated as incompetence. In a collective culture, to be evaluated as low performance has not only financial effect but also considered as shame to personal.

Besides, the performance is not only determined by the motivation and ability of the engineer. For example, when some projects may be canceled base on market analysis, the engineer may be dismissed and have a low performance for this month. It seems not fair that the employees’ performance is affected by event out of their control.

Solution

Functional manager participates in functional value distribution

To solve the value distribution dilemma, the project managers and functional managers participated in the value distribution system. The functional managers take part in to the value distribution process from functional leader in their own functional group. In the functional group distribution process, the functional managers could help balance the individual and group contribution based on their professional judgement.

Figure Modified Pay-for-performance

Support for “low-performance” employees

The project managers and the functional managers took to avoid that situation by carefully human resource location and adjustment. For instance, the engineering R&D division’s human resource demand from different projects was estimated by PMO. The project task was assigned to avoid the engineer’s workload vacancy.  There are also trainings provided to the low performance engineers to better contribute to projects.

Discussion

Overemphasis on individual performance and rewards can lead to unhealthy competition among employees, damaging teamwork and collaboration. The Solution is to balance individual vs. team performance. Involve teams in setting performance goals that align with the organization's objectives. This fosters a sense of ownership and commitment to working together to achieve common outcomes.

Being supportive to low performance engineer is essential in collective national culture. The “father” needs to take care of the weak children. Even with personal good professional intension and capability, the employees’ performance can still be affected by rapid changing environment. It would be logical and beneficial to provide support and training to employees.

The trap for pay-for-performance system is to link performance to working hours. The belief may come from the history of Chinese manufacturing experience. Over-time work may hurt the productivity of innovation and quality. There are ethic problems that overtime work may adversely affect employee’s health. It is not a general disadvantage for pay-for-performance in every nation, but a risk in China based on common belief in traditional management.

The case navigates the unintended consequences of a shift to a pay-for-performance system. Here, the clash between collective culture and individual rewards is evident. The solutions presented emphasize the need for a balanced approach, recognizing the importance of both individual and collective contributions within a performance-driven framework.