Performance-based HRM system needs reviewingSince the 1997 Asian financial crisis, a growing number of Korean companies have replaced seniority-based salary systems with performance-based pay.
In 1996, only 1.6 percent of them based salaries on performance. Last year, the figure went up to 52.5 percent. In addition, more than 30 percent of them paid incentives based on team performance.
The general consensus is that the performance-based Human Resource Management rationalized domestic firms’ operating costs and helped restore financial health after the crisis. But critics say the system has undermined long-term growth potential and innovation.
A decade on, it is a good time to review the performance-based HRM system and make adjustments that can help domestic firms in the shifting business environment.
The Performance-based HRM system in Korea emphasizes efficiency and control over employees’ autonomy; profit and results over process; and differential pecuniary compensation based on performance. These emphases show that Korean companies have moved from offering stable employment and nurturing talent to pursuing flexible workforce management based on performance and results.
The seniority-based HRM system hinders extra compensation for top performers, and performance-based pay helps secure and retain high flyers. However, negative side effects have emerged.
In a survey by Samsung Economic Research Institute, 74.3 percent of the CEOs and other senior executives asked said the biggest downside is an obsession with short-term achievement plus weakened cooperation between teams and departments and employees’ distrust of evaluation methods.
In the United States and Japan, companies are striving to make performance-based systems work more efficiently while minimizing side effects.
For example, U.S. companies focus on breaking from traditional, duty-based systems in which job description and pay are defined. Instead, they factor in capabilities that enhance flexibility and groom new talent.
In Japan, critics say performance-based pay amounts to copying a Western model without considering Japan’s own institutional and cultural characteristics. They complain that stable employment relations based on trust are undermined and long-term nurturing of human resources is neglected.
Perhaps in response to such criticism, more and more Japanese companies now choose a homegrown model, a so-called New Japanese-Type Performance-based HRM, that combines long-term employment tradition and the advantages of a performance-based system.
Korean companies also need to maintain the basic principles of a performance-based system. But they should try to minimize negative side effects and anticipate changes in the business environment.
To this end, employees first need to be encouraged to be innovative. Job security may lead to laziness, but insecurity can undermine loyalty and diligence. The framework of a performance-based system should stimulate healthy tension and still provide job stability.
Second, work evaluation should be process-oriented. Top executives should be assessed in terms of innovation, long-term nurturing of talent and improvement of corporate image.
Third, companies should avoid “one-size-fits-all” rewards. Financial incentives enhance motivation, but overreliance does not always lead to job satisfaction. Encouragement, recognition and promotion are also very effective ways to reward productive employees. In fact, the more creative and innovative a company is, the more it utilizes both financial and non-financial reward schemes.
Finally, the performance-based HRM system should take the firm’s own strategy. For instance, compensation which emphasizes process and capability is effective for technology-led companies where each individual’s creativity is a source of performance creation.
But results-oriented and team-based compensation is more effective for manufacturing companies.
In addition, a customized HRM system should be results-centered for executives whose performance level stands out, and process and capability-centered for employees who adapt well to their company.
The writer is a research fellow at the Human Resources Department, Samsung Economic Research Institute (www.seriworld.org). Inquiries should be sent to email@example.com.