It involves setting performance aims and expectations for the organization as a whole, for each business or operating unit within the organization, and for work groups and individual employees. This framework of performance management is now generally regarded as essential to the success of any system of performance planning and review (Richard 1997).

Many experiences have been documented in the HR literature describing the “gamesmanship" behavior of employees, particularly managers, who take shortcuts, emphasize short-term performance, “juggle" the numbers, and argue over allocations of operating costs and resources (Buzzell & Gale 1987).

Negative impacts on cooperation

For most jobs and operations, cooperation is required for success. Any reward program that essays to single-out and focus rewards on individuals or subgroups within the work flow often leads to difference of opinion and hard feelings (Buzzell & Gale 1987).

Lack of control over factors necessary for success

The lack of control over important work related factors lowers expectancy perceptions (Buzzell & Gale 1987).

Difficulty in measuring performance

Accuracy and validity of performance measurement effects Expectancy I (belief that effort leads to performance) and Expectancy II (belief that good performance leads to rewards). Organizations must ensure that performance measures are relevant and devoid of bias and favoritism (Buzzell & Gale 1987).

Psychological contract

Extrinsic rewards using the “Fixed Ratio" schedule may lead to expectations that rewards will always be forthcoming. Consistency in performance and rewards may lead to dissatisfaction in situations where performance declines. Some experts recommend employing short term individual and group pay incentives only in surroundings where performance trends indicate predictable and consistent growth (Buzzell & Gale 1987).

Credibility gap

For performance based pay to motivate, employees must trust management to set realistic targets and to provide equitable rewards when those targets are met (Buzzell & Gale 1987).

Job dissatisfaction and stress

Job dissatisfaction and stress associated with performance based pay arises from a number of sources, including (Buzzell & Gale 1987):

•Perceived lack of control over work related factors.

•Poor training for the job.

•Break-downs in communication and coordination among individuals and departments.

•Pressure to attain inflexible performance goals.

•Dissatisfaction with the size of the rewards

Reduction in intrinsic motivation

Research in psychology and management science has documented the importance of intrinsic motivation. Employees seek (a) variety, (b) challenge, (c) interest, (d) autonomy, and (e) a sense of personal achievement from their work. Short-term pay-for-performance programs, which emphasize extrinsic motivation, may dilute the sense of employee “ownership" and empowerment, and undermine intrinsic motivational effects (Buzzell & Gale 1987).