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Viet Name banking sector was emerging rapidly after had Joined WTFO at the end of 2006 and performance contingent compensation is a widely accepted means for rewarding managers, but there is no empirical test of its effectiveness in Viet Name banking sectors. Does managerial compensation to organizational performance lead to higher organizational performance? It appears to be a truism that if you want to motivate high performance, you will attach rewards to it.
Several prominent theories of organization behavior (Feint, 1976; Lealer, 1971, 1981) support this common sense view. The study of John L. Pearce, et al (1985) applied a time series procedure to organizational performance data in the Social Security Administration to indicate that the merit pay program had no effect on organizational performance in social organizations. Although, merit pay and bonuses for managers are common forms of compensation, there have been lacks of tests of their effectiveness, especially In banking sectors (Dyer & Schwab, 1982).
In this study, the author will apply a Box and Jenkins (1976) time series procedure, which was used by Perry & Porter (1981) and Pearce, et al (1985), to determine whether or not implementing a merit pay plan that tied to managers salaries to organizational performance indicators resulted in improved organizational performance in Viet Name’s banking sector. The results of the study will contribute to the improvement of conceptualization of human resource management and help human resource managers in Viet Name banking sector planning compensation policy for managers more effectively.
Many theorists have discussed the motivational aspects of pay. Poppas and Dinette (1966) reviewed several prominent psychological theories and discussed their implications for organizational compensation, but their study did not discuss about performance merit pay. Gallerias (1963) emphasized the symbolic role of money, but he did not prove about how to compensation should be applied to increase performance. Herbert, et al (1959) made the excited argument that pay is a “hygiene factor”, not a motivator factor of performance.
However, King’s review of research 1970) found out not support for Herbert et al ‘s two factor theory. Dam’s equity theory (1965) proposed that individuals who perceive themselves to be underpaid or overpaid may alter their efforts to achieve a balance between performance and reward. But again, Dye & Schwab (1982) failed to support the performance predictions of equity theory. A Deterrent perspective was trotter Day Deck won contacted a series studies on the effects of externally mediated reward, such as pay, on laboratory subjects intrinsic motivation to engage in tasks.
Decide drew on this research to argue that intention payment plans should be avoided because they reduce intrinsic motivation, lead individuals to develop strategies that will enable them to get rewards with least effort, and can easily break down. These arguments are particularly relevant to managerial Jobs, since such Jobs are more likely than a routine Job to be intrinsically rewarding and are less likely to be subject to extensive surveillance. Decide suggested that salaries are not directly based on performance are less likely to reduce intrinsic motivation than are salaries that are performance contingent.
However, his study is not clear whether this substitution in task motivations will result in either increased or decreased task performance. Based on Broom’s (1964) expectancy theory, Lealer (1971, 1981) argued that pay can be a powerful performance incentive because it can be used to satisfy so many needs. However attractive money may not motivate performance unless it is contingent on performance and he presented some studies which showed that managerial pay is seldom contingent on performance.
Hair, Eggshell, and Gordon (1967) reported that managerial raises are often uncorrelated from one year to the ext, indicating that either managerial performance is quite different from one year to the next that raises are not based on performance but on other, possibly variable, criteria. Although, most scholars advocate performance contingent pay systems, they recognize that under certain conditions the implementation of such systems may be more dysfunctional than functional.
According to Lealer (1971, 1981), performance contingent pay should not be used when trust levels are low, performance cannot be validly and inclusively measured, and large pay rewards cannot be given to the best reformers. Lealer (1971) also acknowledged that managers may not control all of the factors that affect their unit’s performance, concluding that under such circumstances subjective Judgments by superiors and objective unit performance data should be combined into a managerial performance measure on which pay could be based.
Although there have been empirical studies of the effect of performance contingent pay for non-management employees (Dyer & Schwab, 1982; Feint, 1976), there have been lacks of tests of the effect of performance contingent pay for managers, specially in banking sector. Feint (1976), reporting a consulting firm’s 1971 survey, writes that firms with formal bonus plans (which, we infer, were based on a measure of firm performance) had an average pre-tax return on investment of 15. 8 percent, compared to 1 1. 7 percent for firms without a formal plan. The after tax profits were 8. Percent versus 5 percent. Unfortunately, Feint cannot tell anything about the sample or whether these Territories were sat t TLS Cyclical slanting. Redline (1981) used a randomly selected sample of 25 companies and measured a 5 ear performance ranking that combined earnings growth and returns on shareholder’s equity. He correlated each organization’s ranked performance with its base salary growth and with its salary plus bonus growth over 5 years. He found a correlation of 0. 16 between base salary increase and firm performance and a correlation of 0. 9 between salary plus bonus increase and performance, from which he concluded that there are a little indication of the existence of performance contingent pay plans in current top executive compensation. Loomis (1982), the one who plotted 1981 compensation (salaries, bonuses, profit haring, stock purchase contribution) against return on stockholder’s equity, found a less than perfect correspondence, and more over, highlighted extreme case of executives receiving relatively large increases in compensation during a period of deteriorating profitability for their firms.
Loomis argued that executive compensation in these prominent publicly held firms should be more directly tied to firm performance. Dye & Schwab (1982) noted that there is research evidence that incentive pay plans for non-management employees produce higher productivity. Pearce, et al (1985) analyzed the effect of the implementation of a performance contingent pay program for managers indicated that its implementation had no statistically significant, gradual, permanent effect on the general trend of organizational performance in 1 1 out of 12 tests.
But there were some limitations of this study that prevent drawing definitive conclusions about the effects of merit pay on organizational performance. One of them is that there were evidences that the implementation of this federal merit pay program was flawed in several ways. In Addition, he suggested that in his search, as in so many real world quasi-experimental designs, it was not possible to study a comparable control group, although looking at 4 years of monthly performance measures gave him some control over rival hypotheses.
Pearce study (1985) cannot definitively prove or refute the effectiveness of merit pay for managers. The review of theory and research related to managerial compensation to organizational performance shows that there is still lack of conclusive empirical support for this assumption. In order to find more evidences about the effect of reference contingent pay for managers, this study will attempt to assess the actual effects on organizational performance of the performance contingent pay for managers in Viet Name banking sector.