THE IMPACT OF PERFORMANCE BASED PAY ON SUSTAINABLE COMPETITIVE ADVANTAGE OF COMMERCIAL BANKS

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Introduction

1.1 Background Of The Study

Linking pay to performance and the need to achieve a sustainable competitive advantage is something an organisation seeks to achieve. It is a common practise to associate the introduction of performance-based pay with aim of improving incentives and increasing motivation among employee in an organisation (Brown and Heywood, 2002).

In Nigeria, employees have been awarded financially or the basis of the qualification requirement for a particular task or job as well the perceived value of what the job evaluation and analysis provide (Mensah Francis, 2011:270) .workers are rewarded based on the level of education or qualification or education obtained rather than the level of performance attained.

In recent years, however there has been a discern(awareness) trend toward linking pay to employee performance particularly in the private sectors and schools in an attempt to achieve the organisational objective (Mullio 2005) .This trend had pave way for using performance as a basis for remunerating employees. Performance refers to the result of a task. It means the actual outcome that employee are able to achieve based on the effort that they exerted on a task been assigned to them.

Hannay and Shelton (2008:318-319) were of the opinion that any organisation who have a philosophy of paying their organisation employee for performance must evaluate and measured the performance of its employee accurately. Pay policy based on performance have been discover to attract workers of high quality into the organisation and induce them toward providing greater effort.

The term “Pay for Performance (pfp)” or “Performance Based Pay System (pbps)” refers to a form of accountability for result or outcome achieved by employees (Prasad, 2007:209-214). Although, the performance based pay system (PBPS) and payment for result are synonymous concept. Margaret and Caroline (2008:321) however draw a thin line between the two concept; in that performance based pay apply to both quantity of product produced and where there is no end product to measure e.g. service rendered by bank staff.

Nevertheless, the concept of PBPS had been bewildered with some inadequacies and these have reduced the impact of this type of pay policy on organisational goal, performance, profitability and competitive advantage. Some of the shortcoming and criticism against performance based pay system are that; it suffers from measurement problem i.e. how to determine the performance achieve by the employee, it create unfair and unhealthy rivalry or competition among employees within the organisation culminating into a negative effect on employee motivation and unintended consequence (Lavy, 2007). It is also argue that performance based pay can contribute into ineffectiveness if workers or staff refused or disagree with the employer on the performance standard and if teamwork is the organisational goal (Kathryn, 2012). In addition to above criticism of performance based pay system as opined by aforementioned Scholars i.e. Lavy, (2007) and Kathryn (2012). Organisation may lack the financial resources to fund the performance based pay system adequately, during a time of economic recession and this will affect its ability to compete effectively in terms of human resources capability available to it, which may hinder its ability to achieve competitive advantage that is sustainable.

Furthermore, apart from performance based pay system, organisation also use other form of pay policy such as Job based pay system, Membership based pay, Individual pay system, Elitism(executive) pay system, Egalitarianism (equal) pay, Below market compensation and Above market compensation.

According to Barney (1991) to achieve sustainable competitive advantage, firm must developed its human resources through an effective human resources practise such as training and development, recruitment, selection, and of course reward system (direct pay or indirect pay). It is proposed that human resources are strategic asset capable of providing or contributing to a firm competitive advantage (De Saa-Perez and Garcia- Falcon, 2002; Khatri, 2000). An effective HR practice such as performance-based pay will tend to help firm achieve a sustainable competitive advantage. This is because productivity, which is a component of competitive advantage, is likely to increase both in the short and in the long run as motivated workers will work harder and staff commitment and effort will generate a further gain in productivity (Lavy, 2007). As argue by Akinyemi (2007:9), competitive advantage is achieve not by a mere strategy formulation only but by the implementation of the strategy. According to him, the key to implementation of strategy is the human resources within the organisation. A competitive advantage occurs when a firm makes economic rent i.e. when a firm earning exceed its cost incurred.

Similarly, the concept of sustainable competitive advantage can be differentiated from the basic competitive advantage. According to the Barney (1991) and Elliot (2003), for a firm to have the potential of sustained competitive based on the resource based view, it must four basic attributes of valuable resources, rare resources, imperfectly imitable resources and non-substitutable resources. Sustainable competitive advantage refers to those firms’ resources, core competences and capability that cannot be easily imitated (Barney 2001:23). It deals with formulating and implementation of a unique value creating strategy not simultaneously but with any current or potential competitors action which cannot be duplicated easily in terms of its benefit and absence of threatening market development (Hoffman 2000:3-11).

Consequently, the basic reason for performance based pay system is to enhance performance of employee and hence help achieve a sustainable competitive advantage (Mikovich, and Newman, 2007).

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1.2 Statement Of The Problem

Achieving competitive advantage that is sustained for a longer time is what firm especially commercial bank in Nigeria intends to attain or achieve. However, for a business to achieve sustainable competitive advantage, it human resources i.e. The employee must be motivated toward achieving high level of performance (Wright et al, 1994). Motivation is important because it helps organisation to achieve its objective (Kleiman, 2000).

Motivating employee however is not an easy task to manager. This is because different thing motivate different people and that determining what motivate employee varies from one individual to another. Managers had to make decision on what means of motivation to apply on the employee, whether he/she should motivate employee based on the job (Job based pay) or to introduce an incentive plan (Performance based pay system).

Another problem within the organisation is how determine the appropriate pay for a level of performance that will motivate the employee. This is because there is a divergent view concerning what is a fair and equitable pay between employer and employee and this had hamper against the ability of the firm to motivate its employee effectively and hence achieve competitive advantage. Performance based pay system is also known to breed an unfair or unhealthy competition among employee with a negative effect on the motivation. How then does it help achieve sustainable advantage in term of core competence, profitability and service delivery quality when there is an unhealthy competition? Are there other pay policies that can better help in achieving sustainable competitive advantage than paying for performance?

In addition, paying employee more for a certain level of performance achieve have been observed to bring about a focus on individual goal achievement for higher financial reward rather than the collective goals and objective of the organisation. This had put a doubt on the effectiveness of performance-based pay system as a means of achieving sustainable competitive advantage.

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1.3 Research Questions

The following specific questions are related to this research work and will serve as a guide;

1. What pay policy has the most significant impact on employee motivation?
2. Does performance based pay system lead to an unfair competition among staffs of commercial bank.
3. Are employees of commercial bank motivated by performance-based pay system than a job based pay system?
4. How can the appropriate pay for a certain level of performance be determined?
5. Does pay based on performance contribute to increase productivity?
6. Which pay policy is preferred by staff of commercial bank and why?
7. What are the types of performance based pay system used in commercial banks?

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1.4 Objective Of The Study

The general objective of this study is to determine the impact of performance base pay system on sustainable competitive advantage of commercial bank.

The basic specific objectives are highlighted below as follow;

1. To determine the type of pay policy that has the most significant impact on motivation of employee.
2. To identify various type of performance based pay system that is been applied by commercial bank in Nigeria.
3. To determine whether performance based pay system contribute significantly to improve productivity.
4. To determine which pay policy is preferred in commercial bank and why it is been prefer.
5. To inquire whether pay based on performance bring about an unfair competition between employees of commercial bank.
6. To determine whether commercial bank staffs are motivate by performance based pay more than pay based on job.

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1.5 Statement Of Hypothesis

Eguizoikpe (2008:54) refers to hypothesis as a tentative statement or proposition, which is suggests as a solution to a problem. For the purpose of this research work the following hypothesis are formulated and will be analyzed.

Hypothesis One

• Ho: Performance based pay system does not significantly contribute to the achievement of a sustainable competitive advantage.
• Ha: Performance based pay system does significantly contribute to the achievement of a sustainable competitive advantage.

Hypothesis Two

• Ho: Performance Based pay does not significantly lead to a superior customer service delivery.
• Ha: Performance Based pay significantly lead to a superior customer service delivery.

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1.6 Significance Of The Study

This study of innumerable important to the commercial bank in Nigeria, as it will help them to compete and outwit one another based on their human resources policies and practice.

The research will also go a long way in serving as a viable reference for banks manager; especially the personnel manager and the stakeholder in the banking sector who will need to make decision in terms of its human resource practice and pay policy. It will help them to see the usefulness of performance base pay system and to apply it into their organization reward system to achieve sustainable competitive advantages.

The research will no doubt be of importance to employee, labour union and stakeholder as well as the country as a whole as it will help in shaping the direction of labour related policies in terms of performance based pay system, contribute to the increase in total output of the country, and ensure a better living standard for the employee.

As a purely academic research, the study will also go a long way in adding to the wealth of existing literature on the subject matter and thus contribute to existing body of knowledge. In addition, it would also serve as basis for further research into other possible areas in human resource practise and pay policy that can help organization in achieving sustainable competitive advantages.

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1.7 Scope Of The Study

The scope or Gamut of this study will be limited strictly to the impact of performance based pay system on sustainable competitive advantage; all other factors that can affect the potential achievement of sustainable advantage (competitive) will be considered. This research work will also discuss various types of performance based pay system.

The research will cover some selected commercial Banks in Jos metropolis, both old and new ones and will consist of banks that do not merger or acquire other banks during and after the restructuring and re-organisation of the banking sector. The banks selected are union bank, first bank and united bank for Africa (for old generation banks) and Diamond bank, Guranty trust bank and Skye bank (for new generation bank).

This study will also cover a span of 5 years from 2010-2015 in order for data collected to show the true position of fact and in line with current changing business environment.

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1.8 Limitation Of The Study

The research work should have cover the entire commercial bank in Nigeria, however it is constraint by budget and time which has make it difficult to cover the entire commercial bank in Nigeria.

Some of the respondents were also not willing to disclose or volunteer data when filing the questionnaire due to the sensitive nature and confidentiality normally attached to most organization.

The few problems so encounter do not in any way nullify the validity and reliability of the conclusion of this research work or affect the quality of the work.