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You are hired by the Fair Work Commission Australia as a consultant to examine issues relating to pay and performance. Your task is to provide a report detailing findings from the economic literature on the effectiveness of pay for performance initiatives in generating improved outputs (or business outcomes), how performance should be evaluated and key ideas on establishing incentive pay and related evaluation frameworks for the organisation.
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The relationship between pay and performance is quite a tricky one surrounded by various economic aspects. Analyzing the depths of this link is crucial to employers all across the world in order to extract the best from all workers.
The most fundamental theory that affects this relationship is that of consumer choice which deals with the tradeoff between labour and leisure. There are other factors which affect the tradeoff between earning an income and enjoying leisure and thus worker performance, like unemployment benefits, a hike in wage rate, efficiency wages or the backward bending labour supply curve.
This report will deal with the economic theories that support or argue against the fact that higher pay will result in better performance by the employees and lead to higher output or outcomes. It will also link these theories to real-world situations where they can be applied. The paper will study the effectiveness of pay for performance initiatives in generating improved outputs (or business outcomes), how performance should be evaluated and key ideas on establishing incentive pay and related evaluation frameworks for the organization.
This theory can be shown with the help of indifference curves which would also explain the labour supply curve. The total amount of time in a day available to any person is 24 hours and everyone has to allocate their time of work and leisure within this constraint. An individual derives satisfaction from leisure directly through various means like sleeping, reading, playing, vacationing, and so on. On the other hand, satisfaction is also derived from working, indirectly. Working enables a person to earn an income which is then spent on goods and services which provide satisfaction to the person. Then arises a situation where enjoying an extra hour of free time comes with an opportunity cost of foregoing the money that could've been earned by working.