Problems and Usage of PFP for informal Workers in China

Bachelor Thesis, 2011

49 Pages, Grade: B


Table of Contents


1.1 outline of Performance for Pay
1.2 Informal workers in china
1.3 Objectives of the Study
1.4 Conclusion

2.1 Introductions
2.2 Theoretical Literature Review
2.3 Empirical literature review
2.3.1 Pay for Performance in China
2.3.2 Merits and Demerits of PFP
2.3.3 Problems in performance for Pay schemes:
2.4 Statement of the Problem
2.5 Conclusion of chapter

3.1 Introduction
3.2 Research design
3.3 Target Population
3.4 Sample and Sampling Techniques
3.5 Data Collection and instruments
3.5.1 Validity
3.5.2 Reliability
3.6 Data Processing and Analysis

4.1 Demographic Characterization of Respondents
4.1.1 Distribution by Gender
4.1.2 Distribution by Age
4.2 level of education
4.3 The length of time the respondent had been working in the informal sector
4.4 Category of informal workers
4.5 Presence of performance form pay scheme at respondents work place
4.6 Categories of performance for pay scheme
4.7 Docket under which decisions on pay for performance are formulated
4.8 steps followed in formulation of performance for pay schemes
4.9 Evaluation of employee’s performance at respondent’s work place
4.10 Factors influence pay for performance
4.11 Importance of pay for performance schemes
4.13 The possible drawbacks of pay for performance
4.14 Management commitment to pay for performance.

5.1 Introduction
5.2 Summary of the Findings
5.3 Conclusion
5.4 Recommendations



Pay for performance, is a motivational aspect in human resource management in that the hired workers receive increased benefits for their work output. The informal sector in China forms the small percentage of the economy that does not pay tax and no monitoring done by government and does not form part of the gross national product. Employees in the informal sector have less or low income and lack accessibility to primary and basic protections and services. This call to question, the effectiveness of payment systems they are subjected to in supporting their basic and social needs. The study, therefore, sought to identify and analyze and see possible solutions to the short comings involved in performance for pay for informal employees in China.

The study is descriptive survey on a target population of Chinese workers in the informal sector. 250 respondents were selected and the technique used was random sampling. Workers were served with questionnaires as the main research instrument. The data was analyzed using descriptive statistics such as absolute and relative frequencies, mean and standard deviation. Presentations were made in prose, tables and figures. The study found that pay for performance were not present at the place of work and where they were present, the common means of PFP were payment by results and profit related pay. While the study wound the benefits of PFP to be improvement of individual performance, increase in productivity of the firm and equitable profit, the demerits were de-motivation of workers of lower-ability, pay for performance undermine moral and encouragement of short term focus


This section in general presents the overview of pay for performance in the informal sector, goals that are to be achieved by the study and its conclusion.

1.1 outline of Performance for Pay

Pay for performance, is a motivational aspect in human resource management in that the hired workers receive increased benefits for their work output if the team they belong to, department or group reaches certain set targets by the organization they are affiliated with. According to Conyon and Murphy, (2000) and Bebchuk and Fried, (2006), pay depends on performance of an employee in relation to the threshold set as measurement.

Pay for performance has different categories and they include the following : Competence based payment rewards and training links directly with competency platforms, measured upon on the employee demonstrating specified qualifications like: identifying, analyzing and solving problems, taking responsibility and making critical decisions concerning job description, leadership qualities traits that are relevant to the job, customer satisfaction i.e. good interpersonal skills , dealing with conflicting views and means of resolving them or having certain qualifications. Profits resulting to payments of bonuses or being given shares according to organization performance in their set financial years; this is common and well embraced in the private sector, in which share options as a means of reward are offered to senior managers or top performers based upon organization criteria. Profit related pay has lost its value and appreciation from the time government stepped in and did away with tax exemption on Performance for Pay schemes.

The main criteria followed in PFP are: setting goals, results analysis and connecting the streams of accomplishments to rewards which is in form of payments. The objective and main purpose of pay for performance is to benchmark clear goals and materialize employees with the firm’s reasons for existence; to inspire workers through extending recognition and rewards to attainment of the set target rather than the duration taken by the employees in the firm; to applaud accomplishment thus note under performance in the employees; enhancing working together and integrity; to contribute in totality in increase of production or quality services; to come up with flexible and reliable pay systems, handling efficiently recruitment and retention technicalities in situations for certain employers, to enhance and uplift managers powers and cripple trade union capability of speaking out or expressing sentiments put forward by employees against the organization they work for or employer. Performance pay schemes chain together with measure of person, team or organizational performance (Dowling, G. and Richardson, R, 1997). There are different kinds of criteria used; otherwise methods assume that assurance of higher pay provides a motivation to greater productivity of the workforce. There are varieties of performance related with pay, which can be applied singly or together majorly depending on the culture of the specified organization. Employers may also decide to shift periodically change. Most common: Piece per work (specific price is paid for any out unit, it is an old kind of performance pay). Pay for results attained, giving out bonuses and values of output for each person or groups, mostly from work related time units; this indulges a wide stretch of the bonus methods that have been set and predetermined. Company innovations: Payments of bonuses are scaled upon general values of the organization at large. Advantages pay is rewarding of bonuses mostly from complete assessment of workers contribution to the organization growth and performance. Pay for performance bonus earnings are derived on an measurement of employees performance against from a focal objective, in most occasions interconnected with performance standards systems.

1.2 Informal workers in china

The informal sector in China forms the small percentage of the economy that does not pay tax and no monitoring done by government and does not form part of the gross national product. Employees in the informal sector have less or low income and lack accessibility to primary and basic protections and services (Beneria, Lourdes and Maria S. Floro. 2006). Typical example of informal sector in China is catering and foods business which is popular, well established and has a good market. The number of informal workers in the catering industry is increasing exponentially and at a rate that cannot be compared to other industries in the same economy i.e. informal economy. The earnings and rewards on this for these workers are unreasonable and raise a lot of concern when it comes to survival of the employees and their families. It harbors the full potential of performance and it needs radical improvements. Informal workers or workforce can be categorized into groups according to the different natures of work that they do:

(1) Part-time workers: Part-time workers do complete work description in context and use the spare time to do other things or indulge in commitments in their personal lives. Some are caught up doing two jobs at a time or even 3 so that they can make ends meet
(2) Temporary employees: Temporary employees are those that are hired when an organization is into the business peak; they recruit some extra staff employees. The recruited work force gives a helping hand to the permanent staff or does some of the jobs that require deadlines to be met. Short-term temporary staffs are engaged in not so much. In general it can just last days, a week, or a few months this is of course depending on the stipulations of the contract or verbal agreement depending on the way the concerned organization does it
(3) Leasing- lease employees. Smaller organizations expand their workforce comfortably and with ease without the technical side of the hiring process which is viewed as being cumbersome and tedious, but not the human resource side since this is concerned with the nature and the way the employees interact with the organization. Business owners most of the time are caught in the matrix of payroll accounting, record storage and noting and implementing the benefits that are to be enjoyed by newly hired employees. One common remedy to this problem is the culture of employee leasing. No hustle is involved just connecting with a firm that has such people in their database and calling them in for interviews then hiring.

1.3 Objectives of the Study

General objective

To identify and analyze and see possible solutions to the short comings involved in performance for pay for informal employees in China

Specific Objective

I. To fish out performance for pay schemes in active use in the informal work force in China. To see how they have been implemented and the results that come out.
II. To spell out the problems that are come across or experienced in the implementation of performance for pay for informal employees in china

1.4 Conclusion

The chapter has expressed an overview of Pay for Performance. The chapter has again tabled in details general objectives and specific objectives for the research.


2.1 Introductions

This section unpacks literature review about Performance for Pay. The chapter is structured into the following sections: Concepts applied and contents seen when it comes to Performance for Pay, the overview Performance for Pay (definition, background information and development), advantages, strengths and challenges of PFP, noteworthy issues in PFP, measurement of PFP and conclusion of this chapter.

2.2 Theoretical Literature Review

The three main theories allied with PFP are agency, the forecast expectancy, theory based on set goals. These hypotheses connect to the incentive present in PFP. They focus categorically on the way management can control employees’ concerning their lines of preference between various levels of consideration and effort in their work against a standard of performance measure measures.

Agency Theory

It has taken root in the literature abroad to effect the hypothesis of agency as a accelerating meteorite in the analysis of corporate payment(Gomez- Mejia, Dykes and the famous Dykes 2005) of payment are fixed by the managers concerned with daily running of different firms; on the contrary there is no higher level of business management than the executive. To a certain extent, with top management pay, those who own the organization are thought to find configuration on their personal motivation with top mangers by gratifying them with correspondence that connect their rewards to the share price performance (Goetzmann & Köll, 2005) Recent Chinese economic changes and advancement have started to use some of the basic principles of “stock market capitalism” (Dore, 2000). Even with the absence of long-term incentives, Firth et al. (2006) identified the pay of their proxy for CEO’s in Chinese listed firms is coherently but less associated with organization performance for the period 1998–2000, but their allergy measure for companies with lower state of ownership becomes positive and of great importance. Kato and Long (2006) extend this analysis to 2002, and they acquired a higher and notably positive outcome for their by and large sample. The motivational result from pay to performance requires to be taken into consideration. Until recent times, all executive appointments in the Chinese companies were done by the state. The state had full mandate on that but it consulted various experts in the different fields that needed appointments to be made. Their payment was premeditated in terms of their level of seniority and civil service criteria that expressed equality or close- At the same time, however, our estimate of a pay for performance elasticity of 0.25 for China 2000–2003 is almost identical to same findings for the USA (Hall & Liebman, 1998) and the UK Benito & Conyon, 1999): At the same time, Chinese policymakers and regulation authority can experience satisfaction that the taking of effect of Chinese economic reforms has yielded performance–pay sensitivities (Trevor et al 2008)

2.3 Empirical literature review

2.3.1 Pay for Performance in China

Workers are motivated to accomplish objectives, and when progress is achieved towards the desired goals that are important to them personally they experience job satisfaction and their commitment to the company increases to higher level thus growth in the organization (Maier & Brunstein, 2001). On the other hand, executive pay has in its similarities with financial earnings for all the workers from several of the ancient motivators associated with work structure or high-performance work culture such as job independence or diversity in a given specific field are among many that are experienced in executive opportunities (Wood, 1999). In these situations it has become the model and the foundation for implementation of agency theory and the correct lens for the psychoanalysis of executive pay (Gomez-Mejia, Wiseman, & Dykes, 2005).

While China is embracing significantly several capitalist practices that it did not have earlier on it still keeps some leftovers from the closet of socialism and this has a notable effect on the way executives are rewarded. To be precise and clear, the Chinese government is trying to maintain social accord when it comes to equality and it acknowledges the fact that differences in pay between managers and workers should be dismal or stay at minimal levels. The occurrence in most occasions is that the pay differences between top managers and their workers are certainly related to the organizational performance. Thus it reflects that any swaying contrary to manager-worker earnings custom has to be justified and solidified by extremely outstanding organization performance in a given period of time. In dissimilarity, the perquisites that most managers get are not related to performance in any way what so ever. In contrast, the strong economic development was inclined to bad business performance in reference to accounting numbers and stock market returns (Chen et al., 2006). A variety of factors have been researched and identified that put restrain on organization performances and these are such as the state’s continued majority ownership interest in the listed firms and the absence of monitoring of incentives for top management.

A good pay for performance interaction applies to organizations regardless the major stockholder in the specified company. However, in less developed provinces the positive pay for performance interaction disappears for organizations that are controlled by the state owned and controlled in any other way thus listed. The state of China does recognize the need and importance to give perspective to management on how things are to be run and done to adhere to the set rules and regulations. So was the case in the early 1980s when the government put forward a system of contract responsibility and goal achievement where rewards to mangers came in handy if the performance beat the targets set in the contract (Chen et al., 2006a). Further confirmation of the application on performance related pay for the managers of China were given by Mengistae and Xu (2004).

Low pay differences can be explained by depravation and distributive justice theories which say lower level managers and employees feel agitated at the large earnings of their top managers. This brings the mentality that the work force does a lot of work more than the top management and the management takes the credit for it. This leads to situations of inequality and may result to strikes or go slows (Henderson and Fredrickson, 2001) thus cooperation fades out in the organization. Pay differences in China, are continually rising acutely in recent years but are nowhere close to the levels adhered to by U.S. organizations. One basis for this is the concern for social integration and harmony by the state. This is applicable given China’s current history and its continual use of socialist principles that the state thinks will foster unity and be for the good of the government and the people at large. Assets Supervision and Administration Commission (SASAC), is a government unit that has been set aside that administers stockholdings in listed firms owned by the state. It recently came up with plans and way by which they can probe the salary increases of state controlled listed firms by their senior executives of (SCMP, 2007). In view of the significance of pay disparities in China, they scrutinize the variation in the pay of senior management in a listed organization relative to the average employee pay as per the duration stated for pay and continue to examine if pay differences can be explained by a firm’s performance. In all probability pay disparities are more acceptable for workers and for society at large if an organization performance is exemplary and has reached standards that are way above compared to other firms in the industry doing the same business.

Workers of domestic firms record notably higher levels of performance review satisfaction and justice perception compared to employees of firms abroad. This can be attributed to the fact that those firms that are at home are subjected to some of the communist laws that have been left behind while those abroad it does not apply which might underscore why PFP was more significantly implemented in domestic firms in China (Jing Du Jin Nam Choi 2010) China’s Ministry of Labor did a study which demonstrated that Performance per Pay was confidently associated with self satisfaction at the individual level. In contrast, Performance per Pay was disapprovingly related to employees’ organizational commitment at the organization level. In 1985, China launched market leaning wage reform together with other economic reforms that are applicable organization that were controlled by the state I that general managers worked as bureaucrats and payment was according to the civil service pay scale. Ministry of Labor announced that CEO payment should be linked to firm economic performance in 1985 (the Ministry of Labor, 2000)

2.3.2 Merits and Demerits of PFP.

According to McCausland et al (2005), highly paid workers satisfactions with the employment and with earnings are both higher when under the umbrella of performance pay. The flip side of the coin, for lower paid workers satisfaction is low under performance pay. McCausland and his fellow co-authors advised that the difference between the two sets of workers may result the latter workers are likely to see performance pay as a form of monitoring or control. This may result to negative connotation of the employees towards the organization they work for.

Heywood and Wei (2006) used the National Longitudinal Study of Youth to scrutinize the thresholds of the two: profit sharing and individual performance pay in the United States. Studies show that both profit sharing and individual performance pay are linked with greater job satisfaction and greater satisfaction with reward in terms of pay. Profit sharing is also connected with greater satisfaction to the supervisor of the employees. Amazingly, within the dimensions of individual performance suggestion are those pieces rates may result in reduction of overall satisfaction even as though it increases satisfaction with pay. Neither the large measure of individual outcome pay nor profit sharing were correlated with satisfaction with co-workers, although studies of German workers (Heywood et al.2005a,b) conclude that profit sharing tends to confidently control satisfaction with both supervisors and with co-workers. While these studies control for earnings, they do not try to correct for selection. Lazear (2000) implied that the dynamics of improvement in productivity is associated with performance-related pay. The more productive workers are the more the pay they get from the organization that they work for.


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Problems and Usage of PFP for informal Workers in China
University of Cambridge
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Performance for Pay
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Dr Kelly Clarkson (Author), 2011, Problems and Usage of PFP for informal Workers in China, Munich, GRIN Verlag,


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