Performance related pay

Performance Related Pay

The aim of this essay is to identify if performance related pay (PRP) actually work. In this paper analysis of PRP will be discussed. This is going to be accomplished by looking at some researches that was conducted by different authors. An introduction of performance related pay by Inland Revenue will be discussed, whether it really helped the management to accomplish their goals or not.

In early days 1990s employer from both the private and the public sectors put a greater emphasis on paying for performance and attempting to incentivise remuneration in order to improve individual and organisational performance based culture. According to Armstrong the schemes base pay on an assessment of individual’s job performance. Although such schemes are not identical, they provide individual with financial rewards in the form of increase to basic pay or cash bonuses which are linked to the assessment of performance, usually in relations to agreed objectives. He suggested that pay is linked to performance measured by a number of specific objectives (for example sales targets or customer satisfaction). This reflects a move towards rewarding output rather than input, using qualitative rather than quantitative judgement (Fowler 1998).

Performance related pay turn out to be extensively used in the public sector (for example, local government, the NHS and teachers), for which a government of both complexions have supported the idea. There are number of benefits of performance related pay that was identified by Armstrong (1999). He noted that performance related pay can be used to motivate individuals and consequently develop them and the organisational performance. It can persuade managers to examine the progression of objectives settings as part of their advance to supervising the department or branch. It helps the organisation to attract and retain people through financial rewards and competitive pay and reduces ‘golden handcuff’ effects or poor performer staying with an employer and also meets a basic human need to be rewarded for achievement.

Marchington and Wilkinson stated that, it is hard to find ultimate proof to determine the success of performance related pay; even though it has been broadly supported, and practitioners in particular give the impression to retain huge loyalty in its qualities. In recent years there has been an additional vigilant assessment of the ideas behind performance related pay. They are many studies that suggest that performance related pay can strengthen and contribute to the organisational and individual performance than those suggesting it cannot. Lewis (1998, p74) noted that, “If employers are generally in agreement with both the principle and practise of performance related pay, they will be motivated to better the job performance and beneficial organisational outcomes will follow. On the other hand, if they are not in agreement with either principle or practice of performance related pay then they will not be motivated to perform more effectively in their jobs and such organisational outcomes will not follow”. He argued for more concentration to the softer side of the performance related pay procedure, for instance greater involvement in agreeing objectives, response in a developmental manner, although he observes that in the financial service organisation he examined, managers have a tendency to impose objectives to workers.

Marsden and Richardson (1994) analysed the introduction of performance related pay at the Inland Revenue on the grounds that it should act as a motivator. They query over 2000 workers in relation to the impact of PRP on their own behaviour as well on other judgement pertaining to performance was made in the course of staff appraisals. On the research they conducted they found that the majority of Inland Revenue workers were in favour of performance related pay other than minority who felt antagonistic to it. They also discovered that any optimistic motivational effects of performance related pay have been, at most, very modest among workers. To make it worse, there was a comprehensible evidence of some demotivation between workers. The distribution of performance related pay was seen by a lot of workers as to be unjust.

Awards were given only to those who had received good ratings, but many respondents felt that the appraisal scheme had been contaminated. The observable demotivation between employees was warring for proponents of performance related pay, 55 percent believed that it had contributed to demoralize workers self-confidence, and 62 percent assumed it had sourced jealousy between them. A number of employees felt that the sum of money involved was not huge enough to give good reason for a change in performance. Lawler (1999) noted that anything less than 10 percent of salary is too little for performance related pay. Many staff felt that they were not capable to improve. Therefore the introduction of performance related pay did not work for Inland Revenue management the reason being most of the workers did not support it.

There are many other criticisms directed at performance related pay. The complexity of appraisal, the complexity of planning objectives, the risk of prejudice or perceived bias, the high expenditure of management, the predicament connected with a focus on the individual and the complicatedness of organising and distributing the essential degree of administrative commitment (Torrington et al 2002 p 604-5). In addition performance related pay inspires elevated expectations individuals respond to it because there is a hope of more money and the hope has to be considerably if it is to be attractive.

Management therefore frequently introduces the system by indicating how much individual can look forward to. A theme echoed broadly in the performance related pay literature is that people consider it as a good practice in principle, and certainly it is hard to object to the view that hardworking and effective employees should be paid more than those who do the opposite.