Performance Related Pay free essay sample

Performance-related pay (PRP) is a financial rewarding system that links pay awarded to the work output of employees (CIPD, 2013). It is connected directly to individual, group and organisational performance (Armstrong, 2005). In the late 1980s and early 1990s, performance pay scheme became prevalently used in both private and public sectors in UK organisations, where it is perceived to be a motivation tool. 2. Theories about PRP As Thorpe and Homan (2000), the role of incentive pay in employee motivation nearly sets up on psychological theories. Locke and Latham (2004) define motivation as internal factors that impel action and to external factors that can act as inducements to action. The theories of motivation provide a solid theoretical basis for the study of the use of financial rewards for stimulating employees to higher levels of performance for the achievements of organizational objectives (Schuler, 1998). Expectancy theory and equity theory offer the fundaments for performance-related pay. 2. 1 Expectancy theory Expectancy theory is relied on expectations that people bring with them to the work situation, and the context and the way in which these expectations are satisfied. We will write a custom essay sample on Performance Related Pay or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In other words, there is greater scope to understand how employees may require to be treated differently and to interpret why employees do not necessarily respond in a mechanical way to changes in, for example, the level of pay (CIPD, 2013). Vroom’s expectancy theoryVIE assists to understand the motivation through three elements: †¢expectancy – Employees perceived that they possessed the necessary skills to do their jobs at least adequately; †¢instrumentality– Employees perceived that if they performed their jobs well, or at least adequately, they would be rewarded; †¢valence – Employees perceived the rewards offered for successful job performance to be attractive (Arnold and Randall et al, 2010). According to the expectancy theory, money is a significant motivator for most people, and in order to get or secure a higher base salary or some form f bonus payment, we will normally change our behaviour and attitude, directing or increasing effort in a specific direction. Tying pay to specific performance can ensure people are motivated to increase their efforts and performance and ensure performance outcomes are met (Mikovich and Newman, 2005). 2. 3 Equity theory Another psychologic al thinking that is relevant is equity. Equity theorists claim that people seek balance between their inputs and the reward outcomes. The predictions of equity theory are less often supported by research when people receive than their shares, as opposed to when they receive fewer (Mowday, 1991). In other words, employees are more likely to do something in response to feeling under-rewarded than over-rewarded. Equity theory focuses on perceptions of fairness in the workplace, including distributive justice—that is, whether people believe they have received (or will receive) fair rewards; procedural justice—reflects whether people believe that the procedures used in an organization to allocate rewards are fair; interactional justice—refers to whether people believe they are treated in an appropriate manner by others at work, especially authority figures (Arnold, 2010). When people in an organization feel they have been treated justly, they will be more willing to be ‘good citizen’ at work (Liden et al, 2003). While the motivation to perform ‘good citizen’ behaviours are enhanced by a sense of justice (Arnold, 2010). However, Adams argued that whether the input and reward are in balance is determined on the basis of feelings/perceptions compared with others in relation to social norms. 3. Models In relation to the relationship between pay and performance, pay can be related to individual, the working group or orgnisation performance (Brown and Heywood, 2002). 3. 1 Individual PRP An individual performance-related pay system is â€Å"usually involve payment which is integrated into base salary either in the form of a percentage increase or additional increments on a pay scale† (Kessler, 2005). Individual PRP relates reward on an assessment of the employee’s work performance. It assumes that the differences between individuals are measurable so that retention of high quality employees who wish to enjoy high performance reward is increased (Gerhart and Rynes, 2003). In addition, adopting pay incentives will stimulate employees’ better behaviours that will improve work performance and thus, improve organizational performance. Also, employees are motivated to create more efficient methods to boost productivity. However, individual PRP has negative impacts which may de-motivate employees. It assesses the individual’s performance through using qualitative judgments, therefore bias and unfairness coming from performance appraisal is unavoidable by appraisers’ subjectivity. Moreover, Harris’s research (2001) shows that over half of the management failed to understand the â€Å"value system† of PRP, which in turn made inaccurate judgments on performance. 3. 2 Team PRP Team-based performance-related pay schemes include variable pay which depends on the performance of a team. The aim is to consolidate the team through incentives, establishing a united, mutually supporting team with a high level of involvement (Acas). Meanwhile, team-based pay motivates less effective employees and serves as an incentive for the whole team to improve. There are also potential disadvantages of team-based PRP. In contrast to individual PRP, peer pressure is heavy and result in consistence instead of creativity. Subsequently, bullying or harassment will be resulted from individuals who are perceived to be under-contributing. On the other hand, an amount relies on the underlying magnitude of the free rider problem, whereby team members expect others to accomplish the extra workload to increase team PRP. The greater the concern about some employees’ free-riding, the less will pay be linked to team PRP for the total team input into the production process is reduced (Robert, 2007). 3. 3 Organisation PRP Organizational PRP associates with larger groups than teams, like manufactory and company. The universal PRP schemes for organization level relied on profit-sharing and gain-sharing, or alternatively on dividends of employee-owned shares and change in share value. Hence, employees are able to share such financial participation as profit or share ownership, and are more directly responsible for the project’s success. The firm PRP system is effective as the workforce is aware of their contribution. Besides, employees can participate in organizational control and show greater commitment to the organization. Drawbacks come along with organization PRP benefits. The motivation value of implementing such a scheme is relatively weak. On one side, the added-value systems like profit-sharing involves complicated information and rules and thus employees will feel confused with them. On the other side, the bonus payments are usually available with a delay of several months or years and sometimes combined with other indicators of firm-level performance such as sales, productivity, amount of cost saved and etc. 4. Evidence The tables are from the 1998 Workplace Employee Relation Survey (WERS) (McNabb and Whitfield, 2007). Table 1: Impact of performance related pay, employee and financial participation on individual earnings PRP acts as a motivational tool that attracts workers to perform higher competency and induce employees to pay greater effort. Table one supports this point, showing that workplaces that exert any type of PRP schemes pay higher than those that do not. Among them, individual PRP only makes the most contribution to earnings by comparison with the team and organizational PRP only. Nevertheless, the only single scheme impact is far behind that of combined application of two or more types. Earnings are highest in workplaces where firms adopt a combination of individual and workgroup-based or organizational PRP schemes, as can be seen from the column three. Table 2: Interaction effects Along with, the impact of PRP on pay is strongly controlled by the joint of financial participation. As can be seen from table two, earning is relatively high where PRP co-operate with employee share-ownership. PRP is not only backed up by employers, but also by governments to promote employee financial participation through a range of fiscal incentives. For instance, the UK’s new Share Incentive Plan requires employees to leave their shares in trust for a minimum of five years to avail of tax relief. . Conclusion In conclude, PRP is one of the main financial incentives to motivate employees on the basis of expectancy theory. If PRP is designed and implement efficiently and measured fairly, positive impacts will be appeared on employees’ performance. Earnings are paid higher when organization applies PRP and highest when uses a combination of individual and team or organisational PRP. In spite of this, there is no optimal approach to PRP, an d in practice each model has its own advantages and disadvantages. Individual PRP works best where employee decision-making processes centered on jobs, whereas group-based PRP works best where employees are involved in making decisions about their work-roles in their broader context (Delbridge and Whitfield, 2001). Different organizations should undertake different PRP to suit its own situation. And schemes need to be tailored with the management strategy and organisational culture, such as the organization that demands team work would not be appropriate to establish individual PRP system.