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. 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 theory---VIE 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 of 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 psychological 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.
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