Performance Related Pay

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The Value of HRM to Business
-Performance Related Pay

Word Count: 2942

Table of Content


2Literature Review4

3Case Study8

3.1Case 1-Performance Related Pay: What Makes a Successful Scheme?8
3.2Case 2 - Performance related pay: a case study of a small business.10




Human capital plays a vital role in providing the organisation with a valuable competitive advantage; in addition a reward and pay system concerning the employment relationship, is often viewed as a key method in obtaining maximum human capital, and thus a central part of managing a business.

A reward and pay system that ensures employees’ contributions to the organisation is measured by both financial and non-financial mean (Armstrong, 2007). Since it is crucial to the success of a business, selecting the most correct and appropriate reward scheme seems a part and parcel of attracting and in order to retain employees and survive in an environment with ever so fierce competition. In fact, there are numbers of reward systems, such as skill based pay and profit related pay. In this essay, we aim at mainly evaluating and analysing the value of performance related pay (PRP) in organisations.

Literature Review
From the early 1980’s, PRP rapidly developed as a motivator and way to create performance-oriented cultures, and became a popular pay scheme in organisations (Armstrong, 2002). And because of the horizontal trend of the organisations’ structure there will be less opportunity to motivate employees through promotion and then pay for reward system occupied an important role as a motivator (Conyon et al., 2001). Based on the IPD (1999)’s survey, approximately75% of respondents felt PRP had a positive impact on both individual and organisational performance.

PRP is a method of reward, where the employees can receive an increase in remuneration wholly, or partly, through the individual performance assessment (ACAS, 1996:8). It serves as a kind of financial incentive to motivate employees to work harder, perform at their optimum level in light of creating higher productivity.

There are many definitions for PRP. Mabey and Salaman (1997:211) puts it as an organisation that achieve its objectives through clear internal communications that is related to performance to the employees, constantly checking their objectives and to reward employees that perform well and made positive contribution to the organisation’s objectives. The definition highlights PRP’s functioning features.

PRP is used by a company in order to able to recruit and retain suitable employees that fit into the company’s culture as well as indirectly inform underperforming employee to either perform better or leave. In addition, it is used to promote the company’s value such as performance driven, cost conscious and adaptable. This is done through making individuals committed and ensuring they understand and fully aware of company’s objective and business plan. The assumption of PRP is that individuals are money driven thus if they receive more pay, they will perform better (Kessler and Purcell, 1993; Armstrong, 2002).

Silva (1998) defines that the providing of rewards and incentives to enhance organisational performance by improved individual performance as a broad objective of PRP. It links the employee’s economic returns with the individual, team and organisation’s performance.

PRP is a rewards system that can increase employees’ performance, productivity, efforts and earnings (Lazear 2000; Paarsch and Shearer 2000; Parent 1999). According to the American establishment studies, PRP has a positive correlation with the high earnings (Booth and Frank, 1999). People who work for organisations with the PRP system in place are normally higher paid. Furthermore Mitchell et al (1990) found that employees who work...
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