What Are the Benefits and Problems of Performance-Related Pay Systems for Both Employees and Employers?

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  • Topic: Employment, Performance-related pay, Money
  • Pages : 6 (2008 words )
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  • Published : April 10, 2013
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Performance-related pay (PRP) grew during the 1980s and 1990s due to the decline in Payment by Results (PBR) schemes. PRP looked beyond traditional PBR incentives, they reward individual contributions based on performance rather than on effort. These incentive schemes can filter throughout an organisation to motivate manager’s right through to the manual workers.

This essay will try to outline the benefits and drawbacks of the PRP method for employers and employees using case study examples particularly the education sector where PRP has been or could be effective. We shall also investigate the numerous forms of PRP and whether they are successful payment methods. PRP can be used for both Individuals and Groups, therefore companies need to find the most suitable for their organisation, and the essay shall explore the pros and cons of both.

Firstly I shall investigate the advantages of using PRP for the employers. The most recognised advantage of PRP for the employers is motivation. It has been suggested by F. W. Taylor that the employees are motivated to make as much money as possible, consequently when using a piecework method of PRP employees are going to produce products faster to make more money therefore increasing the productivity of an organisation. It has been suggested that adopting PRP can induce greater effort and it attracts more able workers (Lazear, 1996, cited in Booth & Frank, 1999). Booth & Frank (1999) made an integrated model that encompassed the sorting and effort effects of PRP. They estimated the earnings effects of PRP to underlying productivity differences. Cutler & Waine (2004) studied PRP in schools and found that in the early assessment 68% of the teachers characterised the impact of PRP on their morale as negative, but later on in the assessment this dropped to 38%. This represents the positive attitude employees have towards PRP. PRP is also beneficial when the firm has a flatter hierarchy with fewer promotional opportunities, because the staff can still find a form of motivation.

Another advantage for the employers is that the PRP system is seen as fair, because all employees have an equal ability to make more money, individual employees are encouraged to make a greater contribution because they know they will be financially rewarded for doing so. Therefore there is a lowered risk of industrial action from employees and union groups.

By using individual performance related pay (IPRP) it allows you to measure your employees performance and see who is the most productive, this can allow you to identify the less productive staff and pay them lower wages to match their abilities. This method can also help identify the weak links within the organisation which could be useful if the company is looking to downsize. One way an organisation might measure an employee’s performance is by offering commission for the sales they make, therefore the one achieving more sales makes the greatest commission.

Alternatively the benefits of group PRP are that everybody reaps the benefits of an individual or a team’s good work therefore this could create a high morale. This would benefit the organisation because they would have a good working atmosphere and productivity, so improved performance could spread among the employees, which is why numerous organisations such as some estate agents set monthly team target where they all get a bonus if they achieve this. When individual PRP systems are used a happier working environment can occur and healthy competition can be promoted between the employees in striving for productivity.

As suggested by Booth & Frank (1999) PRP is a useful method to fill bad jobs, and those that fill these jobs are normally women or non union workers, but this theory has been questioned, because women are less likely to be employed in a PRP job, because women require flexibility and a stable wage.

Although there are advantages for employers of the PRP method...
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