Performance related pay (PRP) is a financial rewarding system which is directly associated with the work accomplishment of employees. It seems that the basis of this process is cash or bonus payment: employees will be awarded cash or bonus when they achieve a greater performance. In the late 1980s and early 1990s, the system of payment by performance was widely applied in both private and public sectors in many organizations in the United Kingdom. Brown and Armstrong (1999) claimed that there are more than 50 percent of the UK companies had implemented this method to motivate their employees during that time. However, in fact, Kohn (1993) indicated that there are not quite much research existing which explicitly indicates that performance related pay is an effective procedure to encourage employees to improve their work. Furthermore, there are even some studies indicating that this system could be a de-motivator when workers distrust it. This article will explore the ineffectiveness of performance related pay from two perspectives and then try to provide possible solutions as well as evaluations for managers who are facing similar problems. The first perspective is the reward issue which may not attract employees to work harder. This problem may occur as a result of the different expectation of each individual in rewards. Secondly, the fairness issue, the transparency of organizations to measure their employee performance could cause the curiosity among employees. Once employees feel unfair, the PRP system will become meaningless.
2. Reward Issue
Performance related pay relies on the expectancy theory that the sufficient size of rewards can motivate people (Wood and Maguire, 1993). When organizations apply this concept to the payment system, which is a financial reward, they have an assumption that workers may improve their performance if a high amount of salary or bonus is offered in return. However, according Brown and Armstrong (2000), some workers claimed that the extra pay was too low and it could not motivate them. Cannell and Wood (1992) even claimed that if the extra money is lower than six percentage of worker’s basic salary, employees might feel that they were insulted and it could de-motivate them. Consequently, the performance related pay tends to fail and company could not motivate employees. In fact, the real problem in this issue might not be the amount of the reward offered to workers but might be the type of the provided reward that does not match employees’ preference. The following sections will discuss about the improvement of this scheme by using non-financial rewards and allowing employee to design their own rewards. Solution
1) Non-financial Rewards
It may be concluded from the above information that insufficient financial rewards might not improve the performance of individuals. In other words, it could be said that money would not attract every employee, managerial staff in particular. Williams (2002) noted that the majority of upper managers felt the most significant factor which motivated them should not be the money. The authentic motivator is probably the achievements in their career path and their high self-esteem. All of those things could be called as non-financial rewards. Furthermore, there are some evidences illustrating noticeably that the majority of employees in both private and public sectors value non-financial rewards higher than money rewarding. The information that was provided by Institute of Personnel Management (1992) clearly showed that the respondents from both private and public organizations rated the importance of promotion higher than that of pay. The score of pay method from public employees and private employees are 3.67 and 4.11 respectively, whereas, they regarded promotion aspect as 5.07 and 5.78 on the same scale. The non-financial reward is one of the ways of organizations to award employees in terms of motivation. There are many...
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