The value of performance related pay
Currently, many companies are utilizing the performance related pay (PRP) scheme. The PRP is often regarded as an effective method to achieve a better performance in both individual and collective terms.
In the study of Cutler and Waine (1999), PRP affords employees with opportunities to increase return after the performance appraisal. It is quite different with certain salary schemes, such as those offering an automatic increase in pay but despite employees’ real performance. The PRP scheme is usually designed to increase employees’ commitment and motivate employees through implementing an incentive system and assessing employees’ work performance (Varone and Giauque, 2001). The reasons for utilizing PRP scheme are various. Apparently, it is vital for the management layer to maintain a high level of consistency between employees’ and employers’ interests. Unless the two originally separate interests being aligned, can the corporation operate normally. Since it is difficult to attribute the output to individuals, PRP is an appropriate approach to make the incentives of the company and employees consistent (Kruse, 1996). Besides, the intent to maintain the stability in the employment acts as another reason for the utilization of PRP schemes. The research by Chelius and Smith (1990) indicates the fact that the enterprise with a PRP scheme can have a higher level of stability in the workforce. Also, PRP’s effect on the enhancement of individual employee’s effort towards tasks and the corporate productivity promote its implement to a rather large extent.
PRP’s effect on individual employee, team, organizational motivation and productivity
The PRP scheme can affect a wide range of subjects. In terms of individual employees, the company with a PRP scheme tends to be more attractive and it is more probable for them to increase the input (Lazear, 1986). Since the pay level is related to the different levels of work performance and employees believe better performance would be accompanied by a desirable return that is valued by them, staff may be more willing to exert an effort towards the task allocated. Moreover, the staff is more motivated to better the work performance due to the financial incentive and further achieve a higher level of job satisfaction.
However, the function of PRP on a team-based task is often argued by different studies. For example, it may be difficult to distinguish the individual contribution levels when the job is completed as a consequence of the teamwork (Campbell et al, 1998), so the effect of PRP on the integral team can be weakened. Apart from that, Gielen et al (2006) state that it is possible for the team members to become a free-rider, due to the difficulty in evaluating the individual performance in a team and thus the a group-based PRP scheme may just have little effect on individual performance. In contrast, Varone and Giauque (2001) argue that the problem can be resolved if the reward is on a collective basis rather than an individual one. The reason is that if the reward can be important to the entire team, the team members’ involvement and motivation would be improved.
Also, the PRP has an effect on the organizational motivation, but the situation is very complex. According to the expectancy theory proposed by Vroom (1964), when the management can meet the requirements, that employees have enough capacity to fulfill a task and the fulfillment of the task is related to certain outcomes that are valued by employees, staff can be motivated to accomplish the job. Therefore, if the PRP system is carefully designed and associated with returns which are needed by the staff, the company can achieve the goal of motivation. However, since the process of performance appraisal involves other subjects, the assessment outcome may be subjective. If the employees do not believe outcome of performance assessment, the aim to motivate employees may...
References: Art, D.D. and Turner, T. (2004) Profit sharing, firm performance and union influence in selected European countries. Personnel Review, 33(3), 335-50.
Bradley, K. and Estrin, S. (1992) Profit-sharing in the British retail trade sector: the relative performance of the John Lewis partnership. Journal of Industrial Economics, 40(2), 291-304.
Brody, R.G. et al. (2001) Prior commitment and the merit pay allocation process. Journal of Management Psychology, 16(3), 243-53.
Campbell, D. et al. (1998) Merit pay, performance appraisal and individual motivation: an analysis and alternative. Human Resource Management, 37(2), 131-46.
Chelius, J. and Smith, R.S. (1990) Profit sharing and employment stability. Industrial and Labor Relations Review, 43, 257-73.
Cutler T. and Waine B. (1999) Rewarding better teachers? Performance related pay in schools. Educational Management & Administration, 27(1), 55-70.
Gielen, A.C. et al. (2006) Performance related pay and labor productivity, IZA Discussion Papers, 2211, http://hdl.handle.net/10419/33908.
Heneman, R.L. (1992) Merit pay: linking pay increases to performance ratings. New York, Addison-Wesley.
Kruse, D.L. (1996) Why do firms adopt profit-sharing and employee ownership plans? . British Journal of Industrial Relations, 34, 515-38.
Lazear, E.P. (1986) Salaries and piece rates. Journal of Business, 59, 405-31.
McGinty, R.L. and Hanke, J. (1989) Merit pay plans: are they truly tied to performance? . Compensation and Benefits Review, 21(5), 12-6.
Prendergast, C. (1999) The provision of incentives in firms. Journal of Economic Literature, 38, 7-63.
Salimaki, A. and Jamsen, S. (2010) Perceptions of politics and fairness in merit pay. Journal of Managerial Psychology, 25(3), 229-51.
Schloss, D.F. (1907) Methods of industrial remuneration. 3rd edition. London, Williams and Norgate.
Varone F. and Giauque D. (2001) Policy management and performance-related pay: comparative analysis of service contracts in Switzerland. International Review of Administrative Sciences, 67, 543-65.
Vroom, V.H. (1964) Work and motivation. Chichester, John Wiley.
Please join StudyMode to read the full document