Performance Related Pay

1. Basic of performance-related pay (PRP)

The popular reward system, performance-related pay (PRP) is defined as ЎҐa method of payment where an individual employee receives increases in pay based wholly or partly on the regular and systematic assessment of job performanceÐŽ¦ (Lewis, 1998). It is based on the expectancy theory that employees will increase their effort and/or direct it in specific directions to receive higher payment. (Taylor, 2000)

It usually takes one of the following two forms. The first form is merit-based. In this form, line managers evaluate the work performance of people who work beneath them. Part of employeesÐŽ¦ remuneration is then tied to the evaluation. The second form is goal-based. At the start of the appraisal period, managers meet with employees, and discuss a list of objectives to be met. At the end of the period, employeesÐŽ¦ work performance is assessed based on the achievement of those objectives, and their pay is directly linked with the appraisal. (Torrington, Hall and Taylor, 2005)

2. Is PRP fundamentally flawed

There has been a rise of a interesting phenomena with respect to PRP in the past two decades. On one hand, it has attracted a lot of criticism from academic researchers in the reward field. They attacked all different aspects related to PRP, and announced that PRP has fundamental flaws which cannot be overcome. For instance, psychologists question its use of money to motivate workers. Sociologists think it as a tool to enforce management control. The loudest voice comes from advocates of total quality management (TQM), because PRP represents the opposite of everything they believe to be essential to obtain and sustain competitive advantage. (Torrington, Hall and Taylor, 2005)

On the other hand, managers like the idea of linking a proportion of pay to the achievement of specific performance objectives. As a result, PRP has become increasingly popular in both private and public sections.

It is rather surprising when you think the following question for the first time, how could PRP raise its popularity among managers in the face of increasing criticism from academic writers. This is because rather than thinking PRP is fundamentally flawed, managers only believe that it is difficult to manage effectively. Once it is correctly implemented and effectively managed, it will have a positive effect on employeesÐŽ¦ motivation, and individual and companies performance. This is what I believe as well.

A possible reason for the two groups jumped to the different conclusions, is that they are looking at PRP from different perspectives. Academic writers are in the center of critical works of PRP. They believe in that motivation is essential to the success of organisations, and management intervention is always inappropriate. From this point of view, it is easy to conclude that PRP will always have a negative effect on organisations. (Taylor, 2000)

In contrast, managers view it differently. Firstly, they think PRP ÐŽ§provides a flexible and cost-effective means of distributing rewards fairly between the good and poorer performers while also contributing towards improved organisation performanceЎЁ (Torrington, Hall and Taylor, 2005). Secondly, they consider PRP as an effective tool of management control. It can be used to direct employeesÐŽ¦ effort towards the achievement of organisation objectives. Thirdly, they found that other forms of payment system all have some drawbacks. For instance, under profit-related pay system, good and bad performers are rewarded equally. (Taylor, 2000)

Having outlined the interesting phenomena, and discussed possible reasons, the following sections will evaluate PRPÐŽ¦s attractiveness, difficulties of implementation, and shortcomings.

3. PRPÐŽ¦s theoretical advantages

PRP systems have many well-known theoretical advantages outlined by Torrington, Hall & Taylor (2005):

Ñ"Ь attracting and retaining good performers;

Ñ"Ь improving individual and corporate performance;

Ñ"Ь improving motivation;

Ñ"Ь clarifying job roles and duties;

Ñ"Ь linking effort explicitly to organisation objectives;

Ñ"Ь improving communication;

Ñ"Ь reinforcing management control;

Ñ"Ь identifying developmental opportunities;

In addition to all these, PRP may still be attractive for a number of reasons. Firstly, it can be used to reduce trade union power. Since managers have to evaluate the performance of their team members, which also affects the level of pay, team members become more dependent on the line managers, and less dependent on trade union. (Lewis, 2001)

Secondly, it is an effective method of distinguishing good employees from the bad. By rewarding them accordingly, it sends the ЎҐright messagesÐŽ¦ to both types of workers, telling the good ones that the organisation thinks they are valuable and wants to keep them, and informing the bad ones that the organisation are happy to lose them. By sending the ЎҐright messagesÐŽ¦, it has a positive effect on the motivation of good employees, and forces the bad ones leave. Both effects are good for the organisation. (Kessler & Purcell, 1992)

Thirdly, it is a means of restructuring relationship between the line managers and workers. By giving the line managers greater responsibility, e.g. define the required performance, make ЎҐtoughÐŽ¦ decisions about employeeÐŽ¦s performance and pay, it forces the managers and employees develop a kind of face-to-face relationship. (Kessler & Purcell, 1992)

Fourthly, it can be used as a method to extend management control. The implementation of PRP results in a fundamental restructuring of the employment relationship, in the way that isolating individuals from the group. (This effect also contributes to the decrease of trade union power.) By reducing the collective power of employees and trade unions, it effectively gives more power to the managers. (Kessler & Purcell, 1992)

Moreover, it can be used to promote particular type of behaviour towards the achievement of organisational goals. Finally, it gives management the ability to reward employees for their superior performance without the need to promote them into better paid jobs which they may not be suitable. (Taylor, 2000)

Although