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Managing Performance-related Pay

Managing Performance-related Pay

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Managing Performance-related Pay
Managing Performance-related Pay

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Managing performance-related pay based on evidence from the ® nancial services sector

Philip Lewis, Cheltenham and Gloucester College of Higher Education

I

n recent years performance management has come to the fore as organisations seek constantly to optimise their human resources in the face of growing competitive pressures. The increased interest in performance management has been mirrored by the popularity of performance-related pay (PRP) schemes which reward individual employees on the basis of their job performance, de® ned as `a method of payment where an individual employee receives increases in pay based wholly or partly on the regular and systematic assessment of job performance’ (ACAS, 1996: 8). Indeed, definitions of performance management (eg Clark, 1995; Storey and Sisson, 1993) often include PRP as an intrinsic part of this approach. However, the PRP literature indicates that unsuccessful implementation of PRP is often associated with ineffective performance management processes (see, for example, Cannell and Wood, 1992; Marsden and Richardson, 1992). But, as Dowling and Richardson (1997) note, there have been few attempts to explain empirically any observed success or failure of PRP, including the extent to which ineffective implementation may explain PRP failure. This article seeks to shed light on this debate. It has two aims: the ® rst is to identify the perf orma nce managemen t processes which are fundamen tal to the successful implementation of PRP; the second, to establish how effectively these processes were conducted in three organisations which were the subject of this research. RESEARCH DESIGN The focus of the overall study was to arrive at an explanatory theory of the effectiveness of PRP schemes. The research design featured three ® nancial services organisations: Finbank, a high street bank, Finsoc, a major building society, and Premierco, a leading insurance company. It was anticipated that data collection in three organisations would result in a more valid explanatory theory of PRP success than if only one organisation had been used. Financial services was chosen because it is in this sector that PRP has been embraced with particular enthusiasm, due to the perceived need to generate more commercially aware behaviour among employees in an increasingly competitive product market ± a need with which PRP was assumed to be consistent (Snape et al, 1992). The focus of the study was on managers at branch (or equivalent) level ± the recipients of PRP. In the three organisations, PRP operated in a similar way for managers at this level, and this was the reason for choosing this employee category. Each organisation operated its scheme under the umbrella of a performance management system. In all three the cornerstone of this system was the setting of objectives by the implementing manager for the recipient manager; these were derived from the organisation’s objectives. These individual objectives were assessed at least annually and triggered a performance-based award. Assessment in each organisation was on a ® ve-point scale with any performance award being determined by individual performance. Each of the organisations had been running its PRP scheme since the late 1980s.

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alternatively. The semi-structured interview was chosen because of its ability to probe beneath the surface of information that otherwise may be accepted at face value or. using the outcomes of the review process to reinforce desired employee behaviour through differential rewards and identifying training and development needs. Cheltenham and Gloucester College of Higher Education The main method of data collection was through semi-structured interviews lasting one hour or more with 63 recipient managers. this was con® rmed in subsequent senior management interviews. 2. 1967). not disclosed. In addition to interviews with managers. At its narrowest. eg performance appraisal. setting clear objectives for individual employees which are derived from the organisation’s strategy and departmental strategies. 1992) reported that two-thirds of the respondent organisations which operated PRP without other performance management policies thought that PRP had contributed to improved organisational performance. performance management is used to refer to individual PRP. at its broadest. Performance management is a term used to describe an integrated set of techniques which have had an independ ent existence under their own names. in the Finbank pilot study the organisation’s concern to use PRP to reduce labour costs was not revealed in the ® rst instance in senior manager interviews. There is no clear agreed de® nition of performance management. It can be seen from the above definition that PRP is usually an intrins ic part of performance management. formal monitoring and review of progress towards these objectives. who thought PRP had contributed to improved organisational performance. studied organisational documentation and had two three-hour discussions with relevant trade union of® cials. This contrasted with 94 per cent of the sample which operated PRP with other performance management policies.Philip Lewis. the term can mean any activity which is designed to improve the performance of employees. But it was apparent that this was the perception of branch managers. Storey and Sisson (1993) note that. the author also attended managerial meetings. and 3. Initially the data were disaggregated into conceptual units which were labelled according to the main themes which arose. Storey and Sisson (1993) note that performance management has three basic activities: 1. together with 23 managers who were either the implementers of the scheme (usually area managers) or the designers of the performance management scheme (personnel specialists). Both the general management and personnel management perspectives were thought to be important so that a full picture could be obtained. The ® eldwork was conducted over a period of 18 months between 1993 and 1995. Initial de® nition of relationships between these themes was conducted and then a ® nal de® nition of categories and sub-categories was developed. This pointed the way to an analytical framework derived from the performance management literature. For example. Data analysis was consistent with the grounded theory approach (Glaser and Strauss. PERFORMANCE MANAGEMENT PROCESSES AND PRP Analysis of the data suggested there were several key activities in the implementation of PRP. The IPM survey on performance management (Institute of Personnel Management. Clark (1995) stresses one important additional facet of performance management activity: that of feeding back to the employee the results of the formal monitoring. This suggests the importance HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 67 . What was clear was these had more to do with what have become known as performance management processes than they did with pay per se.

For example. The performance measurement process will provide feedback to recipient managers on their performance level in stage 3 of the cycle. shown here as an interactive cycle as opposed to a series of discrete activities. This may lead to a modi® cation of the rating. Storey and Sisson (1993) and Clark (1995) represent performance management as a cycle of activities. against the rating and the amount awarded. either informally or formally. that is. award and future objectives. and l reward structures which reward performance. But the arrow pointing back to stage 1 indicates that the measurement process may involve a redefinition of the objectives. Among the bene® ts of performance management claimed by Clark (1995: 186) is that it `provides a means of inspecting the functioning of the process links which deliver performance against objectives’. The data are presented below in the order of each stage of the cycle. It is this last bene® t of performance management which makes it particularly attractive as a tool to analyse the implementation of PRP. 1995: 186) at Finbank. Analysis of the PRP data in this study was conducted using a cycle derived from this work. measure performance and give feedback against objectives. requires explanation. ie activities which set objectives. For example. In the case study organisations PRP was concerned with delivering performance against objectives and examining the process links between the various aspects of the implementation of PRP offered a thorough way of analysing the data. of other divisions and regions? Performance measurement calls into question the extent to which information about other recipients is communicated. the performance objectives set in stage 1 of the cycle are those which it is intended to measure in stage 2. together with a greater acceptance of accountability by such managers. Underperformance may lead to a decrease in targets and overachievement an increase. The IPM survey claims several advantages for performance management.Managing performance-related pay based on evidence from the ® nancial services sector of PRP being located within the context of performance management activities. Clearly. The interactive nature of the model. The arrow returning to stage 2 indicates that a consequence of this process may be modi® cation of the measures being used and of the way in which the feedback is given. Finsoc and Premierco. Here. Communication is obviously at the heart of the feedback giving process. Figure 1 illustrates the PRP process cycle. the arrow points back to stage 1 because it is possible that recipient managers may appeal. the PRP process cycle represents an idealised approach to the implementation of PRP. communication is a key aspect of the cycle. how much justi® cation is given for the assessments made? Translation of performance rating into award implies the need for communication of information about the expected level of the `pot’ size and the implications of this for the respective levels of rating. As Lawler (1995) asserts. l the pushing of key decisions down the organisational structure to line managers. including: l more effective employees able to meet increased product market competition. This involves the setting objectives stage. 68 HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 . Feedback on performance eventually leads to the performance rating derived being translated into a pay award in stage 4. the processes are presented in a logical order and there is a relationship between each of the processes in the cycle in that each one affects the others. what are the origins of the objectives? What are the objectives of colleagues. indicated by the arrows. Communication of relevant performance management information from implementing managers to PRP recipients is placed at the centre of the model and it is seen to be essential that this ¯ ows around the complete process cycle. Knowledge of this allows the potential recipient to be clear about the award he or she can expect. Clearly. eg too infrequently or too critically. But it is used here principally as a `means of inspecting the functioning of the process links which deliver performance against objectives’ (Clark.

Branch manager . See text for full explanation. narrowness and number of objectives. The of® cial line was that objectives were negotiated by the branch manager with the area manager. They seemed only to dwell on the achievement of ® nancial business targets.. The lighter arrows indicate the possibility of each stage being revisited as a consequence of what happens at that stage. let’s make it clear ± they are imposed. This encouraged managers to concentrate on the short term rather than build long-term developmental relationships with staff and customers. the assessment of their impact and effectiveness was less so.’ Union national of® cer In addition. without these ingredients a successful scheme is impossible. `OK. 1996) and were used in each of the three case study organisations. branch managers complained there was no such thing as negotiation.Philip Lewis. Effectiveness of PRP process cycle in the three case study organisations Stage 1: setting objectives Fundamental to performance management are measures of performance.. 1990). Cheltenham and Gloucester College of Higher Education FIGURE 1 PRP process cycle Stage 1: setting objectives Stage 2: measuring performance COMMUNICATION Stage 3: giving performance feedback Stage 4: translating performance into award Source: developed from Clark (1995) and Storey and Sisson (1993) NB Bold arrows represent forward progression throughout the cycle. So the employee relations manager at the time said. Pre-determined objectives are one of the most popular forms of measuring performance (ACAS. that they [objectives] were imposed. In their study Cannell and Wood (1992) conclude that. At Finbank the way in which the objectives were set was the cause of unease. the scope of performance objectives for Finbank managers was narrow. HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 69 . Performance management ineffectiveness may not only be a product of inappropriate objectives but lack of management skill in their application (Lawler. Yet most branch managers insisted the reality was that they were imposed by the bank on area managers and by area managers on branch managers: There was the opportunity last year to have some say in this but the bank just went ahead and imposed what they wanted to impose anyway. Lawler (1990) argues that these should be credible and comprehensive. These potential problems are re¯ ected in the data from the case studies in this research. while managers found the setting of objectives easy. where the main weaknesses were the imposition.

The former category consisted of hard.. 1993. Overall. According to one area manager. Some managers were worried about the lack of congruence between their views on the variables affecting achievement and those of the rating manager. The hub of the PRP system was the performance contract. there appeared to be more evidence of ineffective than effective implementation of stage 1 of the PRP process cycle. thereby exacerbating the worst effects of rating subjectivity. and the third related to the extent to which the manager was visible in the performance of the job. this was inevitable: In reality. The second strand was that `managers have their pet issues’. 1992): the extent to which employees feel favouritism is being practised and the tendency for ratings to cluster at the mid-point in the distribution. for example. This calls into question the processes in the performance management cycle. In the same way I can’t really in¯ uence my boss. Marsden and Richardson. the latter soft and qualitative. There seemed little doubt from interview evidence that the business/® nancial objectives were imposed and the personal development objectives were negotiated.’ A fear of a small group of corporate lending managers was that their implementing manager may not understand all the complexities of the job. Premierco managers had a high achievement orientation: set them a target and they would strive to achieve it. These were written into a performance contract giving the manager explicit standards which re¯ ected the need for improved performance. Area manager All Finsoc area managers interviewed pointed out that at least they were likely to give branch managers the opportunity to disagree with their objectives. This is far too many because managers lose sight of the ones they really should be aiming for. This had four strands. Finbank managers expressed concern about the subjectivity of the measurement process. This had the effect of disenfranchising the recipient managers. there was little point in doing so. Stage 2: measuring performance A consistent theme in the PRP literature is that employees agree in principle with the concept but disagree with the way in which schemes are operated (see. But the fourth 70 HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 . There was also evidence at Finsoc that managers thought there were too many objectives: There are too many key performance areas ± about 20.. The latter category covered speci® c areas related to the development of the branch (eg branch appearance) as well as the development of the manager. But branch managers all echoed the point that.Managing performance-related pay based on evidence from the ® nancial services sector At Finsoc the performance objectives fell into two categories ± business/® nancial and personal development. The society hands down the goals and we have to work to them. Managers at Premierco were less critical of the objective setting process. quantitative measures. which they feel is unfair. 1994). Kessler. as many branch managers confessed. although there was the opportunity to disagree. The ® rst was the straightforward `if you don’t get on with your manager it’s not so good for your PRP’. seeing it as little more than bureaucracy. they did not refer to the performance agreement frequently. The general view seemed to be: `it’s okay as long as he thinks in the same way as you. Such clustering has the effect of not discriminating between individuals. Area manager This may be the reason why. there is little opportunity for managers to in¯ uence me in the targets I set for them. Future objectives for managers were derived from the company’s strategic objectives and the previous annual appraisal round. Two main issues dominate the empirical literature (eg Procter et al. of creating the impression that the PRP process cycle was something that was `done to them’ rather than something in which they played an active part. Favouritism was an issue with some Finbank managers.

The implementing manager was not the sole arbiter of performance. which meant promotions were often seen to be based on this rather than on performance. In 1993-4. meeting service quality standards. relationships with other departments and relationships with staff. Branch managers felt staff in head of® ce received systematically higher ratings than retail staff. This meant there tended to be great insularity. immediate colleague managers and other managers able to contribute. Branch manager Managers choosing the `safe’ rating was a significant problem at Finsoc.. including. Managers are reluctant to lose people they’ve groomed. Many interviewees thought there was still too much of this in the bank: After all. for example. Feedback was obtained from all parties who were relevant to job performance. It translated to 0. 1988.Philip Lewis. This was part of a wider issue of perceived unfairness in that retail staff thought head of® ce staff at Finsoc had an `easy life’ in comparison with them. For Premierco managers the measures were precise and demanding. importantly. 1989) and deemed to be a process of key signi® cance.. meeting ® nancial controls. Another facet of the performance measurement stage of the PRP process cycle which was effective at Premierco was the meeting of implementing managers on a quarterly basis to review the ratings given to recipient managers. 84 per cent of Finsoc staff received ratings which used just three (mid-point) of the nine rating options. Business banking manager Perceived favouritism manifested itself in a different way at Finsoc. thus ensuring intrinsic motivation. The most signi® cant consequence of this was that genuine good ± or poor ± performance was not recognised or rewarded: One of the problems with the last award was the difference between a 3 and a 3. It also involved the completion of a questionnaire by the manager ’s staff on her performance as a people manager. There were distinct social groupings in the bank. I. McAdams.5 rating. the latter thought this may have been due to the availability of so many options (nine) for the rating manager. Stage 3: giving performance feedback Feedback on performance is seen as part of the wider issue of communication in the prescriptive performance management literature (see. why did I bother? The difference in effort required surely warrants more than that! Branch manager The low level of funds in the PRP `pot’ in recent years may explain the lack of differentiation.1 per cent of the increase last time which is ridiculous. some argued that this was an example of managers `taking the easy way out’ and not being prepared to be accountable for their actions. Few managers interviewed had been doing their jobs for more than two years. This may not have been promotion but perhaps a new project or extra functional responsibility. spent a year in the head of® ce and I couldn’t believe the lack of pressure those people there were experiencing. Hoevemeyer. Cheltenham and Gloucester College of Higher Education strand of favouritism was the most insidious ± the `old boy network’. PRP at Premierco depended upon improved performance. This was pursued to achieve greater conformity across the division and had the effect of ensuring that implementing managers justi® ed their decisions to peers. People will rightly ask. Managers were measured on keeping within budget. a lot of managers have put in a lot of service together and grown up together in the bank. However. Managers were continually set fresh challenges in one form or another. HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 71 . This was recognised by branch and area managers and the retail HR manager. The consequence of using such a wide range was that recipient managers saw the feedback process as far more complete and the eventual PRP award much more accurate. I think a lot of them ought to have a spell in the branches and see what life is really like.

monthly or quarterly progress meetings and reviews. He has 23 direct reports and he has to do four appraisals a year ± that’s 23 times four times 20 key performance indicators! One of the key performance monitoring aspects was the clear communication to recipient managers of what precisely it was they needed to do to turn this year’s rating into a higher rating in the following year.Managing performance-related pay based on evidence from the ® nancial services sector There was no impression that Finbank managers were receiving qualitative feedback on their job performance. the output of the process was the setting of future objectives and planning training and development needs. Indeed. There was also evidence at Finsoc that the performance management process was not conducted thoroughly. Many managers talked of the major bene® t of the system being `no surprises’ at the end of the year when the ® nal performance rating was announced. It seemed performance management was taken very seriously by managers at Premierco. The lack of money available to drive the performance management system at Finsoc exacerbated the major focus of managers’ dissatisfaction ± the lack of differentiation in the 72 HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 . The retail HR manager acknowledged this was a problem. This could have been provided by the area manager or other senior managers. where senior managers were convinced of its bene® ts. The performance feedback process was the best example of the `new style’ managerialism which was evident at Premierco and was summarised by an enthusiastic operations manager: I don’t know anything at all about the technical side of the jobs my people do. One area manager readily admitted that he only did three reviews a year rather than the prescribed four. It was not dif® cult to have some sympathy with his reasons: There is a far too big a span of control on my part and the managers managing me. There was also the annual appraisal at which all employees completed a self-appraisal. would have been revealing management’s negotiating hand to the trade union. For all managers this operated at two levels: they did not know what they would get and they were not sure what rating to give their staff. In addition. Advancement was something which was seen in terms of salary or promotion. I think it’s my job to manage them. Finsoc managers could not do this. But the way that the system is now. I do that through talking to them about what they do and making sure everything is right for them to do their jobs. This was shared with the reviewing manager who had completed an appraisal of the individual. there was no evidence that managers were encouraged to learn from the experiences of others. you can’t make that connection. In general. A typical comment was from a Finbank business banking manager: What would be nice is if you could say what your level of remuneration was going to be once you had achieved a certain level of performance. and therefore the payments associated with different ratings. but public declaration of the pot size. Stage 4: translating performance into reward In none of the organisations did managers know what the ® nal PRP award was going to be until shortly before it was actually paid. If you take my manager as an example. The situation at Premierco was quite different. The amounts in recent years had been so small that managers generally were keen to push ratings as high as possible. They will want to do it for you. they did not rate it as attractive when it was ® nally paid. If you treat them correctly you’ll get that back 20 times over from them. The situation was similar at Finsoc. There were often weekly. But for many managers salary had effectively been capped and promotion opportunities had been reduced by initiatives which had seen layers of management removed. The object was to reach a consensus.

a less positive point concerned the failure to communicate information regarding the general performance of other branch managers in the team and beyond in the wider organisation. several points arose. Secondly. The economic position in which the company was placed was explained to all employees with the result HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 73 . and frankly he doesn’t know the answer. either in the team. partly. Communication Part of the PRP process entails communicating information to participants. It is essential that managers are open and can say what it is that made the difference between the outstanding performer achieving all his targets and doing that something extra. the communication of society strategy to staff gave branch managers an impression of the broad frame of reference informing the performance feedback of the area manager... When questioned about what he had to do to repeat the rating in the next year he replied: I wouldn’t get the same rating next year. by the system which operated whereby awards were linked not only to performance but position on pay scale. too. and a Finbank business manager explained this very clearly: I.Philip Lewis. Although not a major focus of the interview data. This was due to the limited amount of money available for increases. This would enable the person to emulate the outstanding achiever. There was no information conveyed to recipient managers about the general level of PRP awards at any level... There was little evidence at Finsoc that there was any more communication about PRP than in Finbank. At Premierco.. At Premierco the low level of awards which threatened PRP’s productivity goals was a problem of which the company was very aware. Cheltenham and Gloucester College of Higher Education amount of award between the different levels of performance rating. then why bother?’ Cascio (1989) and Lawler (1990) suggest that anything less than 10 per cent of salary is too little to be of consequence to employees. This situation was brought about. a benchmark from which they may have derived self-esteem. There was a negligible difference between the cash amounts generated by different ratings. nobody gets a 1 in two successive years. The more you open up the system to scrutiny the more accountable you make managers. I don’t know why ± they just don’t. First. This is so others could go to them and say: `What is it you did to make you a 1?’ I have asked this question of my manager. As a consequence suspicion was evident. This failed to provide managers with any benchmark of their own performance. One was the failure to communicate information about the awards which had been given. in recent years the size of awards had been small. Therefore a manager who was high on the scale received less PRP award for the same rating. But there were two noteworthy perspectives which derive from the communication component of the PRP process cycle at Finsoc.. division. managers did not know what the award for a particular rating would be. Secondly. and they should be accountable. There was some interview evidence which suggested this has led to some managers saying `if there is so little to give out. A good example of the mystique created by this lack of openness was related by a manager who did receive a 1 rating in 1994. solace or just satis® ed curiosity. Therefore much time was spent in managing the expectations of employees through employee communication. region or bank. It was also due to the fact the pay award was not declared until the latter part of the review year. in all three organisations the maximum amount payable even to the outstanding performer was less than this amount. During the period of the ® eldwork. think those who achieve 2s and 1s [the top two ratings] ought to be publicised.

the employee will feel at best apathetic. Like the other two organisations. then they will be motivated to better job performance and bene® cial organisational outcomes will follow. 1988). But this raises the question: what do the data presented in this study add to existing insights on PRP theory and practice? This final section argues the case for the value of the process cycle as an analytical framework.Managing performance-related pay based on evidence from the ® nancial services sector that those who had an increase in 1993 were pleasantly surprised. con® rms the pre-eminence of the line manager in the management of PRP and reasons that the inclusion of pay in the performance management process may be unnecessary. It is a highly deterministic theory and one. questions the concern of writers with motivation theory.. if the four stages are conducted effectively and information ¯ ows around the cycle. Thus. without making explicit the possible linkages between cause and effect the understanding of the reasons for success or failure will not be understood. The PRP process cycle constitutes a theory. over two-thirds were unhappy with the way in which PRP was implemented. Value of PRP process cycle Often the literature is clear in drawing the conclusion that PRP is unsuccessful. and only effectively in Premierco. this study has attempted to gain a clearer understanding of these reasons. the argument here is that if employees are generally in agreement with both the principle and practice of PRP. leading to PRP being largely ignored or alienated from both the PRP process and those responsible for its implementation (Gabris and Mitchell. In this respect the PRP process cycle has been helpful because of its ability to examine the functioning of the process links which deliver performance against objectives. Finsoc managers were less strident in their rejection. but less clear about the reasons for this discontent. however. As Guest (1997) asserts.. But at Premierco managers 74 HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 . Over three-quarters of the recipient managers interviewed at Finbank were extremely unhappy with both the principle and practice of PRP. DISCUSSION The evidence outlined above indicates that the PRP process cycle was implemented ineffectively in Finbank and Finsoc. the distribution of ratings at Premierco was not communicated to recipients. 1992). the possible criteria of organisational objectives set for PRP ± in all three organisations these were unclear ± and impact on overall organisational performance ± because of the dif® culty of isolating one HR component (Kessler and Purcell. usually as measured by surveys which show employee discontent (eg Marsden and Richardson. Rather than improved job performance. Kinnie and Lowe. 1995. if they are not in agreement with either the principle or the practice of PRP. moreover. with regard to recen t attempts in the literature to establish the effect of wider HRM practices on organisational performance (see Dyer and Reeves. so much so that the issue was the subject of a strike ballot soon after its introduction. rightly a traditional concern of the pay literature (eg Lupton and Gowler. 1990) ± were rejected. This raises another question: what is meant by success or failure of PRP? This study follows the lead of Lawler (1984) in using the criterion of employee acceptance to determine the level of its success. that takes no account of contingency theory. Conversely. But it makes some advance in our thinking of why PRP may succeed or fail. Guest (1997: 267) explains: `without some linkages. then they will not be motivated to perform more effectively in their jobs and such organisational outcomes will not follow. In adopting a processual analysis. In essence. 1995). although generally accepting the principle of PRP. 1969). then PRP is more likely to be accepted by individuals and the objectives of the organisation in its introduction are more likely to be achieved. we have no theory’.

even if the pay element of the cycle (stage 4) is not accepted by employees. These are perfectly valid concerns. Pre-eminence of line managers It follows from the above that the effective implementation of the softer processes turns on the skills and attitudes of the line manager. increase the quality and quantity of work and whether the amount of award is suf® cient to act as an incentive (Marsden and Richardson. only in Premierco was the PRP process cycle implemented effectively. PRP could be said to be a success in Premierco but not in Finbank or Finsoc. explain these to their subordinates. As noted above. show more initiative. 1992. it must be said that existence of `new style’ managers at Premierco operating in a highly meritocratic culture played a signi® cant part in promoting the effectiveness of the soft processes. Therefore. coaching to improve performance. This reinforces the earlier point about the importance of considering contingency theory in addition to the PRP process cycle theory. In addition. This suggests that. Concern with motivation theory There is clear empirical evidence which suggests employee motivation is high on the list of organisations’ reasons for the introduction of PRP (Thompson. They saw it as conducted fairly and perceived its congruence with the meritocratic values which the company had traditionally preached and they had absorbed. In Premierco this was the skilful giving of performance feedback. This study has con® rmed the conclusion of Storey (1992) that line managers have an important part to play in the HRM model of managing the employment relationship. The Premierco context in which PRP took place was of considerable signi® cance. This prompts questions about the extent to which PRP has provided an incentive for individuals to work harder. may mitigate the unacceptable impact of the pay element. Therefore. communicate these decisions to subordinates and defend their judgements if asked. However. thus further strengthening them. Cannell and Wood. The data from this study suggest that it is the `softer ’ processes ± those which involve employees in the cycle rather than exclude them ± which are likely to be associated with greater acceptance of PRP. giving some credence to the theory articulated above. if conducted effectively. This was largely the case at Premierco. Driving employees to perform better by carrot and stick when they are excluded from the HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 75 . gathering of performance data from a wide range of sources. the processes which concern the determination of the award. negotiation of objectives and the management of expectations about the ® nal award. 1992). but they have the effect of steering attention towards the `harder ’ aspects of the cycle. It may be that there is an inherent contradiction between PRP and the soft goals of HRM. of which PRP is often a signi® cant component. take tough decisions about assessments. It is line managers who must de® ne the required standards of performance and behaviour. exempli® ed in this study by the new style managerialism evident at Premierco.Philip Lewis. The soft side. this role has a hard and a soft side. a virtuous circle was operating where effective PRP processes were rein forcing the meritocratic culture. is thought to be consistent with Guest’s (1987) HRM goal of employee commitment. They have a particularly important role in the implementation of PRP. The hard side is detailed by ACAS (1996). Therefore it is only to be expected that the central concern of both researchers and practitioners is with the degree to which PRP has motivated employees to work in different ways in order to achieve a PRP award. using Lawler’ s (1984) criterion of employee acceptance. 1992). Cheltenham and Gloucester College of Higher Education were overwhelmingly positive about PRP. get work priorities right.

1989. Managing Human Resources 2nd ed. Oxford: Blackwell. S. W. Clark. S. CONCLUSION: `MUCH ADO ABOUT NOTHING’ The thrust of this discussion has been that the soft aspects of the PRP process cycle are those which have been given less attention in the literature. where the outcome of the performance management process is the identi® cation of training and development needs.Managing performance-related pay based on evidence from the ® nancial services sector process by dint of managers monopolising information ± setting objectives and standards and making assessments and awards (Marsden and Richardson. Incentive Pay: Impact and Evolution. November. `Evaluating performance-related pay for managers in 76 HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 . 1992. Note The author acknowledges with thanks the helpful comments of an unknown referee which guided the preparation of this article. Personnel Management. in two of the organisations. What this study has indicated is that. New York: McGraw-Hill. Salaman. when the PRP process cycle is conducted effectively as at Premierco. Appraisal Related Pay . these activities are consistent with what Bevan and Thompson (1991: 39) call `development driven integration’. REFERENCES ACAS. 1992) ± can hardly be thought of as a commitment seeking strategy. PRP is more likely to be accepted by employees than when it is conducted ineffectively. 1991. F. G. The evidence suggested that short-term concerns. whatever the level of award. the feeling still remained that an increase of 2 per cent was `much ado about nothing’ . Mabey and G. Indeed. London: ACAS. C. Cascio. which will lead to the involvement of individuals in the process cycle rather than exclusion from it. then line managers need a longer term investment perspective on their management of employees. 1996. M. 1997. This calls into question the attitudes and skill of the managers. and Thompson. fire-fighting solutions and Tayloristic job design methods which are built on command and control rather than the more timeconsuming consensus-seeking methods’. The evidence from this study suggests that. R. B and Richardson. Even if all the hard and soft aspects of the PRP process cycle had been conducted effectively. Bevan. Dowling. M. `Performance management’ in Strategic Human Resource Management. if the softer elements of the PRP process cycle are to be promoted. London: Institute of Personnel Management and National Economic Development Of® ce. But these activities could be part of a performance management process without the presence of pay. neither the hard nor soft aspects of the PRP process cycle were conducted effectively. monitoring progress towards objectives and feeding back to the employee the results of the monitoring in a developmental way are necessary pre-conditions for the acceptance of PRP by employees. and Wood. The argument has been that agreein g clear objectives. Cannell. governed the thinking and behaviour of these managers. But this study has shown that. So is pay a necessary part of performance management? Certainly the recipient managers at both Finbank and Finsoc thought it doubtful. 1995. 36-39. a shortcoming this article has sought to rectify. Storey and Sisson’s (1993: 76) `quick-fix agreements. `Performance management at the cross-roads’. defining performance standards which emphasise how the job is done as well as the results of the job.

Kessler. 1992. D. `Performance-based reward systems: towards a common fate environment’ . Sisson (ed). 3. P. Gabris. J. Developments in the Management of Human Resources. Guest. HUMAN RESOURCE MANAGEMENT JOURNAL ± VOL 8 NO 2 77 . July. 1987. 103. Human Resource Management Journal. Marsden. and Purcell. `Performance-based compensation: miracle or waste?’ Personnel Journal. I. 263-276. K. T. Blackwell. 1988. T. 1995. Glaser. `Human resource managemen t and industrial relations’ . 64-68. Centre for Economic Performance. Redman. McArdle. and Mitchell. 348-366. Buckingham: The Open University Press.’ Public Personnel Management. `Performance related pay on the shop floor. Edwards (ed). A. M. D. Discussion Paper No. McAdams. no. Performance Management in the UK . M. 4. N. and Wilkinson. July-August: 14-22. `The strategic design of reward systems’ in Strategic Human Resource Management. no. 17. N. and Strauss. 63. E. 3. Storey. no. B. no.113. London: Engineering Employers Federation. `The new pay: a strategic approach’. Vol. Thompson. Lawler. 1995. Research paper 111. 1990. Vol. `Individualism and collectivism in theory and practice: management style and the design of pay systems’ in Industrial Relations: Theory and Practice in Britain. and Richardson. Vol. M. `Selecting a wage payment system’. Managing Hum an Resources and Ind ustrial Relations . 1988. I. L. `The impact of merit raise scores on employee attitudes: the Matthew effect on performance appraisal. D. E. `Human resource management and performance: a review and research agenda’. Brighton: Institute of Manpower Studies. 503-521. San Francisco: Jossey Bass. L. `Human resource strategies and ® rm performance: what do we know and where do we need to go?’ International Journal of Human Resource Management. 45-49. 657-670. and Gowler. Vol. 1992 `Human resource management in building societies: making the transformation?’ Human Resource Management Journal. Cheltenham and Gloucester College of Higher Education the National Health Service. 1969. Devanna. no. K. E. Fombrun. 1992. 1984. International Journal of Human Resource Management. Falmer. P. Dyer. London School of Economics. November. The Discovery of Grounded Theory. `Performance pay’ in Personnel Management. 1993. Strategic Pay: Aligning Organisational Strategies and Pay Systems . Kinnie. D. New York: John Wiley. J. Compensation and Bene® ts Review. Vol. D. 8. T. 8. 1990. G. Storey. 4. Vol. Wimbledon: Institute of Personnel Management. Pay and Performance: the Employer Experience. J. Lawler. and Reeves. 1989. Lawler. E. Oxford: Blackwell. `Performancerelated pay in operation: a case study from the electronics industry’ . Snape. J. 3. 1992. Procter.Philip Lewis. S. 5. June. A. Rowlinson. R. Journal of Management Studies. 75.’ Personnel Management. E. and Lowe. Guest. Institute of Personnel Management. Vol. A. and Hassard. K. Tichy and M. Hoevemeyer. E.’ International Journal of Human Resource Management. 3. Chicago: Aldine. 1994. Personnel Journal. 1993. `Motivation and performance-related pay in the public sector: a case study of the Inland Revenue’. J. no. 60-74. Lupton. Oxford: Blackwell. and Sisson. C. 1997. Forrester. V. 1992. 24. 3. 1967. E. A. Kessler. 369-386. T. 1995.

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