HR4049 – Employee Resourcing and Rewards

Does Performance relate Rewards Work?

Name Student Number Masters Degree Module Leader

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Khushboo Singh 0924658 MA. HRM Charles Leatherbarrow


“Performance Related Pay provides individuals with financial rewards in the form of increase to basis pay or cash bonuses which are linked to an assessment of performance, usually in relation to agreed objectives. PRP emerged in the entrepreneurial 1980’s as the answer to motivating people & developing performance-oriented cultures. It was seen as a major lever for change, & the government of the day adopted it with much enthusiasm but little understanding as a means of transforming public sector bodies into businesses” (Armstrong 2002:261) Over the past three decades schemes relating pay to performance have generated a tremendous amount of interest but very little in the way of conclusive evidence concerning their effects on performance” (Gilman 2009:149) Performance related pay is method of paying staff based on how they perform. Better performance results in higher levels of pay for the individual, poor performance may result in no change to pay or a decrease. Of course as with any pay scheme there are advantages and disadvantages to such a system, and these will be discussed in this report. Performance-related pay is a way of rewarding employees for higher performance. There are a number of reasons why employer might introduce this type of pay scheme. They may: • • • be keen to keep current staff want to compete for new talent be seeking a fairer way of distributing wages

In order for performance-related schemes to work they should be based on clear, measurable targets agreed by both employer and employee. It normally find out about these targets from the contract of employment and performance appraisal meetings they has with their manager. Performance related pay falls broadly under two headings:

Merit-based “Merit-based systems simply involve the immediate supervisor undertaking an appraisal of each subordinate’s work performance during the previous year” (Torrington et al, 2005, pg 639)

The person being appraised will then be scored on their achievement over the year and this will correspond to a level of pay that they will be awarded. Unfortunately this system is not very efficient as the focus can be on recent achievement, not on the entire year. For example if an employee works exceptionally hard and to a high standard for the first two thirds of a year, yet suffers an event in their personal life that causes their work level to diminish the appraiser may focus more on the recent performance as opposed to the hard work that was performed earlier in the year.

Goal-based “Here the supervisor and subordinate meet at the start of the appraisal period and agree between them a list of objectives which the appraisee will seek to meet during the coming months” (Torrington et al, 2005, pg 640)

The employee is then scored by whether they achieved this objective, and this score is then linked to a pay level. A possible downside to this approach is that the employee may focus solely on what he/she believes will allow them to achieve this goal, thus neglecting other areas of their work. One major benefit of goal-based of this method is that any organisational aims/goals will become the priority of the individual. This allows companies to communicate their strategy in a way that makes it clearer what an individual has to do to adhere to it.

Problems and Issues Whether extrinsic rewards such as performance-related pay actually motivate employees to better performance is a matter of controversy. It has been claimed that monetary rewards usually have a limited time-span in regard to their motivating effect. Therefore extrinsic rewards such as performance pay, even if they can exert a continuing impact on performance, should be consistent with overall management objectives, so that performance pay may not be consistent

with, for example, a purely cost reduction strategy; only be used to reinforce a motivational system in which intrinsic (non monetary) rewards exist, such as reorganization of work processes, training, employee involvement/consultation in decision-making, two-way communication, opportunities to contribute ideas, career development plans and goal setting. Some of the reasons why performance-related pay fails and some problems and issues facing employers flow from circumstances such as the following: (i) Inadequate criteria to measure performance, or criteria which are not easily understood, communicated and accepted. Performance pay should therefore be negotiated. (ii) Inappropriate performance appraisal systems in that the objectives of the appraisal system (e.g. where it is intended to identify training needs or suitability for promotion) do not match the objectives of the reward system. In fact, the normal appraisal system should not be used to determine performance pay. (iii) The absence of regular feedback on performance. (iv)The reward system is not designed to meet the objectives sought to be achieved. (v) The absence of a right mix of extrinsic and intrinsic rewards. (vi) The lack of an appropriate quantum of pay which should be subject to performance criteria. This occurs when the amount which depends on performance is too small, or it is too large and therefore the amount placed at risk (when performance is poor) is not acceptable to employees. (vii) The absence of periodic evaluations of the scheme. (viii) Non-recognition of the fact that performance, especially profit, is sometimes (even often) dependent on factors outside the control of employees e.g. management decisions, exchange rates, recessions. Two benefits at the macro level have been claimed for performance pay. The first relates to employment. If increases in basic pay are transferred to a profit-related scheme,

the employer may be more inclined to hire new employees as his fixed wage cost is less than otherwise. If the percentage of profit to be shared remains fixed, additions to the workforce do not cost the employer more in terms of the profit-related pay. On the other hand, new recruitment would reduce the quantum existing employees will receive unless profits increase, and consequently dissatisfaction among employees could set in. The second benefit is that increased earnings through a performance-related scheme will not result in inflationary tendencies as such increases will often be the result of increased productivity. The benefits to management and employees are that: • • Where performance/profits increase, higher earnings accrue to employees Where profits reduce, the reduction in the performance-related pay can cushion employees against redundancies • • Employee identification with the success of the business is enhanced Variations in pay lead to employees becoming more familiar with the fortunes

(or misfortunes) of the business. This would depend on the information sharing practices of the management.

Another problem with performance related pay is that it can be hard to measure. In some industries like sales, job performance is easy to quantify through quotas and sales revenue. But how do you measure the performance of a teacher or a doctor? How do you know if a customer service representative is making her objectives unless you are there to observe her all day long? By customer complaints? What about the number of customers who were dissatisfied with her service but never said so? The fact that performance is hard to objectively evaluate at times makes performance related pay difficult to fairly assess and can cause dissatisfaction and feelings of inequity in the workplace as a result.

Of course, the intuitive thought is that people who perform better should be rewarded more, and – most crucially that people who are performing worse than me should be rewarded less. However, this rests upon the assumption that it is possible to objectively measure performance, but of course it’s not. Performance related pay tends to work best in industries where job performance is easy to evaluate objectively and when the bonus is a major part of the salary amount. This is the case in the financial industry, recruitment jobs and sales positions. In these types of jobs, it is understood that the performance related pay is a part of the salary and that performance must be maintained for the pay to be received. In these situations, performance related pay is traditionally accepted as it appears much more objective in these industries. However, even in these cases, it’s not possible to objectively measure (e.g. what relative contribution to a sale comes from marketing, good product design and the sale person?), so artificially objective measures are placed on people, e.g. sales territories. So although the organisation wants to increase productivity and motivation, what they often get is less satisfied customers and employees using their ingenuity to work out how to play the system rather than working out how to increase customer value. In other industries, it does not appear that performance related pay is an effective tool, due to all of the reasons listed above. Money is not the primary motivator for many employees, as shown by Herzberg's Motivation-Hygiene theory dealing with job satisfaction and dissatisfaction. Job performance can be a difficult thing to measure in objective terms to make performance related pay sufficiently just and fair. PRP can actually lead to job dissatisfaction for some workers who see an inequality in the system. While this system may work for some, it is certainly not an effective tool for most. There are two primary flaws in most pay-for-performance systems.

1) They overweight transactions (short-term benefits) as opposed to relationships (long-term benefits). 2) Significant individual performance in a failing company is under-rewarded and insignificant individual performance in a highly succesful company is over-rewarded.

In the specific example, we need to consider whether they are attempting to use pay incentives in

lieu of better management and leadership. If we have clear standards for the quality of work and the quantity of work that is typical for a trained employee then they can collect and analyze data to see what factors impair quality/quantity. It has been implemented a combined competency - performance system where employees that demonstrated both a higher level of competency (ability to handle more complex/difficult work) and meet performance standards for quantity and quality earned a higher pay rate. In this system, employees were evaluated every 90 days and given feedback. The specific competencies that were willing to pay for were identified by management and training was offered to support their development.

Disadvantages of Performance Related Pay There are several problems with performance-related pay: • There may be disputes about how performance is measured and whether an employee has done enough to be rewarded • Rewarding employees individually does very little to encourage teamwork • It may encourage unhealthy rivalry between managers • There is much doubt about whether performance-related pay actually does anything to motivate employees. This may be because the performance element is usually only a small percentage of total pay. Can an organisation effectively link individual reward and individual performance for developing a performance driven culture ? A recent Harvard study is a pointer. Nearly ninety percent of the winning companies have tightly linked pay to performance. Pay for performance can be a positive reinforcer for organisational change.

Innovative Performance Related Rewards (PRR) schemes are being successfully used by various professional organizations to create performance oriented culture, facilitate excellence and growth as well as retention of talent. There cannot, of course, be a prescriptive "best practice" approach. The right reward processes are the ones which are right for a particular organisation. Culture, climate, environment and management practices make a difference. An intervention of the type will also require the organisation's putting in place adequate support and safeguards. In that others’ experience comes in handy. Also there are guidelines available for deciding as to what is the most appropriate practice in a given set of circumstances. Design, procedure and structure are important, but ultimately the success of a scheme will depend upon how it is introduced, applied, used and maintained. The two day programme which deals with various aspects of designing an effective performance related rewards scheme provides an opportunity for all concerned to have an indepth understanding of PRR and its implementation issues.

"Performance management could be defined as the set of processes by which organizations manage their performance in line with their corporate strategy."


Improved organizational performance is desired by all sectors, private, public and voluntary and to all organizations, small, local, national and global. Most organizations say somewhere in their business plan or marketing materials that " Our people are our most important resource" It is often intriguing to see what follows that statement in terms of actions and reactions - the processes in place for managing and developing people and what the organization rewards. Better performance comes when people use initiative, communicate better, solve their own problems and resolve conflict. Managers and leaders can have a huge effect on staff performance and yet little time is spent on ensuring that the manager and leader is developing and working to their full potential. We have found that traditional learning and development programmes focus on managers having the right knowledge and skills in the professional/technical area that they are managing, rather than the knowledge and skills required to manage, lead and develop their employees to perform. Performance Management is a two-way review of the employee's contribution to the organisation. It actively involves employees in understanding what is expected of them, and provides valuable feedback on their performance to date.

Pros of performance related pay

As was previously mentioned, the major advantage of performance related pay is that organisational aims/goals become the priority of the individual. Setting goals for an employee with a clear reward at the end for achieving the goals should in theory motivate employees more to strive harder toward reaching their goals (however this is not always the case as will be discussed later on in the ‘cons’ section of the report). Higher motivation of employees will result from goals that are not overly difficult to achieve and with the reward being perceived as worthwhile. The benefit of this to the organisation is obvious; a workforce that is more motivated towards achieving the goals of the organisation will make the organisation more productive and more efficient. Performance related pay also allows organisations to hold on to their top performing staff as it allows them to increase pay/bonuses for these particular staff members for hard work to entice them to stay with the organisation. Having attained a more favourable level of pay these harder

working employees are more likely to strive to a further high level, thus benefiting the organization even more. A further advantage of rewarding employees with pay for good performance means that they do not have to reward them with promotion. Rewarding high achievers with promotion can lead to an organizations structure becoming overly full and complex, resulting in less efficient communication within the organization. Promoting high achievers can also not be effective as the organization may end up promoting someone who is not qualified or prepared for this new higher level of responsibility. Also, having performance related pay allows organizations to retain control over the employees.


Whilst performance related pay has clear advantages and disadvantages it is not suitable for all organisations. Whilst it strives towards worker independence and less manager interference it invariably tends towards the reverse. Disharmony in the workplace will be common place as employees will often see their own efforts as being more worthwhile when compared with others who are receiving larger or more attractive rewards than them. This disharmony can lead towards an organisation that does not communicate well, operate efficiently and may not be able to compete effectively. However it can be very effective, with all employees working towards the same goals raising the companies’ efficiency in all these areas.

Performance related pay when carried out fairly can be very effective, high achieving employees will receive the rewards and become more committed to the company presumably staying on and attempting to attain even more rewards within the company. Poorly achieving employees will not be rewarded and thus will be less likely to continue to work with the company, making way for possibly more hard working employees.


Torrington Derek, Hall Laura, Taylor Stephen (2005) Human Resource Management. Harlow: Pearson Prentice Hall. (6th Ed.) Beardwell, J and Claydon, T. (2007) Human Resource Management: A Contemporary Approach, FT Prentice Hall Homans, G & Thorpe,R(2000) Strategic Reward Systems, London: FT Prentice Hall. Bratton, J. and Gold, G. (2007) Human Resource Management: Theory and Practice, Palgrave Luthans, F. and Stajkovic, D. (1999) Reinforce for performance: The need to go beyond pay and even reward, Academy of Management Executive, 13(2) Wright, A. (2004) Reward Management in Context Newton, T. & Findlay, P. (1996) ‘Playing God?’ HRMJ 6(3) Pfeffer, J. (1998) ‘Six dangerous myths about pay’ HBR May-June pp 109-119

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