TOPIC: THE IMPACT OF PERFORMANCE MANAGEMENT ON EMPLOYEE WORK

MOTIVATION

performan
ce
managem
ent
practices

employees
work
motivation

d e p e n d e n t v e r ib le

in d e p e n e n t v e r ia b le

THEORETICAL FRAMEWORK:

ABSTRACT
To be able to exist in this highly competitive economy, organizations are now looking for
alternative strategies which will help them create competitive advantage against its rivals. This
strong competition among multinational firms in the global economy brings many problems for
organizations. One of these problems is to how to implement performance management in order
to achieve its full potential.

Valuing motivation as a solution to higher performance is a key to successful management for

every organization. Although recognising the effect of employee motivation on performance is
very helpful for management, the challenge here is to understand what situations can motivate
employees more and help both the employees and the organizations to improve their
performance.

Performance management practices aimed at evaluating the success of organizations need to take
into account the non-financial dimension, as well as the financial dimension. This is because
many studies show that financial rewards do not keep employees motivated in the long term. On
the other hand, employee motivation has a big effect on organizations performance. With this
study, effective performance management practices and its impact on employee motivation
examined and importance of non-financial motivation in improving individual performance will
be identified.

CHAPTER ONE INTRODUCTION

As result of globally affected changes, organisations are now facing greater competition and it is
becoming very difficult to sustain and defend their positions over their rivals. More and more
organizations are beginning to recognise that the source for sustainable competitive advantage is
highly motivated workforce. Perkins (2000) suggests that in order to continue to stay on the line
with their rivals or even exit them, organizations are now looking for solutions to increase

productivity, ingenuity and motivation of the workforce. Since people are respected as greatest
asset, to the firms which try to achieve a competitive advantage, it is suggested that they need to
correct performance management goals and reward structure.

The rapidly changing global economy forces organisations to be more alert in evaluating
employees performance and to take immediate action to help them perform better. Organizations
cannot afford to ignore these developments; therefore they must pay greatest attention to their
performance and reward management practices in order to keep their employees motivated and
committed to organisation.

As Donald Briggs (2001) state that the most important assets of companies are their customers.
Since the employees are internal customers of every organization they should be kept satisfied at
al the times. Organizations face a significant challenge in trying to satisfy its internal
customers. The answer to this question, for many organizations is pay for performance.
Indeed, pay for performance is one way to reward people; its effectiveness, however, is very
controversial. In fact many studies show that non-financial rewards could be more effective on
motivation which plays prominent role in improving individual performance and can be provided
through successful performance management practices.

Organizations must review their performance management practices to ensure that it is up to date
and able compete in this highly competitive economy. Since organizational performance depends
on their employees individual performance, they have to make sure that their performance

management systems are well designed and they are using the right criteria in measuring
performance. Unless they are successful in proving employee motivation through performance
management their organizational performance is in danger.

In order to help organisations to understand more of these issues, this study aims to analyse the
impacts of performance management practices on employee work motivation.

1.1 Research aim and Objectives

The aim of this research is to evaluate the influence of performance and reward management,
as specified in the HRM literature, on employee perceptions of motivation at work.

The 3 main objectives have been identified to complete the study.

To identify aspects of employee work motivation, especially paying attention to nonfinancial motivation which is defined in performance management and reward
management literature.

To undertake exploratory research to compare and contrast employee views on

performance management and reward management practices and its benefits to
employee motivation.

To identify issues for consideration in future research investigating the potential of

performance management and employee motivation, as described in the HRM
literature.

1.2 Structure of the Study

The study includes two main chapters that are illustrated below.

CHAPTER ONE Introduction describes the study in general and provides the rationale and
academic framework for research and lists and explains each reach objective in detail.

CHAPTER TWO Literature Review commences with providing some literature towards
performance management and reward management. In addition, it provides examination of the
academic framework based on general motivation concepts. Further, it describes what nonfinancial motivation is and gives a clear description of its affect on employee performance as
well as organizations over all performance.

CHAPTER TWO LITERATURE REVIEW

The literature review was formed by reviewing text books, journals, and articles, online
resources which presents the opinions of many theorists taking motivation as key source to
develop performance of employees in performance management and reward management
settings. Literature review includes effect of performance management on employees
motivation. Non-financial motivation is also examined in this chapter as well as the illustration
of how non-financial motivation should be provided in performance management as well as
reward management practices. The main idea behind including literature review in this study was
to illustrate the importance of employee motivation in performance management implementation
which is believed to stimulate over all organizational performance.

2.1. PERFORMANCE MANAGEMENT

2.1.1 Definition
Bones suggests that performance does not need managing. It needs encouraging, developing,
supporting and sustaining. (Bones, 1996) On the other hand Armstrong, (2006) defines
performance management as strategic and integrated process which delivers sustained success to
organizations by improving the performance of the people who work in them and by developing
the capabilities on individual contributors and teams.

Performance management is a flexible process and consist of progressive stages. Firstly it

clearly defines organizational goals to support the setting of unit, team and individual objectives
secondly, the agreement of training and development plans to ensure that learning needs are met
and objectives can be achieved. Thirdly, an appraisal process to encourage an open exchange of
views and discussion on whether objectives have been achieved, exceed or not achieved.
Fourthly, regular feedback is necessary to enable the individual or the team to assess the extent to

which their objectives are being achieved. Fifthly, financial and non-financial reward needs to be
allocated to encourage people to continue to perform. And eventually, the process can come full
circle by encouraging the individual to develop individual career plans which take into account
the long-term vision of the organization and the strength, weakness and aspirations of
employees. (Brown, Armstrong, 2006)

THE PERFORMANCE MANAGEMENT PROCESS

values beliefs and vision

corporate strategy
HR strategy

unit, team and individual objective

mechanism to support and measure performance
objective setting
appraisal-formal and informal
regular feedback
performance related reward
training and development
personal development plans

Figure 2.1 the performance management process (Pilbeam & Conbridge, 2006)

Performance management process need to be designed and implemented within the contact of
the organisational structure and culture while acknowledging the important role of development
and motivating in seeking to gain employee commitment which is central to the achievement of
positive organisational outcomes such as high quality goods and services which are at the heart
of organisational performance. (Guest 2000)

On the other hand, Cokins describes performance management as giving managers and employee
teams of all levels the capability to improve their organizations direction, traction and speed and
most importantly move it in the right direction. One of the problems of performance
management according to him, is that performance managements definition is restricted to as
being only about better strategy, budgeting, planning and finance with an emphasis on
measurement, however he suggests that performance management can offer much more than
that, and he emphasises that performance management is the translation of plans into resultexecution and it is the process of managing exit strategy. (Cokins, 2006 in Adler 2006)

2.1.2 Purpose of Performance Management

The most important aim of performance management is to establishing a high performance
culture in which individuals and teams take responsibility for the continuous improvement of
business process and for their own skills and contributions within a framework provided by
effective leadership. Its main purpose is to focus people on doing the right things by achieving
goal clarity. In other words, the purpose of performance management is to get better outcomes
from the organization, teams and individuals by understanding and managing performance
within an agreed framework of planned goals, standards and competence requirements.
Performance management can also make a major contribution to the motivation of people by
providing the foundation which, many non-financial motivation approaches can be built.
(Armstrong, 2005, p 275)

Armstrong (2006) identifies the aim is to develop the capacity of people to meet and exceed
expectations to be achieving their full potential to the benefit of themselves and the organization.

Performance management is concern with ensuring that the support and guidance people need to
develop and improve are readily available. According to him the aim of the performance
management at every stage is to obtain agreement between managers and individual on how well
they are doing and what can be done together to develop strengths and deal with any weaknesses.
He suggests that, discussions between managers and individuals should take the form of a
dialogue, managers should not attempt to dominate the process and it should not be perceived as
an alternative method of control. (p.67)

2.1.3

The Principles of Performance Management

The principles of performance management have also been summarized by IDS. It translates
corporate goals into individual team, departments and individual, team, department and
divisional goals.

It helps to clarify corporate goals

It is continuous and evolutionary process, in which performance improves over time.

It relies on consensus and cooperation rather than control or coercion.

It creates a shared understanding of what is required to improve performance and how

this will be achieved.

It encourages self-management of individual performance.

It requires a management style that is open and honest and encourages two-way
communication between superiors and subordinates.

It requires continuous feedback.

Feedback loops enable the experiences and knowledge gained on the job by individuals
to modify corporate objectives.

It measures and assesses all performance against jointly agreed goals.

It should apply to all staff.

It is not primarily concerned with linking performance to financial reward. (IDS 2004,
in Armstrong, 2006, p277)

2.1.4

Performance Measurement

Measurement is complex, frustrating, difficult, challenging, important, abused and misused

(Sink, 1991 in Lebas, 1995) as Lord Kelvin said, if you cannot measure it, it does not exist
(Lebas,1995)

With the increased recognition of the problems that affected many company appraisal schemes,
there has been a shift of emphasis from performance appraisal to performance management.
Realizing the importance of integrating HR policies and business strategies, employers have
focused on the role of performance appraisal within a broader organizational context in which
appraisal is only one part, although the key component, of a more systematic process of
performance management. The key encouragement for this development has been the more
competitive environment in which firms operate. This has placed a high quality on firms
ability to measure and improve the performance of their staff. (Bach, 2005)

Amaratunga and Baldry (2002) suggest that appraisal can be used to motivate staff to
improve performance by establishing clear objectives for the future and letting them know
what is expected of them. This contrasts with an appraisal process which is primarily
concerned with distributing rewards based on an assessment of past performance. The appraisal

process can be more geared to development with training needs identified to remedy
deficiencies in performance revealed by the appraisal process. They further argued that;

In order for an organisation to make effective use of its performance measurement outcomes it
must be able to make the transition from measurement to management, it must also be able to
anticipate need changes in the strategic direction of the organisation and have a methodology in
place for effecting strategic change. This concept is defined as performance measurement
literature. (Amaratunga D & Baldry D, 2002)

Bach (2005) argues that; the increased importance of performance appraisal has, however,
been accompanied by greater awareness of its limitations. Recognition that performance
appraisal has often fallen short of managerial expectations has led to an emphasis on linking
individual performance appraisal to corporate objectives, ensuring 'there is a clear line of
sight' between organizational and individual requirements. Also according to him; there
has also been the growth of more varied forms of feedback and broader measures of
performance. A stronger emphasis on employee development is reflected in the extent to
which appraises have increased responsibility for guidance performance appraisal and
employers are also placing more emphasis on values, using performance appraisal to highlight
the behaviours expected of staff. (Bach, 2005)

2.1.5 Effects of Motivational Factors on Performance

A managers first priority is to motivate employees at the very extreme level. On most occasions
this means making them concentrate on the work, and encouraging them to work hard on
motivating them to contribute to the organizational goals. Nevertheless, performance is not

always motivation dependent. It also means that the work conditions and atmosphere of the work
place should also be in place.

Vroom finds an explanation for this relationship by creating a formula that is

P= f (M, A and E)
Where, P= Performance, M=Motivation, A= Ability and E= Environment.

He states that in order to have a high level of performance employee should have a desire to do
the job (motivation), he or she should be able to the job (ability), and should be supplied with
enough working materials to do the job (environment). In the absenteeism of one of these
variables the performance of employee will be disturbed. Therefore he comes to a conclusion
that the needs and conditions that enable the employee to do the best job should be supplied by
the managers. (Vroom, 1964 in Fincham& Rhodes, 2005)

In summary, it is very important to understand motivation and its effects on employees

behaviour, however, managers should also be aware of the conditions which enhance the
employee motivation and try to create situations where motivation can increase employee
performance and consequently, organisational performance.

2.2 MOTIVATION
Over the last few years motivation and its effects on employee performance has been a major
discussion point for many researchers, the reason for this was to find out how managers can

increase and develop their workforces knowledge and skills to attain the best performance by
operating in the companys full capacity.

Motivation has taken by all theorists as a key management term that describes everything
managers need to be aware of. It is clearly identified that without knowing what motivates
employees to behave in certain ways, managers can fall into huge trap and can make serious
mistakes when leading their employees to achieve organisational goals.

One of the basic definitions of motivation was put forward by Steers and Porter (1991) as the
set of forces that cause people to behave in certain ways. (p.5). Moreover, Ivancevich, Donnely
and Gibson (1983 in Steers and Porter, 1991) defined motivation as all those inner striving
conditions described as wishes, desires and drives (p.359). These conditions cannot be seen, or
felt but could only be observed from ones behaviour. Therefore managers are not able to measure
motivation directly since it is not observable. On the other hand, Katerberg and Blau (1983 in
Fincham& Rhodes,2005) defines motivation as the enthusiasm of employees to use high levels
of effort to reach targets set by the organization while satisfying their own needs..

As is known, one of the main duties of a manager is to find ways to motivate and lead people so
as to improve their performance. For this reason, managers should reward employees to get best
performance from them for the organizations interest.

2.2.1 Motivation Theories

Unsatisfied needs create tension on an individual which push drives. These drives force the
individual to find the ways of satisfying the need and reduce tension.

THE MOTIVATION PROCESS

Unsatisfied needTension

Drives

Search
behaviour

Satisfied need
Reduction of tension

Figure 2.2 The Motivation Process (Robbins, S.P, 1996, P 148)

As the figure illustrates motivated employees are in a tension state. In order to reduce this
tension these individuals exert effort. As the tension increases effort level also increase.
However, tension of the individual reduces when the satisfaction of need experienced. But this
tension reduction effort must also be in the line with organizational goals. For this reasons, it is
essential that individuals needs are well-matched and consistent with the organizational goals.
Where this not presents employees put extreme effort to satisfy the need which is not the interest
of the organization. (Fincham& Rhodes, 2005)

2.2.2 Vrooms Expectancy Theory of Motivation

The expectancy theory observes motivation as process governing choices. Thus, to be able to
accomplish the targets employees must execute some behaviour. For that reason, employees
think that some behaviour will be enough to rich desired target and if they think that convinced
behaviour is superior to other behaviours in order to achieve goal then they are most likely to
select that behaviour. (Vroom, 1964 in Dalryple, D. J & Cron W. L. 1998)

EXPECTANCY MODEL

EFFORT

PERFORMANCE
(first-level outcome)

Expectancy

REWARD
(second level outcome)

Instrumentally

Figure 2.3 Vrooms Expectancy Model (Dalryple, D. J & Cron W. L. 1998, p.490)

Expectancy theory was designed around the relationship between employees effort and
performance and the desirability of outcomes linked with high performance.

P expectancy tries to find out if putting effort in order to complete a task can lead to

high performance .Hence, it is believed that for this expectancy to be superior the employee
should the ability , experience , required tools and should be given chance to perform.

O expectancy tries finding out if victorious performance carries the desired outcome with

itself. For instance, if the employee is concentrated on winning a reward by completing a task
effectively, in this situation, victorious performance will certainly bring the reward.

Thus, it will not be wrong to say that P

O expectancy moves at the same direction, this is, if

expectancy is high she/he will highly motivated. For the individual, Valence is the value of

outcomes or desirability for outcomes. Husemen and Carol believe that expectancy theory has a
potential to be used widely in organizations in the future. It might especially be used in
motivating employees and leadership management. (1979 in Dalryple, D. J & Cron W. L. 1998)

2.2.3 Porter Lawler Model

It has been started that although satisfied behaviour increases performance dissatisfied behaviour
reduces it. Both two factors and expectancy theories of satisfaction were proposed to determine
what motivates people when they are dissatisfied, nevertheless, they do not offer an absolute
answer fro the correlation between satisfaction and performance outcome.

Porter- Lowler model is extension of Vrooms expectancy model and was proposed to provide a
complete answer for the relationship between satisfaction and high performance outcomes.
(Smith and Bannock, 1990)

Motivational cycle begins with effort which is the purpose for expected reward. This effort then
connects to the abilities, traits and role perceptions to determine the performance. The outcomes
of results emerge in two types; intrinsic and extrinsic rewards. Intrinsic rewards are elusive and
may be a feeling of success and a sense of achievement and so forth. On the other hand, extrinsic
rewards are tangible and can be listed as pay and promotion. Therefore, an employee measures
his or her performance in an organization with the reward is equivalent to the outcome than the
employee will be satisfied in opposite cases dissatisfaction occurs. (Smith and Bannock, 1990)

In subsequent cycles, satisfaction with rewards influences the value of the rewards anticipated,
and actual performance following effort influences future perceived efforts and rewards
possibilities (Porter and Lawler,1968 in Smith and Bannock, 1990, p231)
2.2.4 The Role of Job Design in Motivation
Hackman and Oldham suggested that jobs differ in the extent, to which they involve five core
dimensions,
a) Skill variety. The extent to which they require the use of a number of different skills and
talents
b) Task variety. The extent to which they require the completion of a whole, identifiable
piece of work
c) Task significance. The degree of impact they are believed to have on other people inside
and outside the organization they are situated in
d) Autonomy. The extent to which they provide freedom, independence, and discretion in
determining such things as workplace, work breaks, and allocation of tasks
e) Task feedback. The extent to which they provide clear and direct information about
effectiveness of performance. (Hackman and Oldham 1975 in Fincham& Rhodes, 2005)

They suggested that if jobs are designed to increase the presence of this core dimension- such as,
by combining tasks and opening feedback channels, three critical psychological states can occur
in employees;

a) Experienced meaningfulness of work. This is determined by the level of skill variety,

task identity, and task significance

b) Experienced responsibility for work outcomes. This is determined by the amount of

autonomy present.
c) Knowledge of results of work activities. This is determined by the amount of feedback
present. (Hackman and Oldham 1975 in Fincham& Rhodes, 2005)
According to Hackman and Oldham, when these critical psychological states are experienced,
work motivation and job satisfaction will be high. Also, behavioural outcomes, such as the
quality of work and attendance, may also be improved. (Hackman and Oldham 1975 in
Fincham& Rhodes, 2005)

JOB CHARACTERISTIC MODEL

Implementation
concepts

Core job
characteristics

Critical
psychological
states

Personal and work

outcomes

Combining tasks

Forming natural units of work

Skill variety
Experienced
meaningfulness of
the work

High internal work motivation

High quality performance

Task identity

Establishing client relationships

High
satisfaction with the work
Vertical loading

Task significance
Experienced responsibility for outcomes of the work
Low absenteeism and turnover

Opening feedback channels

Task
Knowledge of the actual results of work activities
Autonomy

Feedback
Employee growth need strength

Figure 2.4 Hackman and Oldhams job characteristic model (1975 in Fincham& Rhodes, 2005)

2.2.5 Motivation in Performance Management

Since studies showed that employees are not only motivated by money but their behaviours
linked to their attitude, employee needs of motivation become a major issue for management.
Verhellen (1994 in Llooyd, Jones, 2005) argues that motivation strategies purpose to build a
working environment and develop polices and practices which will provide for higher levels of
performance from employees. On the other hand, Tarkenton suggests that employees will be
concerned with measuring motivation to provide an indication of areas where motivational
practices need to be improved; ensuring that employees feel they are valued, developing
behavioural commitment, developing an organization climate which will foster motivation,

improving leadership skills, job design, compensation and reward management, and the use of
behavioural modification approaches. (Terkenton, 1986 in Llooyd, Jones, 2005 )

It is argued that although lack of money can cause dissatisfaction, its provision does not result in
lasting satisfaction either. For people on fixed salaries or rates of pay who do not benefit directly
from an incentive scheme, they may feel good when they get an increase; apart from extra
money, this is a form of recognition and help individual to fell that they are valued; however this
feeling does not long last. (Herzberg, 1957 in Fincham& Rhodes, 2005)

Managing the performance of others would appear to involve both intrinsic and extrinsic
motivation. The actual process of performance management relates to intrinsically
motivating people through performance reviews, training and development and objective setting
whereas the actual outcomes of performance management, the 'tangible' rewards, relate to
extrinsic motivation. The motivational theories have implications for practitioners at each of
the three stages of performance management: planning, managing, and reviewing. (David and
McBain, 2004)

It is also worth noting here that unwillingness to transmit negative feedback to employees has
been attributed to a variety of motives including: a concern that it could prove
demotivating; a recognition that their own lack of support and guidance may have
contributed to poor performance; and a more straightforward concern to avoid conflict.
(Longenecker 1987 in Fincham& Rhodes, 2005)

2.2.6 Performance Management and Non-Financial Motivation

Do financial incentives motivate people? The answer to this question according to Kohn is
absolutely not. He claims that 'no controlled scientific study has ever found a long-term
enhancement of the quality of work as a result of any reward system. It becomes disturbingly
clear that the more you use rewards to "motivate" people, the more they tend to lose interest in
whatever they had to do to get the rewards '. (Kohn, 1993 in Armstrong 2005, p56)

On the other hand, Pfeffer (1998) notes that: 'People do work for money - but they work even more
for meaning in their lives. In fact, they work to have fun. Companies that ignore this fact are
essentially bribing their employees and will pay the price in lack of loyalty and commitment.'
(Pfeffer 1998 in Armstrong 2006) He believes that pay cannot substitute for a working environment
high on trust, fun and meaningful work. Therefore it is hard to say that money is the only and
powerful motivator in PM process.

In todays business environment employees are motivated by the fulfilment of higher level
needs. Pay is not the only motivator. Many people nowadays not essentially motivated by
successful career but concerned about personal fulfilment. Thus, for these people, leisure time,
family ties and non material satisfaction actors are equally important as work. (Deutschman,
1990)

Non-financial motivation is provided by performance management through recognition the

provision of opportunities to succeed skills development and career planning and by job
engagement and commitment. Although extrinsic motivators can have an immediate effect, it

does not necessarily last long. As in Pfeffers argument; the intrinsic motivators; quality of
working life, are likely to have a deeper and longer-term effect as they are not imposed from
outside but inherent in individuals. Armstrong identifies the four factors which has effects on of
non-financial motivation.

Performance

management

and

recognition;

Involves

recognizing

peoples

achievements and strengths.

Provision of opportunities to achieve; PM is founded on joint agreements between

managers and their role can be developed. It is therefore an essential part of job or role
design and development activities.

Performance management and skills development; which refers that PM can provide
a basis for motivating people by enabling them to develop their skills. It provides an
agreed framework for coaching and support to enhance and focus learning.

Performance management and career planning; performance management reviews

provide opportunities to discus the direction in which the career of individual are going
and what they can do with the help of the organization to ensure that they follow the best
career path for themselves and the organization. (Armstrong, 2006)

2.2.7 Issues for Future Research on Performance and Motivation

Bach suggests that; there is a clear trend towards increased employee ownership of the
performance management process with employees assigned greater responsibility for
establishing their own performance goals and for obtaining feedback on their
performance. Instead of employees' being passive recipients of their line manager's

appraisal they are increasingly involved via some form of self-assessment, usually see
the final appraisal form, and are given the opportunity to comment on the written
report. (Bach, 2006)

In cases in which multi-source (360 degree) feedback is utilized, employees have an

integral role in the selection of individuals that will provide this feedback. He
suggested that, this development not only reduces some of the administrative workload
for line managers, but it also reflects the trend to make employees respons ible for their
own performance development. Also according to Edwards;

Three-hundred-and-sixty-degree feedback represents marketing intelligence, targeted to the

feedback receiver. The process may also be considered an instructional technology because, for
many people, the opportunity to see themselves as they are seen by others is novel, instructional
and motivating. The most valuable performance information is that which is specific to the
situation and identifies key areas for targeted action. Fortunately, work associates, team members
and even direct reports are quite willing to provide such specific feedback which enables
improvement of individual, team, and organizational performance.(Edwards, 1996)
He argues that three-hundred-and-sixty-degree feedback makes better performance possible
because it:

Enhances information quality

Provides specific performance feedback

Targets developmental areas

Provides strong motivation facilitates

Performance improvement

Allows measurement of training effectiveness

Enhances self knowledge

Supports continuous learning

Improves the reliability and validity of performance information. (Edwards, 1996)

One another approach that suggested by Kaplan and Norton is balance scorecard which seeks the
redresses the balance by focusing on four perspectives;

1. The learning and growth perspectives; examines employees need to do their job
effectively, the employee tools required and the motivation employees have to use their
capabilities and tools most effectively. Learning and growths is the foundation in
achieving high levels of performance.
2. Business processes; has three key aspects: the underpinning values which drive the
business, the support process which deliver the values and the good citizenship processes
which seek to maintain good relationships with stakeholders.
3. The costumer perspective; defines the costumer value proposition and articulates how
the organization

will be distinctive from others. The costumer value proposition will

include cost, quality, service, time and innovation and it may be based on operational
excellence, product leadership or costumer relationship.
4. The financial perspective; supports the development of the measures in the other three
perspectives and includes profitability, growth, risk, intellectual assets and value
creation. (Kaplan and Norton , 1992 in Pilbeam S, Corbridge Marjorie, 2006 p 124
Kaplan and Norton argued that; In practice, a small number of interrelated measures are
identified against each of the four perspectives and are able to be displayed on a single
sheet-hence the balanced scorecard. This approach enables managers and employees to see
the key targets informs judgement on which areas are doing well and which are doing less

well. As with employees performance management process, the success, or failure, of the
balanced scorecard is significantly affected by the precision with which objectives are set
and valid and reliable measurements are taken. (Kaplan and Norton , 1992 in Pilbeam S,
Corbridge Marjorie, 2006 p 165)
2.3 REWARD MANAGEMENT
As it is known, managers first priority is to find the ways to motivate and lead people in the way
that will improve their performance. For this reason, managers should reward employees to get
best performance from them for the organisations interest. Mullins (2002) argues that managers
can use two types of rewards to motivate employees: intrinsic and extrinsic rewards. Instincts
rewards defined as reward that occurs in connecting with direct consequence of a persons
behaviour. For instance, in some cases a complication of a difficult task may give a person the
sense that he/she had achieved very good results. Extrinsic reward on the other hand, is these
promotions, pay increase and security. It is also named as tangible rewards. The other sets of
factors known as motivators which are intrinsic naturally. For instance; a sense of achievement,
recognition, responsibility, prospects of growth and advancement. (Mullins, 2002) These
motivational factors may manipulate behaviours that reveal superior performance in
organisations.

It has also been identified that an individuals behaviours also affected by psychological traits.
Various traits can influence the magnitude and accountancy of a persons expectancy and
instrumentality establishments (Mc Clelland and Burnham, 1976) People who are motivated by
strong achievement needs are usually looking for rewards such as recognition, personal growth
and feeling accomplishment.

2.3.1 Definition of Reward Management

Employee reward has been defined as all forms of financial returns and tangible services and
benefits employees receive. (Milkovich & Newman 1989 in Perkins 2006). The main objectives
of reward used to be recruit and retain staff whole providing a degree of cost control. However,
organization become more strategic towards reward and have designed reward systems that
include attracting key talent to he organization, motivating employees to contribute their best,
getting employees focused on business goals, and encouraging behaviour compatible with
corporate values. (Breet, 2006)

As Duncan Brown explains;

Reward systems become an important means of communicating and reinforcing the business
gaols of the organization, not just because pay represents an important cost for many
organizations, but because reward systems can incentivise employees to pursue and achieve these
goals, and to develop and apply the essential capabilities and skills supporting them. (Duncan
Brown in Breet, 2006)

2.3.2 Relating Reward to Performance

Performance management if carried out properly can motivate people by functioning as a key
component of the total reward process. It provides reward in the form of recognition through
feedback, opportunities to achieve the scope to develop skills and guidance on career paths. It
can encourage job engagement and promote commitment. All these are non-financial rewards
which can male a longer-lasting and more powerful impact than financial rewards such as
performance relate pay. (Armstrong, 2006, p278)

The argument for separation is that the linkage with pay may affect the honesty of self-appraisal
and interfere with the development objectives of the appraisal process by effectively

transforming the manager form a coach to a judge. The employee is likely to be self-critical and
expose weakness and development needs if it is going to impact on the allocation of monetary
reward. However in practice it is difficult to divorce the formal appraisal process from pay
decisions. Intrinsic and non-financial rewards, such as the provision of opportunities for selfdevelopment and reinforcement of a sense of achievement through positive feedback from the
manager, have an import role in relating rewards to performance. (Brown and Armstrong, 2006)

Restructuring within organizations, with an emphasis on decentralized decision making and

greater responsibilities placed on line managers for staff management, has lent itself to the
use of performance management systems seeking to align individual and corporate objectives.
Evaluating individual performance remains the main focus of performance management
systems, but it is also used to help make reward decisions especially in the private sector.
Moreover, many organizations have viewed the introduction of more formalized
performance management as a means to facilitate cultural change and establish and evaluate
staff against a set of organizational core competencies.(IRS 2003a:9 in Armstrong)

2.3.3 Pay for Performance

The answer to the question of whether financial rewards make a direct impact on performance or
not in the 1880s and 1990s was a clear yes through individual performance-related pay.
However pay for performance is still a common practice, the e-reward 2004 survey of contingent
pay found that 65 per cent of respondents had pay for performance, does not mean successful it
has often failed, because of poor supporting process, especially performance management,

inadequate consultation with those concerned, and line managers without the commitment or
capability to implement it fairly and consistently. (Brown & Armstrong, 2006)

Paying for performance, competence and contribution is still used by many organizations since it
is accepted as fair and equitable to reward employees differently depending on their
performance, competence and contribution. It also emphasises the fact that performance and
competence are important so that it motivates people to perform better. (Armstrong, 2005) On
the other hand research conducted by Marsden and Frenchs suggested that only a few people
who got financial rewards might be motivated while the majority of people, who did not, were
de-motivated; therefore pay for performance made negative impact rather than positive.
(Marsden &French, 2003 in Armstrong & Baron, 2005)

Another research conducted by the Corporate Leadership Council in 2002 to establish the
percentage impact of different strategies on individual performance found that financial
incentives has a significant impact on intent to stay (19 per cent) and commitment (13 per cent)
but an almost negligible impact on individual performance (2 per cent). Extrinsic financial
motivation such as a pay for performance or bonus scheme only works if the link between effort
and reward is clear and the value of the reward is worth the effort. It is suggested that it is a bad
mistake to believe that money by itself will result in sustained motivation. One of the problems
concerning the impact of financial reward on performance is fairness or distributive justice.
Without it, the impact of pay may be considerably reduced. (Baron and Armstrong, 2005)

Financial rewards, on the other hand provide extra money for extra achievement in terms of
contribution or output. The emphasis is on recognition and on equity, in the sense of paying
people according to their just deserts. However, the relationship between pay and future
performance is not always clear. This difference emphasizes the fact that pay-for-performance
schemes which are designed to provide motivation and incentives may fail in practice, although
will be worthwhile to recognising contribution. (Mwita, 2002)

PERFORMANCE, PAY AND MOTIVATION MODEL

Needs
(food)

Values
(money can
buy food)

Goals
(receive
payment)

Action
(go to
work)

Figure 2.5 Performance, Pay and Motivation Model, (Locke and Henne, 1986 in Fincham&
Rhodes, 2005))

Locke and Henne (1986) argued that there is strong linkage between an employees performance,
pay and motivation. This linage can be perfected by building blocks as illustrated above.
(Fincham& Rhodes, 2005)

According to Goldthorpes (1968 in Mwita 2002) research pay is the dominant factor in the
choice of employer and considerations of pay seem most powerful one. Financial incentives
motivate people who are strongly motivated by money and whose exceptions that they will
receive a financial reward are high. However less confident employees may not respond to
incentives, which they do not expect to achieve. As noted, although money can provide positive

motivation in the right circumstances not only because people need and want money but also
because it serves as a highly tangible means of recognition. However badly designed and
managed compensation and reward system can demotivate. Mwita (2002)

2.3.4 Reward and Motivation

Rewards provide recognition to people for their achievements and contribution and they could
act as motivators, if individual consider that worth having and attainable and know how they can
attain them and it could be form of financial and non-financial. On the other hand, incentives are
designed to encourage people to achieve objectives. They provide direct motivation. Although
incentives are generally financial, they can be delivered in a non-financial form - such as
promotion or any other assignments that could be interesting for individuals.

It has been suggested by Wallace and Szilagyi that money can serve the following reward
functions. They argued that, financial incentives and rewards can motivate. People need money
and therefore want money. It can motivate but it is not the only motivator. They suggested that,

It can act as a goal that people generally strive for, although to different degrees

It can act as an instrument which provides valued outcomes

It can be a symbol which indicates the recipient's value to the organization

It can act as a general reinforce because it is associated with valued rewards so

often that it takes on reward value itself (Wallace and Szilagyi, 1977 in Armstrong,
2005)

2.3.5 Strategic Reward and Performance

Expectations of both the reward and diversity functions have shifted in the past decade to
become more strategic and supportive of business goals. Both seek to engage employees and
central to this is ensuring individuals receive a fair reward for their work. The growing diversity
of the workforce needs to be considered when designing reward strategies. (Brett, 2006)

One of the main objectives of strategic reward management is to create a high performance
culture in order to deliver improved individual and organizational performance. As Brumbach
explained performance means both behaviours and results. Behaviours occur from the performer
and transform performance from abstraction to action. Not just the instruments for result,
behaviours are also outcomes in their own right (Brumbach 1988 in Armstrong &Brown, 2006)

Reward system consists of financial and non-financial rewards. Financial rewards consist of
fixed pay, variable pay and employee benefits. On the other hand non-financial rewards are
recognition, praise, achievement, responsibility and personal growth. Reward strategy defines the
intention of the organization on how its reward policies and processes should be developed to
meet business requirements. (Mwita, 2002)

According to Mwita (2002), an effective reward strategy is based on several attributes including
corporate values and beliefs, as result of business strategy to which it also contributes; and is
driven by business needs and fits the business strategy. He suggested that the strategy should be
develop in a way that integrate with organisational and individual competences and other
personnel and development strategies; and be appropriate with the internal and external
environment of the organization.

APPENDIX 1-Survey Questionnaire for Managers

1. Please indicate the extent to which you agree/disagree with the following statements
a)
The most important aspect of performance management is the setting of
challenging and stretching goals
b) Performance management will only succeed if it is part of an integrated approach
to the management of people
c) Performance management will only succeed if it integrates the goals of
individuals with those of the organization
d) It is essential that line managers own the performance management system
e) Performance-related pay is an essential part of performance management
f) The focus of performance management should be developmental
g) Performance management should be a continuous and integrated part of the
employee-line manager relationship
h) The main objective of performance management should be to motivate
individuals
2. How important are the following criteria in the measurement of individual
performance in organization?
a) Customer care
b) Quality
c) Flexibility
d) Competence
e) Skills/learning targets
f) Business awareness
g) Working relationships
h) Contribution to team
i) Financial awareness
j) Productivity
k) Aligning personal objectives with organizational goals
l) Achievement of objectives

3. What are the key factors which you use to determine whether performance
management effective? Please ranked the following objectives of the any incentive
scheme in your organisation between 1 and 10, where 1=highest and 10=lowest rank
a)
Achievement of financial targets
b)
Development of skills
c)
Improved costumer care
d)
Changes in behaviour
e)
Motivation
f)
Productivity
g)
Development of competence
h)
Improved quality
i)
Changes in attitude
j)
Labour turnover

a)
b)
c)
d)
e)

4. In general, how effective have your organizations performance management

processes proved in improving overall performance?
Very effective
Moderately effective
Effective
Ineffective
Dont know

5. What is your organizations main purpose of operating an incentive scheme?

Please ranked the following objectives of the any incentive scheme in your council between
1 and 6, where 1=highest and 6=lowest rank
a) Reward good performance
b) Promote organizational change
c) Motivate employees
d) Increase commitment to the organization
e) Improve performance of the organization
f) Reinforce existing culture, values and performance expectations
6. What is your personal view on the following statements?
a) The most important thing about a job is pay
b) The kind of work I like is the one that pays top salary for top performance
c) I give considerable amount of feedback concerning the quality of output on job
d) A performance based incentive scheme promotes improvement in
organizational performance
e) An incentive scheme improves communication with the individual supervisor, the
managers immediate supervisor and an improvement in performance
f) A performance-based incentive scheme helps managers to focus on certain
objectives
g) A performance based incentive scheme provides greater opportunity to interact on
a more frequent basis with the supervisor for discussing the focus of direction of
the targets set

7. Please ranked the following objectives of the any incentive scheme in your
organization between 1 and 7, where 1=highest and 7=lowest rank
a) Performance based pay incentives are not successful in improving employee
motivation
b) Performance pay encourages employees to exercise a narrow focus on short-term
quantifiable goals, neglecting long term issues
c) Difficult measure individual performance objectively
d) It is principally unfair in discriminating between individual contributions
e) Assumes the money best award
f) As result of operating a performance-based incentive scheme, my work objectives
are clear and specific. I know exactly what my job is
g) The process of linking pay to performance is ambiguous and very subjective

APPENDIX 2- Survey Questionnaire for Employees

1. How important are the following criteria in the measurement of individual
performance in organization?
a) Customer care
b) Quality
c) Flexibility
d) Competence
e) Skills/learning targets
f) Business awareness
g) Working relationships
h) Contribution to team
i) Financial awareness
j) Productivity
k) Aligning personal objectives with organizational goals
l) Achievement of objectives
2. In general, how effective have your organizations performance management
processes proved in improving overall performance?
a-Very effective
b- Moderately effective
c- Effective
d- Ineffective
e-Dont know
3. What is your personal view on the following statements?

a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)

I feel that my pay does not reflect my performance

My pay compares favorably with what I could get elsewhere
I think the organizations pay policy is overdue for a review
I understand how my job has been graded
I am clear about what I am expected to achieve
The performance pay scheme encourages better performance
The job evaluation scheme works fairly
I feel motivated after my performance review meeting
I do not understanding the pay policies of the organization.
My contribution is adequately rewarded
I am not paid fairly in comparison with other people doing similar work in similar
organization

4. What is your personal view on the following statements?

a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
m)
n)
o)
p)
q)
r)
REFERENCES

I am not clear how decision about my pay are made

I get good feedback on my performance
I am proud to work for the organization
I was given plenty of opportunity to contribute to formulating my objectives
I am quite satisfied that the objectives I agreed to were fair.
I received good feedback from my manager during the year on how well I was
doing
My manager was always prepared to provide guidance when I ran into any
problems with my work.
The performance review was conducted by my manager in a friendly and
helpful way.
My manager fully recognized my achievements during the year.
If any criticism were made during the review, they were based on fact, not on
opinion.
I was given plenty of opportunity by my manager to discuss the reasons for
any problems with my work.
Performance-based incentive scheme has no effect on my work performance
With performance-based incentive scheme my individual efforts and
achievements are recognized
With performance-based incentive scheme I have a clear idea about how the
organization is performing overall
I am generally told what is going on in the organization
I have got clear idea of what this organizations goals and plans are for the
future
Performance-based incentive scheme has yet to overcome some difficulties in
this organization
Performance-based incentive scheme makes me show more initiative

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