Performance-Related

Pay (PRP)
Lecture aims:

Examine the link between pay, performance and motivation

key themes in study of PRP
Highlight
Goal Setting and Productivity

Measurement
Motivation, Fairness and transparency

other roles for performance related-pay

Consider
Individualisation and control

Re-grading and job content

Pay-bill control

Defining Performancerelated pay

Definitions of
conflated
with

PRP are problematic as they are frequently

other payment systems which link pay to
performance it is often called merit pay too (WERS)
PRP is a method of remuneration that links pay progression to a
subjective
assessment of (individual) performance, usually
measured against pre-agreed objectives.

increases awarded through PRP are normally consolidated

intoPaybasic
pay although sometimes they involve the payment of
non-consolidated lump sums.

PRP can be defined to include many differing systems that link

individual
and group performance to pay.
CIPD Factsheet on Performance Related Pay (March 2010)
Source http://www.cipd.co.uk/subjects/perfmangmt/perfrelpay/prefrelpay.htm
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The extent of PRP

IPD survey of 5,000 (large) organisations found:
1998
40% of managers and 25% of employees covered by individual PRP

schemes
8% of managers and employees covered by team based PRP
6% of managers and 11% of employees covered by skill/competency
based pay

See http://www.eurofound.europa.eu/eiro/1998/03/feature/uk9803107f.htm

2011 - Survey of 21,981 employees

WERS
20% of workplaces used merit-based PRP systems where pay is

based upon subjective assessment of performance and 28% used

payment by results (objective assessment)
Evidence of growing use of PRP in private sector (from 16% in 2004 to
21% in 2011)
Expect greater use of PRP in public sector following Coalition plans on
pay progression (notably for teachers, but also in NHS).
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Relating pay to
performance
behind the application of PRP are associated
Assumptions
with psychological theories of motivation, notably expectancy
and goal setting theory which see a positive relationship
between work, effort performance and reward.

Offer a valued reward to employees

Employees increase work effort to obtain award based on clearly
established targets
Performance is frequently monitored through measurement of targets
and or continuous appraisal
Employees efforts are translated into improved organisational
performance

Problems associated with PRP schemes as hurdles

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The Expectancy Framework

Obstacles:
Inadequate skills
Weak goal setting
Poor coordination

Effort

Obstacles:
Poor performance measurement
Mgt. lack necessary money
Mgt.bad faith

Performance

Reward

Value of
reward
to employees

Obstacles:
No scope to increase effort
Very tight management
Already work at max.

Source: Marsden and French (1998)

Obstacles:
Performance rewards not valued
Other motivators more important
Conflicts with other motivators
Mgt. motives distrusted

Key issues in studying

PRP: Productivity

is impossible to demonstrate the impact of performance

Itrelated
pay schemes on organisational productivity

Complexity of measuring productivity in many settings

Impossibility of disentangling the impact of performance
related pay from a range of other contributory variables
Problems usually mean researchers rely upon (subjective)
views of managers and employees to ascertain a perceived
impact on performance
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PRP in the UK public sector

(Marsden and French 2007)

PRP as stated aim of government policy

Potential problems of operating PRP
reliance upon subjective measurement.
the use of selective financial rewards in a sector targeted for
pay restraint and pay freeze
conflicts between public sector ethos and PRP as a
motivator.
high levels of union membership (collectivism).

PRP schemes in the UK

public sector
Characteristics

Implementation:
Centralisation/imposition vs. decentralisation/discretion.
Coverage:
selective (manager only) vs. inclusive (all employees)
Appraisal:
individual vs. group
Annual Award (%):
part of annual reward vs. whole of annual award

Evaluating PRP using

expectancy framework (1)

The principle of Performance Pay

Rewards

Performance

majority of staff surveyed not opposed to the principle of

relating pay to performance (except teachers)
the amount of PRP available is an insufficient reward for
high performance or incentive to improve performance.
difficult to link PRP with performance, but limited effect of
PRP on quality (c.f. quantity) of work done
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Evaluating PRP using

expectancy framework (2)
of Performance
Measurement
difficult to measure type of work

done objectively, therefore

assessment requires subjective judgements. raising questions of
consistency and fairness

Fairness
quota systems; to control the overall paybill and maintain consistency

the distribution of performance markings are controlled

favouritism; the subjective nature of performance assessment is
perceived to lead managers to rewarding their friends
appeals procedures; not viewed as fair and effective and perceived
as requiring too much effort for too little reward.
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Evaluating PRP using

expectancy framework (3)

Demotivation
divisive: a large majority of staff believe PRP causes jealousies

and undermines morale.

teamworking: individual PRP schemes undermine teamworking by
placing staff in competition and group-based PRP raises problem
of free-riding.
work relationships: PRP makes staff less willing to help colleagues
and has a negative effect on co-operation with management.

opportunities
Equal
limited evidence of discrimination (against women and ethnic
minorities) in operation of PRP schemes.

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What is PRP really about?

PRP is frequently implemented as part of a range of new

HR measures aimed at issues of control:

Financial control

Managerial control

reward selectively without increasing the paybill

penalise poor performance by withholding pay
act as a substitute or fixed costs of promotion

restructure the employment relationship by individualising pay

setting
use PRP to bring about changes in job content (intensification and
extensification), usually in association with job evaluation
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Changes to the Inland Revenues

PRP scheme 1989-1993
1989

1993

No (standard for grade)

Yes

PRP based on
promotion system

PRP based on separate

Performance Agreement

Grading changes (JE)

No

Yes

Penalise poor Performance

No

Yes

Increments

Yes

No (weighted progression)

Cost of living

Yes

Yes (nominally)

Pay Consolidation

Yes

Yes (to pay band max.)

Appeals

Yes

Yes (after review)

Individual Objectives
Assessment procedures

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Conclusions

PRP schemes have become widespread, and their use in the UK private
sector has grown and will be extended in public sector
Most early substantive research into PRP was based upon psychological
assumptions of expectancy theory and focused upon motivation and
productivity
However, studies of PRP schemes raise a range of problems (inherent) to
their operation which question the impact on motivation and productivity
Need for a wider perspective on PRP which links it to traditional industrial
relations studies on pay (as with PBR schemes) based upon key issues of
financial and managerial control .
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