Performance Related Pay free essay sample

The Value of HRM to Business -Performance Related Pay Word Count: 2942 Table of Content 1Introduction3 2Literature Review4 3Case Study8 3. 1Case 1-Performance Related Pay: What Makes a Successful Scheme? 8 3. 2Case 2 Performance related pay: a case study of a small business. 10 4Analysis12 5Conclusion17 Reference18 Introduction Human capital plays a vital role in providing the organisation with a valuable competitive advantage; in addition a reward and pay system concerning the employment relationship, is often viewed as a key method in obtaining maximum human capital, and thus a central part of managing a business. A reward and pay system that ensures employees’ contributions to the organisation is measured by both financial and non-financial mean (Armstrong, 2007). Since it is crucial to the success of a business, selecting the most correct and appropriate reward scheme seems a part and parcel of attracting and in order to retain employees and survive in an environment with ever so fierce competition. In fact, there are numbers of reward systems, such as skill based pay and profit related pay. In this essay, we aim at mainly evaluating and analysing the value of performance related pay (PRP) in organisations. Literature Review From the early 1980’s, PRP rapidly developed as a motivator and way to create performance-oriented cultures, and became a popular pay scheme in organisations (Armstrong, 2002). And because of the horizontal trend of the organisations’ structure there will be less opportunity to motivate employees through promotion and then pay for reward system occupied an important role as a motivator (Conyon et al. 2001). Based on the IPD (1999)’s survey, approximately75% of respondents felt PRP had a positive impact on both individual and organisational performance. PRP is a method of reward, where the employees can receive an increase in remuneration wholly, or partly, through the individual performance assessment (ACAS, 1996:8). It serves as a kind of financial incentive to motivate employees to work harder, perform at their optimum level in light of creating higher productivity. There are many definitions for PRP. Mabey and Salaman (1997:211) puts it as an organisation that achieve its objectives through clear internal communications that is related to performance to the employees, constantly checking their objectives and to reward employees that perform well and made positive contribution to the organisation’s objectives. The definition highlights PRP’s functioning features. PRP is used by a company in order to able to recruit and retain suitable employees that fit into the company’s culture as well as indirectly inform underperforming employee to either perform better or leave. In addition, it is used to promote the company’s value such as performance driven, cost conscious and adaptable. This is done through making individuals committed and ensuring they understand and fully aware of company’s objective and business plan. The assumption of PRP is that individuals are money driven thus if they receive more pay, they will perform better (Kessler and Purcell, 1993; Armstrong, 2002). Silva (1998) defines that the providing of rewards and incentives to enhance organisational performance by improved individual performance as a broad objective of PRP. It links the employee’s economic returns with the individual, team and organisation’s performance. PRP is a rewards system that can increase employees’ performance, productivity, efforts and earnings (Lazear 2000; Paarsch and Shearer 2000; Parent 1999). According to the American establishment studies, PRP has a positive correlation with the high earnings (Booth and Frank, 1999). People who work for organisations with the PRP system in place are normally higher paid. Furthermore Mitchell et al (1990) found that employees who work these organisations have the opportunity to earn 11% more than those not. Weitzman and Kruse (1990) point out that linking pay to performance, may result in an increase of productivity, adversely it may be unpopular, because of the variable pay rates. PRP assists organisations to encourage employees to give greater effort, as well as serves the purpose of attracting employees with a greater skill and higher drive to achieve (Booth and Frank, 1999). It has an effect on recruitment and retention of staff, as it provides an opportunity for people to receive additional income. Little (1991) believes that pay links cause and effect, therefore employees of PRP systems become committed to the organisation and improve their performance in order to be paid more. However, theory X and theory Y regarding the motivation indicate that the real motivator for the employee is the actual work itself (Fuller-Love, 1997). Moreover, Armstrong (2002) believes that remuneration is not the only motivator, or even an effective motivator. PRP links the individual, team and organisation’s performance together. The company sets targets for employees based on its overall objectives. However, PRP encourages employees to focus on their own objective. They seek their short-term fulfilment in order to gain supplementary pay, thus the organisations long-term objective will land up being ignored (Armstrong and Baron, 1998). Performance assessment plays an important role in PRP. Armstrong (2002) said: â€Å"Organisations cannot pay for performance unless they can actually measure it†. Assessing the individual’s performance fairly, objectively and consistently is a complicated task (Armstrong and Baron, 1998). For the majority of jobs, it is difficult to find a detailed and systemic standard in which to measure with. Furthermore a supervisor’s own attitude may cause unfair assessment and even discrimination (Pilbeam and Corbridge, 2002). Hanley and Nguyen (2005) suggest that the company could implement frequent appraisals to solve this problem; however the other point is that this will cost the company more money (Booth and Frank, 1999) Setting clear and specific objectives is a complex task, since every job is different; and PRP puts a great deal more pressure on line managers (Armstrong, 2002) who spend much time and effort on setting these objectives, receiving feedback and assessing performance. PRP also presents a negative effect on team work. In this type of scheme, performance becomes a key factor to assess an employee; therefore some might simply focus on their own performance or even sacrifice team spirit in order to obtain higher individual rewards (Salaman et al, 2006). Moreover DeCkop (1999) points out that PRP could weaken the spirit of cohesion and cooperation, because it is a kind of competitive reward method. Case Study Case 1-Performance Related Pay: What Makes a Successful Scheme? The first case is researched by Aisling Kelly and Kathy Monks who conducted questionnaires on 107 managers who work in a multi-divisional company in Ireland, in order to understand their attitudes after the introduction of PRP to the company. According to the research, PRP is a highly welcomed scheme for this company ith 97% of managers agreeing that it is a good system, and 74% believing that it is also fair. From the data and the interview, we can observe that most of the managers are of the opinion that PRP has a positive effect on both the individual’s and organisation’s performance, with 75% of managers believing that PRP creates a general performance improvement. As well as this, the research also indicates a tie between communication and perform ance. The PRP system requires more frequent communication between the supervisor and the employee in order to discuss the particular objectives. These objectives provide a clear description allowing the employees to fully understand their work. This case also reveals that employees who are clear about their work’s goals and the value of the company will possess a greater desire to accept PRP. And it can be observed that these employees were all clear about the company’s plan and performance. The managers ranked four main disadvantages of PRP, however. The first is that it is complicated to measure individual performance objectively. Even though 87% of the managers are of the opinion that their work objectives are clear and specific, the performance is still difficult to measure, since this information is simply not adequate enough for evaluating the performance. Second, the interaction concerning the feedback with supervisor is lacking. The third drawback is the PRP system’s over-emphasis on the short-term objectives. PRP encourages employees to focus on the short-term performance, which ultimately results in the neglect of the long-term objectives.