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Does performance related pay motivate or de-motivate employees?

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Veit Muerz CB 519 HRM Assignment No. 2 Deadline 14th January 2002 Does performance related pay motivate or de-motivate employees? Performance related pay schemes aim at linking pay to a measure of individual, group or organisational performance in a company. Motivation can best be defined as the willingness to undertake certain kinds of action. Performance related pay (PRP) has three aspects to it. Paying the employee for output is an objective method of assesing performance. Likewise, paying the employee for input is a subjective method, since it is hard to value the effort. The third method is a hybrid of the two, where both in- and output are measured. "PRP schemes attracted considerable attention in Great Britain in the 1960s and 70s. At the firm and workplace level the focus was on eliciting effort and ensuring that the payment system was appropriate for the activities of the organization." ( Fernie, S. & Metcalf, 1999) The objectives of PRP schemes should ideally be laid out in a specific, measurable, achievable, realistic and time related manner by the management to stimulate performance (Fernie, S. & Metcalf, 1999) The financial rewards are basically of three types: 1. ...read more.


(Dublin City University 1996 - 1997) Another factor why a performance related pay system might be demotivating is the danger of discrimination, when operating such a system. Recent research found that performance based pay systems often discriminate against women because: the appraisal process is subject to gender bias and stereotypes; women's skills are often undervalued by their managers (and by women themselves); women - especially those working part-time have fewer opportunities for training, and managers are less likely to correctly assess women's training needs. (M.T. Strebler et al.,1997). Performance pay may run counter to the development of objective, gender-neutral job evaluation schemes, which are being introduced to achieve equal pay for work of equal value. (Unison Trade Union - Public Services union - Fact sheets 2001) Most managers are aware of Herzberg's (F. Herzberg - Work and the Nature of Man, 1966) view that the job itself is the source of true motivation, not the pay or even the conditions of work' (Dwyer, 1994: 17). A study by Kovach (1987) reported a mismatch between managerial and employee views concerning what motivates. While managers attributed high financial needs to employees, staff cited pay as fifth on a list of ten factors, while the other four were concerned with intrinsic motivators. ...read more.


The objectives of the business need to be translated into effective and meaningful performance criteria. PRP schemes must offer differential levels on performance rating, so that high, medium and low performance levels are adequately rewarded. The new PRP scheme needs to be communicated to all the employees, with clear reasoning as to why the PRP schemes are being introduced. PRP schemes, should, like any other pay structure needs to be reviewed regularly to ensure its appropriateness to the needs of the business. The goals and rewards must be; known, understandable; and attainable. Reward must be distinctly and directly related to performance" According to Beer et al. (1984:124), `the motivational and satisfactional value of a reward system is a function of the perceived equity of the reward system'. Without the presence of this perceived fairness, trust in the system is likely to be low and there is the distinct risk that the contingent link between performance and pay will not be accepted. In addition to the issue of fairness, problems associated with PRP include a tendency toward a short-term focus on quantifiable goals to the neglect of more long-term issues, such as financing PRP in times of adverse economic climate. ...read more.

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