HISTORY
According to Filer et al (1996, p333) payment according to time or hourly wage rate and payment by result or piece rate represent traditional models that have been used by employers since the 14th century.
White and Druker (2000, p**) and Mahoney (1993), cited in Towers (1996, p285) identified that fixed pay systems were required due to the increased management “control” of the late 19th century and early 20th century. Here pay schemes reflected scientific and time based management methods that were at the core of the employment relationship. This lead to managers being paid a set salary and workers were being paid an hourly wage.
According to Heery, cited in White and Druker (2000, p64) mass production in the early 19th Century became associated with standardised pay arrangements, which were often negotiated at industry level through multi-employer bargaining. Piore and Sabel (1984) say that pay was set on the basis of a rate for the job. Mahoney (1992) comments that this was an era where the job concept and payment methods used were in line with Taylor’s scientific management approach to organisation and management
Torrington et al (2002, p600) states that one common fixed method, namely payment by results (PBR), was conceived for the stable and predicable work situations of the early 19th Century. The author adds that the dramatic changes of the 1980`s and 1990`s swept away this stability and demanded that organisations be more responsive and dynamic. This, according to Torrington et al (2002) had the effect of making PBR obsolete and leading to demand for new payment methods that were more responsive to business needs.
____
Heery , cited in White and Druker (2000, p64-67) noted that there has been substantial changes in UK pay systems since the late seventies, most notably the decline of agreements by collective bargaining and increasing control by management of the methods for and practices of reward systems, including payment methods.
According to Cappelli (1995, p 178 ) there have been fundamental changes in the nature of work and employment relationship.
Heery, cited in White and Druker (2000) cites the reduction in manufacturing, rising unemployment, organisational de-layering and the rise in service sector employment as reasons for the need for new payment methods such as PRP. They add that the introduction of such incentive schemes this signalled a severe reduction of union power in these heavily unionised sectors.
According to Purcell and Ahlstrand (1994) and Edwards ( ****) cited in White and Druker (2000, p **) larger corporations decentralised and began to place more emphasis on accountability and flexibility of individuals. The authors indicate that traditional pay methods were incapable of reflecting this trend
Performance related pay is a key element among personnel practitioners in the management of reward and remuneration systems and is a fairly recent development, particularly in the public sector, which has grown sharply in use since the 1980s (White and Druker ,2000, p 216, Torrington et al 2002, p **, and *********).
Stevens (1996, p**) confirms that there has been an increased interest in this area of HRM in recent years. This view was backed up by an IPD survey in 1998, which showed that organisations were increasingly investing in and adopting pay related performance schemes with over 60% of organizations having some sort of PRP scheme in place.
MAIN BODY
Affects on organisations
Cost-effectiveness (Profits)
Heery, cited in White and Druker (2000) cites the reduction in manufacturing plants, rising unemployment, organisational de-layering and the rise in service sector employment as reasons for the need for new payment methods such as PRP. He adds that the introduction of such incentive schemes represented a new individualism within the employment relationship , which signalled an increase in employer control, and a severe reduction of union power which was present under the old pluralistic relation.
Org strategy & goals
As a tool of performance management performance related pay can play a major role in providing for an integrated and coherent range of human resource management processes which are mutually supportive and contribute to organisational goals and effectiveness ( Armstrong, 2003 p475)
Furthermore unless clearly and objectively established and communicated PRP will not necessarily eliminate poor quality performance or end product.
Both of these negative affects will do little to assist organisational effectiveness.
Six dangerous myths about pay, by Jeffrey Pfeffer, Harvard Business Review, May/June 1998). Seventy-three per cent of responding companies had made major changes to their IPRP systems in the previous two years and 51% of employees said their IPRP systems provided little value to the company.
According to Torrington et al (2002, pp601-606) PRP schemes can be expensive to implement as they require additional resource and time with regards to information gathering, assessment and feedback. In addition all PRP schemes retain an element of self-financing in that it is normally expected of employees to, in effect, generate their own monetary rewards. It follows therefore that a poorly costed scheme or one, which does not deliver the required monetary returns, may not survive for long. Along with the financial losses this may cause instability within the organisation and much confusion or de-motivation amongst its employees.
The IDS survey (1998, pp 5-8) shows that many schemes are withdrawn or radically overhauled each year. This indicates that the mere introduction of PRP schemes is not sufficient.
Jeffrey Pfeffer, 1998, (Harvard Business Review, May/June 1998). Seventy-three per cent of responding companies had made major changes to their IPRP systems in the previous two years
Occupational psychologists such as Kohn ( 1993), cited in Torrington et al (2002, p604) have questioned the ability of PRP to motivate positively.
Kohn (1993, p60) qualifies this by equating PRP to bribes in the work-place which can never work as they can only succeed in securing temporary compliance or, at best, superficial and short-term improvements.
Sisson and Storey (2000, pp123-124 ) opine that many UK organisations have mistakenly introduced incentive schemes, such as PRP, for the wrong ideological reasons including good public relations, re-enforcing management control or undermining union powers. The authors add that where this has happened such incentive schemes have failed.
Hertzberg (1966), cited in Torrington et al (2002, p595) argued that while pay was limited as a tool of motivation it can very easily de-motivate when managed poorly.
Furthermore where PRP is not closely linked to organisational performance pay drift may occur causing the PRP scheme to become uneconomical ( Armstrong 2003).
Wright (1991) states that even the most ardent supporters of PRP recognize that it is extremely difficult to manage effectively and consistently.
Fowler (1988, p 158 ), stressing the economical need for PRP schemes to avoid over-complexity, cited an example of a 34 page management manual which required the completion of a six page appraisal form for each of the 300 employees, by three senior managers.
Lockyer, cited in Towers (1996 p 291) states that time and rate systems are simple and cheap to operate and are easier to understand. This should make for a better understanding on the part of employee and employer alike.
However traditional payment schemes have also achieved notable organisational improvements. Iler, Hammermish and Rees (1996) cite the example of Ford Motor Company who managed to reduce turnover by 80 percent , raise productivity by 95 per cent and reduce absenteeism from ten to less than .5 per cent per annum by merely raising it’s hourly rate to $5.
Economically PRP can make sense for organisations especially where overheads such as wages can be reduced in time of business difficulties. ( *** )
PRP can create a performance culture, reward achievement, identify under performance and, where applied on a group basis, foster teamwork and fairness.
Establishing a means of rewarding high performance can assist in retaining the most industrious staff.
Within HRM literature there exists conflicting opinions as to whether reward should play a supporting or soft HRM role, a view implicit in the Harvard model of HRM, or, conversely, that it should drive organizational performance - an opinion which finds greater favour amongst exponents of hard HRM (Kessler, 1995: 254).
Authors such as Balkin (1992, pp203-204) and Purcell (2000) state that PRP can be very difficult to implement effectively as such schemes can cause employees to develop a narrow focus, undermine team-work, creativity and de-motivate employees especially in the area of perceived and actual ratings. The authors add that employees can feel helpless or intimidated by the process which itself is prone to bias, inconsistencies and exaggerations. ************************************************************************************************************************
However, as ***** pointed out, PRP can result in short-termisim i.e. the pursuit of short-term goals to the detriment of longer-term organisational goals.
However Lockyer , cited in Towers (1996 p 297) states that there appears to be a gap between the aims and realities of PRP schemes. According to Storey and Sissons (1993, p139 ) there are signs in many organisations that PRP has caused major problems, especially where the criteria and links to levels of pay are ambiguous or mis-understood.
Does performance management really encourage desirable work behaviour from employees?
Affects on employees.
The IPD survey in 1998 established that seventy four per cent of respondents believed that PRP improves employee performance with particularly positive impacts being made on the high performers. ( Armstrong 2003 ).
According to Lockyer, cited in Towers (1996, p297 ) PRP can be used to successfully change employee attitudes towards an emphasis on high performance. In addition it can be successfully coupled with appraisal schemes to aid the application of effective training and development policies
According to Lockyer, cited in Towers (1996, p299) effective HRM strategy must focus on employees as the human assets of the firm. The author adds that PRP can be crucial in this regard as it is a means of linking the individual employee with the organization and creating a mutually beneficial relationship. linking
It is fair to reward employees according to how well they have performed (A). This is in keeping with the view of Filer et al (1996) who opines that that the labour supply of an employee should be considered by employers to consist of not only the hours they work but also of the efforts and talents they bring to the job.
Legal aspects …Discrimination
White and Druker (2000) comment that during the early days of standardised pay arrangements women were severely disadvantaged because social values at the time emphasised women’s role to be in the home and not in mainstream employment. According to Pollert (1981) this resulted in them being discriminated against as they were normally excluded from higher paid male-dominated occupations.
Rubery (1985) argued that PRP can be used as a means of perpetuating gender inequality in payment.
According to Armstrong (2003) one of the most compelling advantages of PRP is that it is equitable to reward those who perform better for the value that they create.
He adds that even where PRP does not motivate directly or obviously there may be at least some indirect positive consequences of recognising achievement by tangible means.
Armstrong (2003) and Armstrong and Brown (1998) state that PRP systems can be picil elevamn and effective where they are part of a wider competency-related pay scheme. Here the employees are rewarded for not only their actual performance but also their ability to perform.
If properly integrated into other performance reward processes such as appraisals it can serve as an indicator to employees towards areas they need to develop or improve upon. ( ****)
Morale
However White and Druker (2000, p215-219) state that PRP can also be a great area for conflict and confusion.
All aspects of performance management arouse controversy, especially appraisals and performance-related pay. Critics such as Kessler (1994) and ******** point to weaknesses which may exist in their methodology and basic philosophy.
Employees are often dissatisfied with the methods of performance management systems and managers are frequently reluctant to engage in the process because of its confrontational nature. At a deeper level, it can be argued that if true commitment exists performance management is superfluous. Heery, cited in White and Druker (2000, p64-69) states that too many organizations mis-use PRP to enforce compliance of an unhappy workforce
Thompson (2000), cited in Torrington et al (2002, p 595) argues that PRP schemes can be perceived by employees as tools of management control which reduce their autonomy and discretion, thus potentially causing resentment, dissatisfaction and industrial conflict. Sociologists such as Hendry, Woodward, Bradley and Perkins (2000) have said it is one method of increasing management control at the expense of worker autonomy.
However as Armstrong (2003) and Kohn (1993) point out money by itself cannot sustain employee motivation. A study involving over two hundred firms by Thompson (1992), cited in Torrington et al (2002, p595), found no evidence of any link between incentive schemes and superior performance.
As previously out-lined PRP can be of particular benefit to those higher performers within a company. This may serve to exclude poor performers who may represent a sizeable percentage of any workforce and whose contributions, or lack of them, may ultimately undermine over-all organisational performance and profit levels.
Recent reports into Directors remuneration such as the Cadbury Report ( 1993) and the Greenbury Report (1995) have acknowledged that mistakes and misjudgements have been made by such PRP schemes. The Hampel Code (1998) subsequently recommended that such PRP schemes, which applied to company Directors, should be more transparent to employees, shareholders and the public. .
SPLIT BETWEEN LOW & HIGH WAGE EARNERS !!!!!
Over fifty per cent of organisations involved in the afore-mentioned IPD study of 1998 believed that there was no change or benefit to poor performers as a result of the introduction of a PRP scheme. For these people at least it would appear that unless additional methods of motivation are used they will be left behind. Pfeffer (1998, pp 218-220) argues this may also serve to create a divide amongst the work force and be counter-productive to the principles of team working and group effort, thus having a detrimental affect on the organisation’s competitive advantage.
Armstrong (203) cites another possible disadvantage where performance targets are unrealistic. Such unachievable targets will prove a demotivating influence on employees who have done all possible but receive no tangible benefit in return.
In a 1998 study by Marsden and French involving the Inland revenue the majority of employees did not believe that the PRP scheme had increased their motivation adding that they found it to be divisive and inhibiting towards co-operation and team-work.
Similar findings were made by Hague ( 1996) and Thompson (1991) who stated that PRP did not reward performance but had in fact served to de-motivate staff.
Even where individual employees meet their performance targets this may be to the detriment of team-work ( **** )
Jeffrey Pfeffer (1998) reported that 47% of employees found the PRP systems in use to be neither fair or sensible;
Importance of info i.e. re quality, valid, current & reliable
OTHER FACTORS !!!
Organisational Size & Structure
According to Smith (1988) and Cully, Woodland, O`Reilly and Dix (1999)
larger organisations benefit from the use of performance related pay schemes, which allows them to link organisational strategy and goals with individual performances. White (1999) quoted in White and Druker (2000, p15) cite evidence that small businesses are better suited to simpler pay systems with very few additions to the basic rate of pay.
Brown and Armstrong (1999) state that PRP cannot be endorsed universally as it may work in some situations but not in others.They add it is mmrelikely to rkin high involvement cultures and entrepreneurial type organisations. Situational variables such as culture, management styles, technology and the type ad competencies of those involved are important determination success or failure.
Power … Mgmy & Union & employee
Includes “perceptions” & attitudes ( psych contract )
Increased abilities to respond to external influences e.g. globalisation
Technology advances have served to make much more detailed and valid information available than was the case in previous decades. Such information is a must for the effective operation of an efficient PRP scheme.
Druker and White (2000, p16-17), citing Schein (1988), indicate that PRP schemes are supportive of other rising HRM topics, namely the Psychological contract. The authors add that PRP schemes help to align perceptions, assumptions, attitudes and performance amongst employer and employee alike.
Traditionally unions have sought to resist PRP schemes as they seek to ensure security, equity and stability of earnings for all of its members. ( Druker and White 2000, p18). It follows that PRP schemes stand less chance of success in highly unionised organisations where management may be weak.
Much recent legislation on equal pay and discrimination has served to encourage payment reward schemes as they can provide a line of defence in the event of such claims. ( White and Druker, 2000, p18)
The success of PRP schemes can also be influenced by cultural factors. Sparrow, cited in White and Druker (2000, p 217) distinguishes between the principals of meritocratic societies such as the UK and US, where PRP schemes may be more accepted as opposed to the egalitarian societies of Japan and China.
EVALUATION
DOES IT HAVE A FUTURE ?
POINTS FOR
Despite the problems previously outlined it is possible to Implement PRP successfully as shown by the Industrial Relation Services case study in 2000.
However according to Torrington et al it will only work if used in appropriate circumstances and implemented properly having taken account of all relevant internal and external organisational factors.
Gomez-Mejia and Balkin, cited in Torrington et al (2002, p605) specify that favourable conditions for a successful PRP scheme should include objective and relevant measurement, maximum employee control, minimum emphasis on team-work and an individualistic organisational culture. Brown and Armstrong (2000, p314) argue that PRP should not be operated in isolation from other methods of reward. According to Torrington et al one main advantage of PRP schemes is that they help ensure organisational goals become individual priorities thus leading to organisational improvements.
POINTS AGAINST
CONCLUSIONS
As we have seen, and in accordance with Lockyer, cited in Towers (1996, p 300) there is not one best payment scheme for employers to use.
While it has been shown that PRP schemes can be limited in providing incentives through financial gains alone they should not be rejected out of hand.
It would appear that all PRP schemes have their strengths and weaknesses.
Taken at face value, these intentions seem entirely compatible with an integrated and strategic approach to human resource management. In reality, however, the definition and measurement of good performance is a controversial matter, involving fundamental issues of motivation, assessment and reward.
Are they a step in the right direction ? … but not the finished article…
