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. Profit sharing, where an organization distributes a share of the profits to groups or individuals.  2. Job evaluation, where an objective assessment of performance is taken and rewards given accordingly, and 3., merit rating, where effort is praised likewise with financial rewards. (Dublin City University 1996 - 1997).  There are a wide variety of methods used, but all kinds of PRP schemes assume that the promise of increased pay will provide an incentive to greater performance. However, from a macroeconomic viewpoint, in times of recession, a company may not be able to keep up the schemes offered, leading to a loss in motivation among the workforce.

The effectiveness of PRP schemes varies between the private and the public sector. In the public sector the increases in productivity tend to limited due to cash limits making rewards for high performance ratings too small to motivate staff. (Accel Motivation theory, 2000) Problems of poor training for managers and inadequate communication with staff have had a negative impact on staff morale. Studies of NHS managers in 1997 and 1998 showed that performance-related pay did not contribute to improve performance but did cause jealousies between staff and undermine moral. A wide range of research has found PRP schemes less effective than expected in increasing productivity. (Dowling and Richardson, 1997, Marsden and French, 1998). Further research conducted in public services shows that the majority of public employees accepted the principle of linking pay to performance. The research shows that participants in the surveys were unsure whether it was ex post in rewarding a good performance (objective) or ex ante in providing an incentive to work beyond job requirements or showing more initiative (subjective).

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In the UKs private sector, profit related pay as being one method of PRP have become less common since the government got rid of the tax relief on PRP schemes. Share options as another PRP method have become less popular as stock markets have tumbled recently.

Performance related pay systems tend to be based on appraisal of the individual worker, often by their line manager. This opens the door to bias and personal favouritism and can influence the result of pay reviews.  Instead of motivating workers, performance may be able to "undermine performance of both the individual and the ...

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