Does performance related pay motivate or de-motivate employees?
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 organisation by undermining team work, encouraging a short term focus and leading people to believe that pay is not related to performance, but to having the ‘right’ relationships and an ingratiating personality". (Jeffrey Pfeffer, 1998)
If the reward plan is seen to be unrealistic, for example promotion on the basis of seniority, it may definitely have a negative effect on motivation. If a reward is to be effective, it has to be generous and significant, hence it should be structured to attain a proper balance of motivating people to purpose and at optimum effort. (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. PRP schemes can also be related to Douglas McGregor's theories on motivation. Namely that there is a danger that the schemes could demotivate certain types of employees. The effectiveness of PRP schemes would therefore depend on whether an employee tended to be more of theory x type or theory y type of person. McGregor generally outlined two groups of types of employees. Theory X types generally do not like to work and are lazy and would therefore have a generally negative mood towards basically working more. Theory Y types generally regard their work like play, but, however tend to be more after the intrinsic rewards (McGregor D, 1960). Employees of the theory Y types however, might be motivated by group PRP schemes, because it involves working together more as a team.
What can in itself act as a source of motivation is the extent to which employees have the opportunity to participate in pay design decisions, the quality and timeliness of information provided, the degree to which the rules governing pay allocations are consistently followed, the availability of channels for appeals, and the organization's safeguards against bias and inconsistency (Greenberg, 1986) and (Hammer, 1975) points out that the more frequent the formal and informal reviews of performance and the more the individual is told about the reasons for an increase, the greater his preference for a merit increase system and the lower his preference for a seniority system. Frequent reviews by management, coupled with the opportunity to air grievances through a formal appeals process, may therefore eliminate many of the difficulties associated with employees' perceptions of unfairness and may promote motivation further. (Dublin City University 1996 - 1997)
For performance related pay schemes to work effectively and motivate employees, certain requirements must be met by the management before implementing them. PRP as a motivator may be in theory a great idea and its success would seem logic, considering the nature of most human beings, but it is important that it is implemented in the right way, tailored to the needs of the organization. Practical examples include the American company Safelite Glass, who replaced their hourly rated pay to performance related pay. Safelite Glass employees under the PRP scheme got paid for how many windscreens they fitted rather than getting paid for how many hours they worked. The success was overwhelming, with productivity rates up by 40%. Examples where PRP did not work out well are mainly found in the public sector, where employees are rather motivated by intrinsic rewards. So first, the management has to find out about the attitudes and opinions towards PRP schemes. The average age of the workforce plays an important role, as older employees may be more used to a seniority based pay system. Assessors in the management should have adequate training to be able to work out a system, which works for the particular organization and they should monitor the results of the scheme consistently. 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.
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