Performance-Related-Pay - Assignment Example

With the increased competitive environment due to globalization, Performance-related-Pay (PRP) has become an important toolkit for optimizing human resources in the face of competition. PRP influences not just the economic performance but also impacts the issue of pay inequality. PRP has been defined as a “method of payment where an individual employee receives increases in pay based wholly or partly on the regular and systematic assessment of job performance” (ACAS, cited by Lewis, 1998). Many organizations have performance management system and attach incentives and rewards to attain objectives. This paper will discuss the effectiveness of PRP from an organization’s viewpoint. An organization needs to measure performance because it helps to determine if a function is productive and where to focus energies on (Hendry, Woodward, Bradley & Perkins, 2000). They must know where to use the quantifiable and data effectively thereby justifying the need for additional resources. One of the reasons for introduction of PRP is employees’ motivation but organizations do not always meet with success (Lewis, 1998). Incentives depend on the business cycle stage of the firm. The reward system is based on the assumption to attract, motivate and retain people and PRP is attempts to restructure these assumptions. Money linked to performance targets has varied opinion – some feel it is the sole motivator while others feel that motivation is purely intrinsic and money should never be linked to it (Hendry et al.,). Belfield and Marsden (2003) cite Prendergast (1997: p7) who notes that incentives are provided to workers through the compensation practices of their employers. The New Economics of Personnel (NEP) theory suggests that PRP will produce better results because this creates an explicit connection between the individual and the organizational interests. In maximizing his own interest, the worker also enhances the firm’s position. The problem for the managers arises when they have to determine an individual worker’s contribution to the overall performance of an organization. Amidst uncertainties managers risk overpaying the workers for their contribution, in which case the workers are likely to withdraw the effort they put in for the compensation. Under such circumstances, the NEP suggests it is better to pay the workers on the basis of input. The workers are also likely to withdraw their effort if they consider the compensation unfair. The support of senior management is essential is determining the PRP. At the same time, pressure can result in disastrous results. Snow Brand Milk was the largest producer of milk and dairy products by 2000 in Japan. The brand was so powerful that consumers in blind taste test preferred the competitor but when they saw the Snow Brand, they wanted nothing else. As deregulation increased competition, even Snow Brand had to bring down prices as private brands were found on the shelves. The pressure to cut costs was paramount and the factory units resorted to unethical and unhealthy production conditions until a disaster struck affecting 13000 people. One of the three primary reasons was attributed to pressure for results which forced the plant managers to resort to unethical and illegal actions (Finkelstein, 2005). In the manufacturing sector in the UK, PRP was the standard method of structuring workers’ compensation. Although it is on the decline in the manufacturing sector, it is steadily on the rise in the service sector. Research suggests that PRP is associated with higher intra-workplace inequality. This in turn is negatively associated with organizational performance but Belfield and Marsden contend that any negative effect is overpowered by the positive incentive effect provided by the pay structure. Managers are aware that there cannot be a perfect system in place to implement PRP. They have to take into account the pay system’s interaction with workplace specific factors. Managers too realize that this is a complex issue and hence resort to trial and error method to determine the best possible system. PRP has often been found to be unsuccessful which demonstrates employee discontentment. Lewis (1998) states that if the performance management is in place employees are better able to meet the increased market competition and key decisions can be pushed down to the line managers who accept accountability. The four stages of the PRP process include setting objectives in line with the organizational objectives, measuring performance, giving performance feedback and translating performance into rewards. Study revealed that if there is no congruence between the different managers’ views, it would affect ratings. It was also found that most often managers are not aware what rating to give to staff. Sometimes they gave high rating because they did not know what rewards it would be translated into. If the four stages are conducted properly and the information flows around the cycle, then the objectives are more likely to be achieved. The line managers have an important role to play in the HRM model of managing employee relationship, of which PRP is a significant component, says Lewis but Hendry et al., contend that line manager is seen as a weak link in a system designed and imposed by others. In the British Public Service, line manager are seen as agents of renegotiation (Marsden, 2004). To get the best out of the system of PRP, the organization has to effectively communicate the process to the employees through the line managers. Defining objectives and monitoring progress can exist even without relating it to pay. In any case, if the process concerned with determining rewards is conducted effectively, it mitigates the unacceptable impact of the pay element. Hence why performance should be related to pay when progress can be monitored even without it? Other motivation techniques can be applied than linking it to pay. Linking competency system to PRP is with the motivation to control not only the outputs of behavior but also the inputs (Hendry et al.,). Appraisal should be concerned about development but this too fails. The failures of such control system are not due to defects in design but due to the inadequacy of the psychological assumptions. Incentives tend to control because of the threat of punishment or withholding of rewards but this can have a negative impact on performance. Today performance of a company cannot be measured in terms of the overall financial performance but it is translated in terms of time, service and quality levels. The balanced scorecard assesses overall performance from four different perspectives - the customer, internal competencies and efficiencies, innovation and improvement activities and financial measures, including increased shareholder value. Currently the people management measures are not linked to business performance. There is little evidence to suggest that HR policies and practices contribute to organizational performance. Studies suggest that it is cognitive complexity, conceptual flexibility and information search that differentiate effective performance, rather than interpersonal skills. Thus, unless the corporate strategy is in place, HRM and its policies cannot enhance performance. It has also been found that companies use their vision and strategy to measure performance. The corporate business performance depends upon a limited number of people and this should be the focus of attention for improvement. Performance management system may support employee development but here too inherent problems have been perceived. Objectives have to be defined and aligned properly but it has been seen that in UK that the objectives laid out for the chief executives remains almost exclusively financial. It should be so clearly laid out that people should be able to see clearly behind the targets and measures. PRP measures are defined from top-down due to which they do not understand the bigger picture and end up pursuing targets blindly. Rewards and incentives have been found to generally act less as motivators and more as retrospective rewards. The performance evaluation systems have short-term goals for the purpose of measurement and thus the purpose of motivation is not served. Another problem that arises is that top managers usually base their judgments on their experience but they may have different competency files from others. Reward systems invariably reflect the assumptions and prejudices of top managers and HR professionals. Performance management has to be seen as a management process. If it exerts more pressure on the managers, then the system is a failure. Although the purpose of PRP is about development but it has been observed that it is more about control. Control, avoiding mistakes and stopping bad performance are necessary but the purpose of performance management system is development and improvement. There is often confusion over the objectives. Rewards help organizations to structure their relationship with employees, and PRP attempts to restructure the employer/employee relationship to emphasize performance. Attaching rewards to performance has an impact on the relationship. It thus has an effect on culture and sub-cultures of the organization. PRP in the British Public Services has failed to motivate the public employees in Britain and its operation had been divisive (Marsden, 2004). Performance has to be determined in terms of the output in customer service. This requires working more intensively when necessary to meet the customer’s needs like the patients in a hospital or the taxpayer. Incentives and goal-setting in PRP still play a vital role but motivation is only their secondary function. Goal-setting theory places less emphasis on rewards and stresses on the motivating power of defining appropriate work goals. This also results in greater employee commitment. Performance management in organizations is conducted in a superficial way and its significance to the HR role is not really appreciated. It has to be remembered that performance is about improving performance and all actions should be taken accordingly. At the moment the way organization function on PRP, it has a detrimental effect on the organization as well as the workers. Performance measurement should be a goal driven process and hence rewards should not be the criteria. It should strive to enhance the relationship between the company and its people. The managers have to be well informed and the ground work has to be firm. Motivation can be induced even without linking performance to pay,. Incentives can be offered in several ways than pay. So, effectively PRP has not been found to have a positive impact on the performance. References: Belfield, R., & Marsden, D., (2003), Performance pay, monitoring environments, and establishment performance, International Journal of Manpower Vol. 24 No. 4, 2003 pp. 452-471 Finkelstein, S., (2005), When bad things happen to good companies: strategy failure and flawed executives, Journal of Business Strategy, VOL. 26 NO. 2 2005, pp. 19-28 Hendry, C., Woodward, S., Bradley, P., & Perkins, S., (2000), Performance and rewards: cleaning out the stables, HUMAN RESOURCE MANAGEMENT JOURNAL VOL 10 NO 3 PP 46-62 Lewis, P., (1998), Managing performance-related pay based on evidence from the financial services sector, HUMAN RESOURCE MANAGEMENT JOURNAL VOL 8 NO 2 pp 66-77 Marsden, D., (2004), The Role of Performance-Related Pay in Renegotiating the “Effort Bargain”: The Case of the British Public Service, Industrial & Labor Relations Review, Volume 57, Issue 3 2004 Article 2 Read More