Performance-Related Pay Systems - Essay Example

? Strategic Human Resource Management Contents Introduction 3 Performance-related pay systems 5 Conclusions 11 Reference 13 Bibliography 14 Discuss the proposition that the disadvantages of performance-related pay systems outweigh its advantages. Introduction Globalisation of business has led to increase need to identify as well as analyse ways through which business organisation operates effectively in the present and also in the future. Therefore organisations which are looking to gain a competitive advantage, thus the implication of strategic human resources are a key factor for performance of the organisation. Strategic HRM is all about adaptation and integration. The strategic HRM concept has gained momentum and is mainly due to importance of strategic human resource, the way strategic HRM is managed, integrated, developed, retained, engaged and finally utilised and gain a competitive advantage over its competitors. The business organisation tends to exits in a competitive environment and often faces issues like scare resources which needs to be managed effectively and thus gives the organization a competitive advantage. Thus applying the definition of strategic human resources, it can be said that it is a long term focus, provides a linkage in between the human resources and strategy process, enhances effective performance and finally foster excellence corporate skills (Deb, 2006, p. 45-48). The main purpose of HR strategies is to articulate the intention of organisation related policies and practises and as per the dictum of Fomburn (1984) the business and the manager needs to perform well in the current environment in order to succeed in the future business environment. Strategic human resource management has various sectors such as recruitment and selection, training and development, performance management and others. However this paper will talk widely about performance management and performance related pay (PRP). Performance related pay also forms an integral part of the reward system in an organisation. Pay for performance is one of the key elements in the monetary reward system. Pay for performance also defined as variable pay or bonus or performance related reward and other which has gained popularity and is preferred as reward component in various organisations across globe. Reward is a key practise in the framework of performance management strategy. Reward systems are of two types, one is monetary component of reward management which tends to fulfil the needs of employees such as hygiene factors, security and physiological needs and second factor is recognition and job satisfaction (Kandula, 2006, p. 59). The logic behind implementing the performance pay by organisation is as follows, PRP focuses on the effort where the organisation actually requires it PRP supports the culture of performance oriented The PRP scheme emphasis the performance of individual PRP aims to strengthen the process of performance planning PRP rewards the right employee and hence motivates to work more (Salaman, Storey & Billsberry, 2005, p.178). Therefore PRP is an essential and important tool use by organisation to enhance the performance of both the employees and the organisation as a whole. The next section deals entirely with performance related pay and aim to answer to the proposition whether the disadvantage of performance related pay outshines the advantage of PRP schemes. Performance-related pay systems The various forms of paid employment which also includes remuneration on base pay tend to have performance expectation or standard attached to it. According to Behrend, every form of employment which is paid involves effort bargain and also pay bargain. Performance standards are highly implicit and thus are open to contestation and misunderstanding of psychological contract. Strategic decisions which take place at the board level encompass performance related pay mainly for senior managers and directors. The PRP is often regarded as motivational tool for the top level management to achieve the target which is to get incorporated into strategic plans. Thus the consideration do not necessarily extend to the other section of workforce but recently most of the organisation adopted the philosophy of PRP which now extends to the office desk to shop floor members. The performance pay relates system has been adopted in both public and private sectors but remains to be contentious subject as it is surrounded by wide division based on opinion amongst consultants, researchers and practitioners. In the current system, performance related pay system is a term which describes specialised form of the pay system which is linked to appraisal and merit. However various versions have occurred in different forms (Lundy & Cowling, 1996, p.309). One of the most important and interesting development with respect to variable pay is performance related and merit and is mainly because it intends to spread more widely as compared to other forms of variable pay. PRP presents a form of change or a perception towards fairness in remuneration ranging from reference to the objectives related to job with emphasis on criteria such as qualification based on reward based on performance of individual. Every country practises the same form of remuneration and is used in managerial as well as professional groups (Brewster, 1994, p. 101). Although this system was highly criticized by many commentators for its disorganised and chaotic nature of pay management especially in 1950s to 1980s letting rise of performance related pay schemes and assess the performance of individuals. Pay is one of the most sensitive issue and employees tends to be cautious about PRP. This system is first implied to senior manager and latter extended to other employees of the organisation. It is an addition to the normal pay and does not intent to replace the existing pay scheme. Performance related pay has formed part of general pay increase, has been used to extend the pay scale and such caution exists mainly due to sensitivity and complexity of the performance related pay scheme for employee relation. Employee has the habit of taking pat scale seriously and thus justifying and negotiating changes in the pay structure is time consuming and difficult and therefore is much more sensible to conduct the scheme in gradual way commencing with the top management. The concept seems to be fair where people get paid as per the contribution and also according to studies it was revealed that most of the business minded people agreed with the concept. Theoretically the scheme of performance related pay benefits both employers and employees. By way of emphasizing the importance of effective performance and efficiency employers can benefit from high productivity. With increment in pay system can target better performance by the employee and encouraging performing and retaining them to a high level. Employees tend to benefit from the extra pay for their contribution towards quality of performance. Therefore it can be said that well direct pay schemes will reinforce the appropriate behaviour and allowing the employees to achieve the organisational goals and targets and cultivating a result base culture in the organisation. Performance pay related schemes can be related to the assessment of performance of a group, individual, company or department (Price, 2007, p. 478). Based on the performance of the employee, appropriate reward system needs to be identified. The most effective reward system depends on the phase of market development, the managers’ need to determine the best way to reward the employees who have contributed in reaching the objective of the organisation. As organisation aims to seek increase in performance in order to improve the quality as well as retain the valuable people of the organisation. In addition also need to achieve the best values in the form of pay. However the linkage between performance and pay seems to be controversial and the line manager plays the most vital role. According to Armstrong and Murlis (1994), performance-related pay tends to link the pay progression towards performance and competency rating. The main methods of performance related pay as per survey conducted by personal management in 1992 were profit sharing, merit pay, individual bonus, and team bonus and share options. As per the survey it was also revealed that almost about three quarters of organisation used performance related pay and it was analysed that the scheme improved the performance of the organisation only when it was a part of performance management system and not just used as standalone policy. Organization which have adopted the performance related pay are much more likely to develop decision making based on pay and is the most essential element if performance assessment and measure are directly linked with pay. The main objectives of PRP are to motivate the employees to work effectively; deliver positive message; focus attention; differentiate in between rewards; improve on recruitment and retention and link pay bill with performance of organisation (Cornelius, 2001, p. 167). Performance related pay appeared to be an effective motivator and also helps to convey message that high level of performance from employees are expected and they will be rewarded in return and since pay is very much related to performance, the higher performance in an organisation should get more than the average or the lower performer in the same organisation. The concept of PRP is fair and justified in rewarding the employees as per their contribution. Performance related pay has various advantages like it motivates employees to perform well, provide them with the right kind of message and ensures the rewards will be given to the performers. However with advantages the performance related pay schemes also faces with many disadvantages as it is felt that motivation cannot be guaranteed and the performance is based on rating scale and hence the appraisal is likely to be unfairly or inconsistent. Teamwork is not appreciated in the process of rewarding individual for their performance. PRP is depended on performance management and have its own set of deficiencies (Goel, 2008, p. 227). In PRP schemes it is difficult to design fair measures which do not emphasis on the effort of the individual at the expanse of the team. Also it is not always possible to base rewards on the right time frame. Poorly designed performance related pay schemes has the possibility to interfere with other ongoing improvement initiative and programs. Although the PRP scheme seems to be quite popular as by 1991 about 51% of the companies in America were implementing the performance related pay schemes. In the current state almost half of the British companies have adopted the scheme of PRP (The Economist, 2009). An important feature of the performance related pay scheme was that it motivated the employees to work effectively and efficiently in the organisation for which they received reward as per their performance. On paper it looked straightforward to motivate the staff but one of the primary reasons why performance failed to motivate employees was that monetary satisfaction was not everything. One of the popular tools, “The Motivational Styles Questionnaire” which was designed by Roland Tarleton had identified the factor which individual employee vales the most. Some of the employees get motivated by monetary benefits while other seeks for qualities, job satisfaction, and good relationship with colleagues. Thus the scheme of performance related pay appeals to people who get motivated through monetary gain but have little impact on people who want to develop deep expertise, enhance creativity and make difference. In addition another reason for the failure is that the scheme does not tackle with demotivation. Motivation acts as balance sheet for benefit and cost. The level of motivation depends on advantage for given action which tends to outweigh its disadvantage. The best suitable motivational strategies usually work from both the end, adding to the positive value and at the same time reducing the negative factors. The managers who consider pay for performance schemes need to have idea whether the work is advantageous to the schemes or the initiatives. The initiative tends to work best at level when field and the employees operate at a different level and independently to each other. The system do not encourages the team member unless and until the bonuses are with regards to the performance of the whole team and is shared equally among the team members. If the performance is defined by the total numbers of cases taken up by the employee and completed, the staff members who has taken time in doing the same task or helping the colleagues tends to lose out on this. Therefore anything sort of activities which reduces the potential reward and hence reduce the power to get motivated. If the employee fall behind the potential target the chances of receiving bonus reduces and hence pay performance will be discouraging rather than a motivating factor. The reasons might be stress, illness, problem associated in work but still the performance related pay scheme seems to work in this situation as reward but as a motivation factor it tends to leave behind the people required the most. Performance related pay is straight forward and straight and that is one of the major reasons for problem faced by the scheme as value of individual performance and motivations are complex processes which are the main factor in PRP schemes (Gregory, 2011). PRP which provides monetary rewards and do not satisfy other needs of employees. In support of this context Kohn (1993) believes that monetary reward helps to achieves temporary compliance and not lasting commitment and hence it is a way which destroys the cooperation and organisational excellence which forces employees to compete for reward, rank or recognition against each other. Reward also discourages risk taking and thus ignore the fact that excellent work are done for interest and not just reward. In addition to Kohn, Marc Thompson (1995b) also in support of Kohn viewed the schemes as less effective than appraisal; the process to set objectives and goals may likely act as key to improve the performance and the scheme of PRP can also undermine the psychological in the workplace. Apart from the above, Kohn (1993) believes that the managers use incentive schemes as one of the substitute for providing workers to accomplish the task but instead should treat the workers well and provide them with useful and productive feedback (Cornelius, 2001, p. 169). Organisation perceives that performance related pay is highly important and according to surveys conducted, the organisation claims that PRP connects pay with high performance and is now practised to more groups of employees. But still the disadvantage of performance related pay tends to outweigh its advantages. Employees focusing only on performance are likely to get involved into conflict regarding compensation goal. The employees who are working in the same group and doing the same kind of work might get paid differently according to the performance of the individual thus feeling of inequity arises and mainly if the program are not well communicated or designed. The program puts explicitly and implicitly seems to put employees into competition. In an organisation the most important factor required in corporation and when every members needs to work together the differential pay system likely to have divisive effect which has the potential to produce lower performance and not high performance as expected. Another reason why performance related pay is not suitable is because of administrative issue. The PRP requires time and effort of managers and should be administrated and designed carefully failure to which will lead to distrust management among the employees. The lack of trust is another valid reason for not to be a desirable factor or component. The PRP relies upon the judgement of the manager with respect to the level of performance by the employees. Unless the employees are convinced about the judgement the managers takes and believes that the performance is actually rewarded. Trust cannot be created through compensation scheme but an effective and good program enhances the feeling of being trusted by the employees (ACAS, n.d). Conclusions In conclusion it can be said that the concept of performance related pay is widely being used in organisation to enhance the performance of the employees to a great extend and organisation has revealed the benefit of adopting the performance related pay schemes. But despite of some of the advantages of the schemes it still suffers from serious drawbacks which outweigh its advantages it had with the system. Thus indicating that the scheme of performance related pay is not suitable for all organisations. It works well for workers independence and which are less interference by managers. The PRP schemes leads to disharmony in the workplace as employees tends to compete with each other in order to receive rewards based on performance and in doing this, quality gets hampered and relationship among the employees also gets disturbed. This can further lead to organisation which lacks effective communication and is also not able to compete effectively. But at the same time the performance related pay can be highly effective when the employees tends to work towards the same goal set by organisation. Performance related pay if carried out appropriately has the potential to serve the organisation effectively as employees who are committed towards the company will perform well and achieve more rewards. The reward motivates those kinds of employees who aim for monetary satisfaction. Employees with poor performance will not be rewarded in the performance related pay scheme resulting in conflicts in between the employees of the organisation mainly those belonging to the same group of work. But if seen on a positive note, the competition in between the employees will enhance the performance of each of the members in a group which in return will benefit the organisation with on time submission of work and improve productivity. But analysing the whole concept of PRP scheme it can be said that the proposition that the disadvantage of performance related pay system outweighs the advantage of PRP schemes is true as it do not tends to satisfy employees who are just not looking for monetary benefits but job satisfaction, mental satisfaction and other related factors. Reference ACAS, No Date. Incentive schemes for individuals. [Online]. Available at: < http://www.acas.org.uk/index.aspx?articleid=735> [Accessed 18 Jan. 13] Brewster, C., 1994. 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