Implementing Performance Related Pay in to a Company - Case Study Example

Paper Submitted by: XXXXXX Number: XXXXXX of XXXXXX XXXXXX XXXXXXX XXXXXX Submission: XX – XX – 2009 Word Count: 1597 (Excluding Executive Summary & Works Cited) Executive Summary As said very rightly by Dulewicz (1989), “… a basic human tendency to make judgements about those one is working with, as well as about oneself”. It is noted that appraisals are inevitable and is universal. People evaluate how well a job is done to set performance standards. The practice of performance appraisal started years ago in the early 20th century. This study has been conducted to understand the concept of performance related pay and taking an organisation as an example to understand the same. The organisation / service provider chosen for the study is National Health Service (Dowling and Richardson). The main aim of the service is to provide free medical service to all including temporary residents and tourists and the services are financed from the central taxation. The group has grown over the years and is now undoubtedly the best medical service available all across the United Kingdom. The group has been established for over 60 years now and is now one of the most reliable treatments free of cost for all. Table of Contents Executive Summary 1 Table of Contents 2 Introduction: 3 Background of Company: 3 Performance Related Pay: 3 Why Link Performance and Pay? 4 Advantages of Incorporating Performance Related Pay: 4 Disadvantages of Incorporating Performance Related Pay: 6 Conclusions: 8 Works Cited 9 Introduction: In the present time, it is reward systems being used within an organization are becoming a major extremely essential. This paper aims at discussing the usefulness and drawbacks of implementing Performance related pay in to a company. The chosen company for this study is NHS (National Health Service). The planned change involves the implementation of performance related pay into the organization. Before moving into the topic, it is essential to gain a brief idea of the organization. Background of Company: The National Health Service was started in July 1948, to provide the citizens with a free health care service. The main aim of the service was to provide good health service to all without the patient having to pay for the services. The hospitals were financed entirely from taxes paid by the people in accordance with their financial situation (Dowling and Richardson). The health secretary Aneurin Bevan opened a Park Hospital in Manchester which brought together doctors, nurses, pharmacists, opticians, dentist, hospitals and all medical facilities within one organisation. Bevan, a Welsh miner was very passionate about the NHS and wanted to ensure that everybody receives the best treatment at any given point of time in the country, without having to worry about the cost of the treatment. His main aim was to put the welfare of the sick before any other consideration, despite the financial and economic anxieties at that time. Performance Related Pay: Performance Related Pay refers to pay scheme used to measure individual performance in the company. It can also be used to measure group or organisational performance. The main objectives of introduction of performance related pay were to increase motivation in employees to perform better, increase the self esteem of employees, provide better understanding of the job description and functions, create better communication amongst the participants, encourage employees to be self motivated, and help improve the institutional manpower planning(DeSilva). It also helps recognise the achievements of individuals and identifies the under performers, thus creating fairness in pay. Why Link Performance and Pay? There have been various researches that have been conducted by various authors regarding the principle of linking performance with pay. It has been noted that performance related pay has proved to be useful for managerial staff since it allows them to be able to set goals that need to be achieved (Kessler). This makes them motivated to work towards the goals, as performance related pay ensures them of a reward on achievement of the goals. The principle of relating pay and performance has been very useful and has acted as a good motivator (Lawrie). Advantages of Incorporating Performance Related Pay: There are a number of reasons why companies decide to link pay to performance and provide employees with performance related pay. A few of the basic objectives are as follows: Renegotiating the effort bargain: Every organisation and all managers have a fair idea o what a fair day’s work would comprise, the total number of hours a person can work. While setting goals for an employee this needs to be kept in mind by managers. There needs to be a percentage of employees the management need to set to be able to introduce the new scheme (Makinson). This plays a major role in the performance of the employees. Improved hiring: Performance related pay is a different approach to paying employees, thus it also attracts different kind of recruits to the company. It has been noted in recent studies that a large portion of the improved productivity is based on output based pay. The employees who fit into this category of people are often applicants who have a urge to produce more to be able to earn a higher pay. Improved Motivation: Famous authors and researchers like Lawler, Porter, and Vroom have pioneered psychological theories of expectancy. The theory should a simple relationship between the efforts put in by an employee, the rewards, the motivation of the employee and the possibility of gaining if the required amount of efforts is made. The theory highlighted conditions that are needed for the schemes to be motivating to the employees. Also budgetary constraints played an important role for the rewards to given to employees who put in the efforts (Marsden and French). All these and a lot of other factors were discussed by the authors. All the possible obstacles between an employee’s performance, efforts and rewards were highlighted by the authors. This factor increases the motivation of employees to work better and strive to be amongst the top performers. Improved Goal Setting: Another approach is that for the reasons of relating performance and pay is provided from the Goal Setting theory. It has been studied that the setting of goals has proven to be a sure shot method of improving performance It has been seen that if an employee is closely involved in setting the goal, the employee not only accepts the goal but ensure it is completed with perfection like their own (Mask). The theory of an employee being completely involved in the decision making of the goals to be set, would make the employee more related to the project thus improving the performance as well as ensure the goal is completed in time and perfectly. Disadvantages of Incorporating Performance Related Pay: There have been a number of books in the past which highlight the advantages and disadvantages of the pay schemes and provide the readers, personnel, etc with guidelines to the system. However the recent studies and books provide information about performance related pay in a less optimistic image (Mohrman, Resnick-West, Lawler). The recent empirical researches have proved that performance related pay is not very viable and should be organisation specific. It has been noted that both textbooks as well as empirical researches have shown that performance related pay is surrounded by a number of issues. Moral and Motivation: Most of the time this system failed as different people have different levels of motivation and performance, but might have the ability to work on roughly the same level. It has been studied that poor training for managers, inadequate communication with staff affects the moral of the employees to a great extent. A study conducted on NHS managers during 1997 – 1998 showed that performance related pay did not improve the productivity of the employees but did cause a lot of issues like jealousy among the employees and lead to reduced moral among employees. Authors observed that even though pay rates were an important factor for employees however there were other factors which played an important role as well. Factors such as morale and self esteem had a major influence on the employee performance (Cannell and Wood). Due to these factors, the emphasis on rewards based on output was rejected. Fairness of pay: This is a very essential part of performance related pay. It is noticed that there are several cases where even though the employees contribute to the company’s performance it goes unrecognised. This can be due to bias from the line managers or even personal favouritism. In cases like this performance related pay can undermine the performance of the individual and the company due to lack of team work and cooperation within the organisation. This can also build the belief that pay is not based on performance but is based on the relationship with people within the organisation and maintaining a pleasing personality (Dervon). Discrimination and Gender Bias: There have been various studies that have been conducted and it has been found that performance related pay schemes often discriminate against women. There is a clear gender discrimination, due to which women’s skills are often not valued and their contributions do not receive the kind of recognition they deserve for their contributions (Monks). It is also notice that almost two third of the employer do not have any means to check for racial and sex discrimination in companies which follow performance related pay systems. Performance Related Pay Scheme in NHS: The performance related pay scheme was introduced into the NHS system way back in 1986. Then the scheme was applicable to the general management grades, however this was extended to the senior management (i.e. anyone earning as little as £15,490 p.a.) as well in 1989. Almost all the NHS trust still follows the performance related pay scheme and manager’s performances are rated on a yearly basis to assess the achievement of the objectives (Strebler, Thompson and Heron). The scheme entails they key elements. The first is where the individual managers have set objectives for the year. The second where assessments of the progress of the mangers throughout the year are made to ensure that managers work towards meeting the set targets. The third element is to increase the pay on the basis of the ranking in the assessments. The rankings are on a scale of one to five, one being the highest and five being the lowest. The five ranking are based on how well managers meet the short term goals and what contributions have been made towards the long term goal. Conclusions: Based on the above discussion, it is clear that performance related pay has a number of advantages and disadvantages. It is essential to understand the nature of the organisation before implementing this concept. Using this concept, in an organisation like National Health Service, will not be appropriate and will only lead to high levels of issues and confusions with the organisation. Hence it is recommended that this form of reward system is not utilised and a simple monthly basic pay format is adopted. Works Cited Cannell, M. and Wood, S., 1992, ‘Incentive Pay: Impact and Evolution’, London: IPD and NEDO Dervon, M. G., 1990, ‘The Paradox of Performance Appraisals’, Personnel Journal, Vol 69, February 1990, p 107 – 111 DeSilva, S., 1998, ‘An Introduction to Performance and Skill – Based Pay Systems’, International Labour Office, Bureau for Employers’ Activities Dowling, B. and Richardson, R., 1997, ‘Evaluating Performance Related Pay for Managers in National Health Service’, June 1997, International Journal of Human Resource Management, Vol 8, Issue 3, p 348 – 366 Dowling, B. and Richardson, R., 2000, ‘Performance Related Pay’, Unison, May 2001, Accessed on 18 October 2009, Retrieved from http://www.unison.org.uk/acrobat/B871.pdf Dulewicz, V., 1989, ‘Performance Appraisal and Counseling’, Assessment and Selection in Organizations: methods and practices for recruitment and appraisal, John Wiley and Sons, New York, p 645 - 649 Kessler, I., 1994, ‘Performance Pay’, In Sisson, K. (ed), ‘Personnel Management’, Oxford, Blackwell Lawrie, J., 1990, ‘Prepare for a Performance Appraisal’, Personnel Journal, Vol 69, April 1990, p 132 – 136 Makinson, J., 2000, ‘Incentives for Change: Rewarding Performance in National Government Networks’, London, HM Treasury Marsden, D. W. and French, S., 1997, ‘Performance Management and Performance Pay at the Inland Revenue: 1996’, Centre for Economic Performance, London School of Economics Mask, D., 2000, ‘A Brief History of Performance Appraisal and the Five Pitfalls to avoid’, Accessed on 17 October 2009, Retrieved from http://www.alliancetac.com/index.html?PAGE_ID=292 Mohrman, A. M., Resnick-West, S. M. and Lawler III, E.E., 1989, ‘Designing Performance Appraisal Systems: Aligning Appraisals and Organizational Realities’, San Fransisco, Jossey – Bass Monks, K., 1997, ‘Performance Related Pay: What makes a Successful Scheme’, DCUBS Research Papers, 1996 – 1997, No. 18 Strebler, M. T., Thompson, M. and Heron, P., 1997, ‘Skills, Competencies and Gender: Issues for Pay and Training’, IES Study, Vol 333 Read More