Managing Employee Performance - Research Paper Example

MANAGING EMPLOYEE PERFORMANCE: The PRP Systems Introduction Performance related pay systems are present in all types of organisations today, ranging from the public sector to the private sector. PRP systems include schemes that attach additional compensation, over that of base salary, based on individual or group contribution to meeting a specific or group of organisational goals. These goals can be short-term focused, such as achieving a project within budget expectations, or long-term such as an executive who has achieved goals toward market expansion by changing organisational design or improving product innovations. The beauty of PRP systems is that they can be developed to fit the unique goals of an organisation and be used as a means to boost performance for employees, executives and a variety of administrators as well. There are arguments that these systems do not actually work properly, whilst others suggest that if they are implemented properly, the long-term effects are improved worker or manager performance in their job roles. The role of HR manager consistently changes and is different based on the unique organisation where the manager is employed. The role of HR changes in response to social, economic and political conditions that impact organisational efforts, therefore the scope of HR involvement in PRP systems will differ from one business to the next (Foot & Hook, 2008). This paper describes how performance related pay improves performance as well as the difficulties of implementing these systems. The concepts of PRP Recent studies conducted with a variety of Dutch firms identified that PRP systems had improved productivity by nine percent (Gielen, Kerkofs & Van Ours, 2010). This is because performance related pay gives workers and managers a specific target to reach that is directly linked to their job roles. For example, a Dutch manufacturing firm might find that workers are not meeting output goals for production, therefore PRP systems are developed that take into consideration social and work environment needs and link them to job performance. A company that demands increases in productive outputs by 20 percent might create a finished product output PRP system that rewards individual performance. If an employee meets this output goal, they understand clearly how much money this entails and motivates these workers to continue to meet targets. In many ways, the PRP system acts as a system of control to ensure productivity. “Strong pay for performance systems motivate people to do exactly what they are told to do” (Turner, 2006, p.24). This is why PRP systems motivate performance because they control the job responsibilities and individual job behaviours of employees to get them on track with organisational goal-setting and commitment to excellence. For example, a line manager that has trouble with meeting divisional outcomes might attribute this problem to poor interpersonal relationships between team members in special project objectives. Traditional efforts to enhance these poor relationships might have included more group meetings or personalising job roles to make them overlap with others, thereby increasing the frequency of group involvement. However, the PRP system gives a specific outcome that employees can receive and forces them to meet these targets in order to achieve higher compensation rewards. Where traditional efforts failed, if the criteria listed for higher compensation is improving teamworking functions, then a control system has been developed that alters employee behaviour to ensure they meet goals. A recent survey identified that more than 77 percent of today’s workers believe that performance pay is a very important objective of their job roles (Williams, 2009). Seven out of 10 people surveyed also identified that rewarding exceptional individual performance is crucial to motivating effort (Williams). This means at the psychological level, employees have a belief that extra remuneration for job performance should be included as a regular part of the HR design in order to fit their personal needs. With most motivational theories, there are needs for job security that must be met in order for an employee to find value in their organisation. The PRP system provides security by laying out a template for bonus receipt that offers not only job role security, but the promise that performance will be recognised and rewarded over that of non-performing peers. Comparatively, performance related pay systems identify top performers from low performers, giving contributors more exposure and trust in the organisation over their less-motivated employee peers. PRP systems also can be effective in boosting motivation if they are developed and implemented properly. “Poor objective setting can lead to undesired behaviour changes – for example a focus on short-termism or unwillingness to engage in teamworking – as employees try to achieve their individual PRP awards for the year” (Egan, 2010, p.2). This means that the specific criteria for achieving bonus awards must be communicated so that employees fully understand what they are attempting to reach in terms of HR targets. If the objectives for attaining these goals are not developed properly, there will be confusion toward how to achieve bonus award that can lead to less organisational commitment or team focus. Cyr (2010) offers that communication must be a primary goal when setting up PRP systems. “It must eliminate fear, educate and, ultimately, create employee buy-in” (Cyr, 2010, p.25). This again links the PRP process to human emotional needs and job security needs by reducing fear about bonuses. Williams’ interpretation of the performance related pay concept also suggests it is linked strongly to organisational culture development where everyone is performance-oriented and understands how to achieve bonus awards by reviewing clear and concise objectives that should be communicated properly. Also related to job security, PRP systems can act as a security builder in a time where the global economy is uncertain and job losses are ever-present in different countries. By the beginning of 2010, more than 55 percent of companies that had strong PRP systems had found that the budgets had been cut for these efforts (Williams, 2009). Some companies have even developed pay freeze programmes while their companies attempt to ride out the economic storm. In this type of environment, rewarding individual performance becomes even more paramount to avoid higher turnover rates from dissatisfied employees. When employees see their PRP benefits being slashed or worry that their jobs might be lost through consolidation and cost-savings efforts, having a well-defined PRP for individual performance breaks through the emotional concerns of job security. It shows that certain people in the organisation will be rewarded for exceeding corporate goals, even if the targets might seem unrealistic. It boosts motivation to ensure that job cuts skip the high-performing employee and that they will be valued and recognised if they meet difficult performance targets. In any event, it elicits behavioural changes and makes them committed to meeting goals even if only to save their jobs in tough economic environments. The PRP process has found considerable success in many organisations because of how it is structured. Most companies make use of the formal performance appraisal system, which reviews individual job performance with meeting specific organisational goals. The appraisal process and how it is developed is customisable for organisations depending on their specific targets and strategic needs; or company mission and vision. A company that has a high focus on customer service as their key cornerstone value will likely have a PRP process that links higher compensation to satisfied client bases or improving the volume of customers through individual employee effort. An appraisal identifies an employee’s strengths and weaknesses, offering an opportunity for further HR training when needed to become more successful. This is why PRP systems are effective in motivating performance, because employees see, through the appraisal, that the business and its leadership consider the needs of employees and will work to develop them better. It has a psychological effect on motivation by improving manager and employee relationships and giving the employee more visibility. Some companies even develop a 360 degree feedback system that takes into consideration the viewpoint of peers, customers, and other divisional managers to round out and justify the performance auditing findings. There is a sense of distributive justice and fairness that comes from PRP programmes, which is why they are so successful in changing behaviours positively. “Organisations need to regularly and systematically audit, evaluate and continually improve their performance appraisal systems” (Wilson & Western, 2001, p.93). The criteria set for annual or periodic bonuses related to performance need to be upgraded and made relevant to the current social or economic situations being faced by the company. For example, if the organisation is finding difficulty with gaining employee support toward international expansion of service offerings, the appraisal might not have the right criteria listed that show employees the type of international focus they must represent in order to achieve bonus reward. Previous PRP systems and appraisal systems may have focused on product support and have not been changed for global focus. New criteria, through auditing and redevelopment of appraisal systems, should include criteria that measures cross-cultural competencies, teamworking and volunteerism, or the receipt of additional cultural training to help in providing face-to-face or telephone networking support to global clients. If the appraisal and PRP processes are not relevant, they will not drive compliance or cooperation to productivity or efficiency goals. There is a risk that HR managers might not understand the business culture or external environment, therefore making the appraisal seem mundane and not very motivating for ongoing, current employee needs. There are some in business that believe that pay for performance plans, when offered in the form of a bonus, do not motivate people properly. This is because bonuses are considered a hygiene factor (Management Today, 2007), under Herzberg’s model of employee motivation, which involves organisational components that do not typically drive motivation. Under this model, promises of advancement, personal achievement, and the job itself are motivators, where salary and bonuses are just part of the regular organisational environment and should be expected for achieving higher productivity. This argument against PRP systems as motivators suggests that they are not effective because they are not properly linked to motivators, such as advancement. If the PRP process involves criteria that not only spells out how to achieve bonus award, but can be linked to personal development toward management advancement and promotion, it is likely to have more impact and positive results. This means that HR managers must be aware of the bonus schemes in place, know which groups they are targeted at, and remain upgraded with linkages to different motivational needs in employees and managers. It does not seem that the PRP process can be effective unless it is linked to the actual psychological needs of employees so as to appeal to their inherent demands related to job role and status within the organisation. If employees believe that they are to receive more than just bonus compensation when meeting goals with exceptional performance, they might be more apt to model these behaviours in the future. This would be true especially if they noticed that promises were kept, based on appraised strengths, toward promotion that also gives a compensatory reward for their efforts. Customised PRP systems Other than specific goal-attainment criteria laid out in most performance related pay schemes, there are options for customising these programmes to give them more relevance to the specific organisation and its role in its market. Busy Bees, a large nursery and caretaking business in the UK, had a serious problem with turnover. The turnover rate in this SME was 37 percent and remained at this level for over two years (Vevers, 2007). This is much higher than what would be considered acceptable industry norms, therefore the business needed a radical change in how to link performance with reward. New criteria was listed in their annual appraisals that included performance indicators in areas of timekeeping, uniform, attendance, parental communications, and childcare knowledge application and practices (Vevers). What essentially happened at Busy Bees is that the regular cost-of-living appraisal was not motivating workers to remain committed to meeting Busy Bee goals for service and support. After a survey was delivered to employees, it was discovered that 77 percent of staff believed that performance pay should be included, thus turnover was reduced to 29 percent in just one year (Vevers). In this case study, employees were suddenly motivated to meeting many different goals because the PRP system and appraisal process clearly identified what goals needed to be attained in order to be recognised. It created a sort of positive employee competitiveness that build stronger advantage in the childcare market industry. “Pay for performance systems should be cyclic and top-down driven” (Landsberg, 2009, p.12). Some PRP systems fail because they are just communicated on paper or through the company intranet and do not achieve high-level executive support. The image of the executive is very important in gaining commitment from employees, such as their visibility within their firm or their behaviours when dealing with subordinate workers. Executives should be transformational, having integrity, vision, charisma and efficiency in order to gain lower-level employee support. In one case study involving Capital One Financial, a CEO earned 90 million USD over three years as part of their structured PRP systems, however during this period shareholders lost considerable funds (Thurm, 2010). In this case, employees witness their CEOs achieving high compensation, even when their own job security might be at risk when stock losses are noticed or when sales decline. It is very important that the different PRP systems in use at the organisation not only have executive commitment, but that there is the perception of distributive justice in the organisation where employees feel that bonuses are being delivered fairly and to the right people. If employees see an executive failing to commit to the smaller-scale bonus packages received by employees, whilst at the same time achieving millions of bonus award for little performance, there is apt to be resentment against managers which can change future behaviours toward goal-setting. There really are no specific performance related pay systems that are more effective than others, only that they are flexible for achieving specific organisational goals, whether short-term or strategic in nature. Employees can be given small rewards for assisting in special launch projects, such as a new technology support system implementation, simply to reinforce that they are valued and appreciated as high performers. Very large-scale bonuses can be developed, such as profit-sharing or just mass payments, when very difficult sets of criteria are met, such as improving market share by 10 percent in just over 15 months (as one example). As long as they promote concepts of security, motivation, and fairness, PRP systems will enhance motivation. Conclusion Employees are only motivated to achieve goals if the PRP is communicated properly and is developed with very clear and concise sets of criteria needed to be achieved for bonus receipt. Without executive buy-in that starts at the top, these programmes are nothing more than an HR effort designed to change behaviour or elicit controls. Employees must perceive these programmes as being relevant to their social and political needs (such as receiving promotion) and should be used for developmental purposes. As long as business environments change, they are customisable for short- and long-term gains. References Cyr, A. (2010). Is your firm ready for pay for performance?, Canadian HR Reporter, 23(2), pp.25-27. www.sciencedirect.com. (accessed April 27, 2010). Egan, J. (2010). Performance-related pay. http://www.cipd.co.uk/subjects/perfmangmt/perfrelpay/prefrelpay.htm?IsSrchRes=1 (accessed April 27, 2010). Foot, M. & Hook, C. (2008). Introducing Human Resource Management, fifth ed., Harlow/FT Prentice Hall, pp.4-5. Gielen, A., Kerkhofs, M. & Van Ours, J. (2010). How performance related pay affects productivity and employment, Journal of Population Economics, 23(1), p.291. Landsberg, R.D. (2009). How to make pay for performance pay off, Journal of Financial Service Professionals, Bryn Mawr, 63(3), p.12. Management Today. (2007). Performance-related pay, London. October, p.22. Thurm, S. (2010). Getting bang for the buck, companies run by best-paid chiefs typically deliver above-average shareholder returns, Wall Street Journal Online, March 31. www.wsj.com (accessed April 26, 2010). Turner, J.H. (2006). Pay for performance: Contrary evidence and a predictive model, Academy of Marketing Studies Journal, 10(2), pp.23-38. Vevers, S. (2007). Creating a buzz, Personnel Today, Sutton. September 11, pp.28-30. Williams, N. (2009). Performance-related pay hit during recession, Personnel Today, Sutton. November 3, p.23. Wilson, J. & Western, S. (2001). Performance appraisal: an obstacle to training and development?, Career Development International, Bradford. 6(2/3), p.93. Read More