Performance Related Pay Essay

1754 Words May 5th, 2013 8 Pages

1. Introduction
Performance-related pay (PRP) is a financial rewarding system that links pay awarded to the work output of employees (CIPD, 2013). It is connected directly to individual, group and organisational performance (Armstrong, 2005). In the late 1980s and early 1990s, performance pay scheme became prevalently used in both private and public sectors in UK organisations, where it is perceived to be a motivation tool.

2. Theories about PRP
As Thorpe and Homan (2000), the role of incentive pay in employee motivation nearly sets up on psychological theories. Locke and Latham (2004) define motivation as internal factors that impel action and to external factors that can act as inducements to
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Individual PRP relates reward on an assessment of the employee’s work performance. It assumes that the differences between individuals are measurable so that retention of high quality employees who wish to enjoy high performance reward is increased (Gerhart and Rynes, 2003). In addition, adopting pay incentives will stimulate employees’ better behaviours that will improve work performance and thus, improve organizational performance. Also, employees are motivated to create more efficient methods to boost productivity.

However, individual PRP has negative impacts which may de-motivate employees. It assesses the individual’s performance through using qualitative judgments, therefore bias and unfairness coming from performance appraisal is unavoidable by appraisers’ subjectivity. Moreover, Harris’s research (2001) shows that over half of the management failed to understand the “value system” of PRP, which in turn made inaccurate judgments on performance.

3.2 Team PRP
Team-based performance-related pay schemes include variable pay which depends on the performance of a team. The aim is to consolidate the team through incentives, establishing a united, mutually supporting team with a high level of involvement (Acas). Meanwhile, team-based pay motivates less effective employees and serves as an incentive for the whole team to improve.

There are also potential disadvantages

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