Performance-related Pay in Motivating Employees - Essay Example

Performance-related Pay in Motivating Employees Name Institution Course Date Performance-related Pay in Motivating Employees Organisational performance is a broad concept that is used synonymously with effectiveness, competitiveness and productivity and is a subject of research from a variety of disciplinary perspectives. Over the years, efforts have been made and research done by HRM theorists to establish a connection between HRM and performance. One strategy used to improve the performance of the employees is the performance-related pay (Cardona, 2007). Pay linked to performance rewards employees with consolidated or non-consolidated financial payments with regard to the assessment of their performance and achievement of goals and objectives. This reward method was first introduced in the United Kingdom in the 1980s with the hopes of bringing about organisational cultural changes and boost individual and organisational performance (Schmidt, Trittel and Muller, 2011). Pay linked to performance is now a fundamental element of various organisations’ reward approaches especially in industry sectors like financial services. Since its establishment in the United Kingdom, organisational psychologists, theorist and reward specialist have disputed the effectiveness of this motivational tool. Advantages of pay linked to performance include; its ability to provide direct incentive, it provides flexibility needed to retain quality staff and is a tangible means by which an individual’s achievement is recognised (Schmidt, Trittel and Muller, 2011). However, on the downside, this strategy demotivates a greater number of staff members at the expense of a few employees; it is discriminatory and undermines the ‘fair’ perception of equality. The failure of payment strategy as a means of enhancing performance is attributed to many factors including the mechanistic way in which it is implemented (Schmidt, Trittel and Muller, 2011). If implemented correctly, this strategy will improve how employees undertake their work. This paper will evaluate the ways in which organisations in the United Kingdom can implement the pay linked to performance in order to motivate employees and improve how they undertake their work. Many organisations import strategies from other organisations with little thought given to back up the strategy such as objective and target setting. Organisations fail as a result of applying ‘universal’ solutions that are often ill suited for their situation. For any pay for performance approach to be effective, organisations should follow a so-called ‘reward strategy pathway’ (Schmidt, Trittel and Muller, 2011). They should take into consideration the overall performance goals set and the ways to reflect them in the potential pay system. Organisations should make sure that they align reward strategy with the available set business strategy priorities. They should also ensure that the pay linked to performance is supported by other people in the organisation and the management policies such as employee relations reward to name a few. Generally, there should be congruence between performance management and objectives of reward (Schmidt, Trittel and Muller, 2011). For instance, a company would not desire the performance appraisal to be focussed on development yet the reward system is already performance determined. Performance pay system works best with the availability of a connection between organisation and employees’ interests. This is witnessed in business environments with high degree of trust where the workers respect the integrity of the leaders in deciding on the performance judgement. In addition, organisations should also consider the external and corporate framework within which a given reward strategy should operate. For instance, a research conducted by WERS established that the degree of competition faced by organisations was a factor affected by the available incentive pay schemes (Schmidt, Trittel and Muller, 2011). Therefore, the external environment should be considered before implementing any incentive pay schemes. Thus, the best approach is to follow the best fit and not the best practice (Cardona, 2007). According to Contingency theory, to be effective, a pay linked to performance strategy should be connected to the organisation’s characteristics and needs. Crucially, performance-related pay should be founded upon an operational performance management system that supports organisational goals and managers who are confident and competent enough in aligning performance against individual objectives (Cardona, 2007). Furthermore, the clarity and communication about a performance-related pay scheme’s objectives linked to organisational strategy and goals are the fundamental differentiation of whether the pay scheme will be successful or not. Transparency and communication are critical principles founded upon a successful implementation of any performance pay scheme. Therefore, managers should make sure that they communicate the right message to employees about a reward scheme to prevent any misunderstanding. It is easy to pay for performance if it can be measured (Reilly, 2003). Performance is assessed in one way or another. For this reason, not only should an effective performance management system be set in place but it should involve a series of discussion and development that increase skill acquisition and fairly reward the achievement of objectives and goals. The methods that measure performance impact the behavioural responses to performance-related pay strategies. Whether absolute or relative measures are utilised as a performance determinant is one key issue (Binderkrantz and Christensen, 2012). For instance, absolute measures of performance may limit the incentive for the low-performing employees owing to their likelihood of not attaining their targets. On the other hand, relative measures may reward employees with the lowest baseline performance owing to ease of achieving the targets. In order to overcome such difficulties, combining absolute and relative payment measures may be effective as it rewards target attainment and improvement. Another important factor to consider is threshold and linear performance measures. Threshold measures tend to reward achievement of level and linear measure tends to reward per unit improvement (Binderkrantz and Christensen, 2012). The optimal measure depends highly on the goals and objectives of the pay scheme. Therefore, what UK organisations should do is to institute a performance measure with respect to the goals of the pay schemes. The nature and range of targets of any performance related pay scheme is an important issue. Performance related pay strategies will be more effective if UK organisations set goals and objectives that are specific in nature (Binderkrantz and Christensen, 2012). If the targets are complex, employees will not be able to understand the incentive scheme and thus this will limit its effectiveness in impacting performance. However, simple models of incentive schemes with narrow range of goals and targets can bring about risk of narrow focus that can potentially lead to misallocation of efforts. Therefore, targets should be clearly set in line with the organisational strategy and should be openly communicated to the people concerned. Evidence from a number of literatures suggests that positive effects of performance related pay are greater when they are directed at small teams and individuals and not at large groups (Alshamsan et al., 2010). Research done in some UK organisations showed that in organisations offering individual-level incentives, performance outcomes were greater compared to organisations that offered group-level incentives. A lack of greater impact from incentives offered to larger groups may be attributed to ‘free-riding’ problems and lack of staff awareness. A number of studies have linked the lack of impact from performance related pay scheme to lack of awareness of the scheme among staff in an event where the incentive is distributed at a larger group level (Alshamsan et al., 2010). Performance-related pay tend to be more effective in small teams compared to larger groups since there is more scope in monitoring of employee’s effort that prevents ‘free-riding’ (Alshamsan et al., 2010). Nevertheless, there some evidence that show that offering institutional level incentives can brings positive impacts. For institution-level incentives to bring positive impacts on the performance of the employees, they should offer provision to changes to quality improvement infrastructure. For instance, a study conducted in US hospitals with regard to performance related pay showed that whether large group-level incentives have positive effects depends heavily on the availability of room for improvement and resources that supports clinical process improvements (Alshamsan et al., 2010). According to the research, improved performance could be attained by changing the working practices despite lack of knowledge of the incentives by employees. Performance improvements might have been higher if employees had been included in the incentive schemes more directly. Motivation of employees is considered an important factor that determines the performance of an organisation (Herzberg, 2001). Every organisation requires their employees to work harder in achieving objectives. The congruity between performance related pay and motivation of the employees is a complex issue debated in human resource literatures. A famous theory regarding motivation of people is the Maslow’s hierarchy of needs. According to the theory, people’s needs follow a hierarchy. When the needs and wants of one level of hierarchy are satisfied, individuals will aim at achieving the needs at the next hierarchy level (Herzberg, 2001). Applying the Maslow’s hierarchy of needs in performance related pay, very junior staffs who earn low wages are motivated when they receive higher monitory rewards since this enable them satisfy their physiological needs. When employees become progressively highly paid, monetary rewards become less important since other needs in the level of hierarchy like job security and achieving one’s potential become more important. Herzberg shows that increasing rewards and monetary value temporarily motivates the employees. When they become de-motivated again it becomes essential to ‘recharge their batteries’ using other criteria. A better way to recharge the employee’s battery as a way of motivating them is to ‘install a generator’ in order for them to recharge by themselves. This can be done by finding out what motivates them (Bratton and Gold, 2007. Herzberg suggests that it is the intrinsic factors including recognition for achievement, growth and advancement that really motivates the employees (Herzberg, 2001). For instance, on top of using pay to increase performance, giving greater responsibility to them can increase employee’s motivation. Monetary value alone cannot fully motivate employees. Perhaps what UK organisations should do is give praise to its employees, promote staff, involve them more on decision making on top of using performance related pay to increase performance. Managers make decisions for the organisations acting as company’s agents. It is also important that the risk preferences of senior employees and managers should match the risk preferences of a firm and the stakeholders. Many performance related pay schemes are faced with a problem in that the managers are too risk averse since they cannot make investments that risk their goals and targets not being met (Bratton and Gold, 2007). Many countries have established new laws and regulations to change this situation. United Kingdom organisations should therefore adhere to codes whereby remuneration structures adhere to sound risk management practices. In conclusion, the success or failure of a performance related pay scheme is linked to the mechanical way in which it is implemented. In order for pay linked to performance to be able to motivate the employees in achieving organisational goals, the risk preferences of managers should be aligned with those of the organisations, performance-related pay should reflect on the motivation concepts of the employees, the goals of an organisation should be aligned properly with those of the incentive schemes and should be linked to organisational characteristics and situations. In addition, incentive schemes should be directed towards small teams and performance measurement strategies should be of greater efficacy. Generally, performance-related pay is an effective reward tool and in the right circumstances and approaches, it can form a basis for motivating employees to undertake their work. References Alshamsan, R., Majeed, A., Ashworth, M., Car, J., and Millett, C 2010, “Impact of pay for performance on inequalities in health care: systematic review”, Journal of Health Services Research & Policy, 15 (3), 178-184 Binderkrantz, A. and Christensen, J 2012, "Agency Performance and Executive Pay in Government: An Empirical Test", Journal of Public Administration Research & Theory, 22 (1), 31-54 Bratton and Gold, 2007, Human Resource Management Theory and Practice, 4th edition chapter 10, Palgrave Macmillan Cardona, F 2007, Performance Related Pay in the Public Service: in OECD and EU Member States, Paris, OECD. Frederick, H 2001, One More Time: How Do You Motivate Employees? Harvard Business Review, Sept/Oct 2001. Reilly, P 2003, The Link between Pay and Performance, Brighton, Institute for Employment Studies. Schmidt, W., Trittel, N and Muller, A 2011, "Performance-related pay in German public services", Employee Relations, 33(2), 140-158. Read More