Performance Related Pay: an evaluation of raising employees’ motivation
By : Muhammad Hatta
Republish : Zulfikar,ST
Introduction
Performance related pay schemes have been growing since the early 1990s (Lewis, 2006). The purposes of companies adopting such schemes were to motivate employees and to reward high performance employees in order to achieve the company’s goals (CIPD, 2007 and Kauhanen and Piekkola, 2004). However, there is also increasing concern whether it is able to motivate employees. Robbins (2003) suggests that there tended to be a weak link between pay and performance in most organizations. Similarly, Heery (1996) and Mitra, Gupta and Jenkins (1995) argue that the performance related pay scheme seemed to increase risk for employees. It, in theory, will improve employee motivation; however, there is evidence to suggest that, in practice, it appeared to fail to achieve the expected result.
The purpose of this essay is to discuss and evaluate to what extent the performance related pay will most likely motivate employees to achieve company objectives.
This essay has been organized in the following ways. First, it will review motivation theory and pay. Then, the trend and issues of performance related pay will be presented in next section. Finally, the rest of this essay will discuss companies’ reasons for implementing the scheme and present recommendations and conclusion
The Motivation Theory and Pay
Before discussing the performance related pay scheme, this section will review the motivation theory in order to provide the basic principle of motivation. According to Robbins (2003), motivation is related to intensity, direction and persistence of effort in order to achieve a goal in general. In this context it will focus on the company’s goal. Intensity is how hard an employee will work to achieve the goal. Direction is the alignment between the individual and the organization’s goals and persistence means how long employees will put the effort in order to achieve the goal. So, the performance related pay could be maintained as a motivator if all those three respects are fulfilled. If one of those factors is absent, it can be argued that people are not motivated, although they put effort into working.
Despite the fact that there were some critics about the methodology, Frederick Herzberg’s two factors theory, also called hygiene and motivation theory, is significantly relevant to be used as a basic principle in examining the relationship between performance related pay and motivation. In brief, the theory explains that increasing a salary might only fulfill their hygiene factors and give them “no dissatisfaction” or make them happy but not give them satisfaction. Robbins (2003) suggests that to increase employee salaries might not directly motivate employees to perform better in their job. Likewise, Mitra, Gupta and Jenkins (1995) argue that even if employees are given a large increase in their salaries, it probably will make them happier at the time of the salary increase, and short term, but it does not mean that it improves their motivation. However, if companies want to motivate employees, they need to satisfy them. This includes providing employees opportunities for personal achievement, growth and recognition.
These theories indicate very important points for the pay scheme, particularly, for what factors companies should focus on in designing and implementing the scheme in order to motivate employees to achieve company goals.
Another theory that is also relevant to any review is equity theory, which emphasises equality in the treatment of employees. Robbins (2003) argues that people will be motivated when they are equally treated and rewarded. As an illustration, AA, a new graduate student, has just been accepted at an information technology company as a program analyst. He shows as a very highly motivated employee. However, after one year, the company recruits another new employee, called BB, whose ability is as same as AA but BB is paid much higher. As a result, AA decides to resign from the company because he feels that the company treats and rewards him unequally. This shows us that employees can be motivated in certain periods and can be unmotivated in the other periods, which is related to persistence as Robbins suggested. Therefore, it is important to design the pay scheme that ensures employees will be rewarded equally.
Regarding the direction in definition of motivation, the Vroom’s Expectation Theory suggests that to fulfill employees’ expectations may lead to improve their motivation. Therefore, it is essential to establish clear performance criteria and match company goals and employee expectations. Robbins (2003) argues that people will be motivated when they believe that they are rewarded the same as their effort, performance and expectations. Employees will most likely be unmotivated when performances are not measured based on the agreed criteria and the reasonable performance target. In addition, employees will also not be satisfied if the benefit or incentive scheme does not match with their individual need or goal. Despite the fact that it is virtually impossible to satisfy all employees’ needs, it important for companies to attempt to provide an accommodative reward scheme, which accommodates most of their expectations. It appears that expectation theory is relevant to what Robbins called direction, which means companies need alignment between company goals and employees’ expectations.
In summary, having reviewed the motivation theory above, it appears that in order to motivate employees, the company might need to focus on not only the employee hygiene factor but also motivator factors which include providing fair treatment and aligning employee expectations and company objectives.
The Performance Related Pay Trend and Issues
Performance related pay trend
Recently, performance related pay is gaining popularity. The findings from the Workplace Employment Relation Survey (WERS) 2004 indicates that the percentage of companies who adopted performance related pay schemes increased significantly by approximately 60% in the period of 1998 and 2004. In 1998, that was only 20% of the company, who participate the survey, adopted the scheme and in 2004, the percentage has increased to 32%. The survey involved over 20,000 employees, and around 3,200 managers in the United Kingdom (Kersley et. al. 2006). A similar trend was also shown in Finnish industry. There was a small proportion (10%) in 1990 of the Finnish industry who adopted the performance related pay, whereas, it became a majority of them (more than 50%) who had applied the scheme as their pay system in 1998 (Kauhanen and Piekkola, 2006).
The Performance related Pay as motivators?
Although performance related pay has gained popularity and been widely adopted, as mentioned above, there is also increasing concern whether the pay system relates directly to people’s motivation or whether the system might even demotivate employees. Holbeche (2005) argues that such pay schemes affect only a small proportion of employee performance and it tends to have an effect in the short term. Similarly, Herry (1996) suggests that performance related pay creates risk for employees in different ways; reducing the proportion of total remuneration, employees cannot control overall performance and employees feel uncertainty.
Regarding reducing the proportion of total remuneration, this occurs because the proportion of some its components are based on achieved performance. Armstrong and Murlis (2004) suggest the total remuneration, including base pay, contingent pay, variable pay and other forms of cash payment. Since the contingent and variable pay in the pay scheme will depend on company employees’ performance and company performance, the total remuneration will vary and depend on the achievement of both performance; individual and company. If they fail to achieve the performance, then total remuneration will be reduced.
As far as control is concerned, it is obvious that certain performance targets are not under the employees’ control. They might depend on many other aspects. On the other hand, the achievement of the target still affects the total employee remuneration, so that, Herry (1996) argues, that factor might also generate another risk employees will feel uncertainty about. As a result, employees, cannot secure their total remuneration for their income as a whole, because it might for some time be lower than expected.
If we refer back to the definition of motivation above, that motivation is related to direction, then, it can be argued that performance related pay could not be suggested as a motivator tool because it is a different direction. Employees may attempt to work hard not because the scheme motivates them but rather they try to keep the same amount of their total remuneration in order to secure their income, which might affect their mental state and behavior toward their job. On the other hand, the main objective of the company adopts the scheme is to motivate employees.
The Pay Increment Issues
The second issue is related to pay increments. According to Robbins (2003) and Mitra, Gupta and Jenkins (1995), the most common issue in performance related pay is around pay increments. A similar argument is also maintained by Wilensky (2007) that small increases will most likely demotivate employee. With a small pay increment, employees will see the pay does not relate to their performance. The Mitra, Gupta and Jenkins’s study result suggests that the merit increment should be a least around 6% to 7% to keep employees motivated. On the other hand, based on that similar study and three other different surveys, conducted by Hewitt Associates, Buck Consultants, and ORC Worldwide, as summarised by IOMA (2006), suggest that the average salary increase in most companies is only between 3.9 to 4.4 %.
To this point, the evidence above shows that the performance related pay would not be able to be a motivator if the salary increment is not high enough.
Concern about Performance Management
Another concern about performance related pay schemes is performance management because, in most companies, its result will determine some component of employees’ remuneration. However, Armstrong and Murlis (2004) maintain that, some companies only focus on appraisal, which is the last path of the performance management system. They tend to avoid paying attention to planning, reviewing and giving feedback. The common reasons for such responses are that they are time consuming and involve many resources, include administration and management focus. The other problems are lack of understanding and inability to appraise fairly (Wilensky, 2007). Those problems can lead to demotivated employees because they will perceive unfairness and cannot fulfill their expectation, as mentioned in expectation theory above.
According to Redman and Wilkinson (2006), the other criticisms of performance management were as a source of conflict and its subjectivity. The former has a potential for disagreement between superiors and employees in the performance management process. In the early stage of the process, setting targets, it can be argued, the superior will try to set a high target because the target will also relate to their own targets. However, employee will attempt to have the job targets as low as possible, because the achievement of the target will determine their reward. The latter, as human beings, appraisers or superior also have their own human relationship in their workplace. Consequently, they might be biased in the performance management processes; they will probably give a little higher mark for close friends and they will give a normal mark for the other employees. That is also called ‘crony effect’
It appears that the performance management process could also become a source of problem in implementing the pay scheme.
Company Attitude and Recommendations
The reason for implementation and implication
As has been discussed above, performance related pay tends not to improve employees’ motivation but rather it generates risk for employees, yet the system is increasingly adopted by companies. The most common objectives of the company introducing the performance related pay scheme were productivity related (Kauhanen and Piekkola, 2006). According to Harris (2001) there are two agendas for the company implementing the scheme; official and hidden. The former agenda is aimed to increase employee motivation. The latter is to manage the company effectively and to reduce costs while raising workload. Harris’s study conducted in 1998-9 shows that majority (above 55%) of respondents identified the benefits of the pay system and were able to recognize individual contributions, as tools to manage work and to have a formal appraisal system. Interestingly, the majority of respondents (68%) said that the system does not work as a motivator.
Therefore, it can be argued that the scheme is implemented as a mechanism to encourage employees to contribute toward company goals rather than to improve employees’ motivation. A number of studies, as cited in Rynes et al (2004), argue that performance related pay would increase productivity and product quality. It is obvious that from a company’s point of view, there is a tendency to focus on the company’s achievement rather than employee satisfaction. Consequently, those factors would be most likely to increase stress levels among the employees. Based on the Management Agenda survey, many employees feel much stressed at their workplace because their superiors set unrealistic targets and give them almost no help when the employees have difficulties in achieving their target (Holbeche, 2005).
It is obvious, that there are different agendas. The main purpose of the company in implementing the scheme is related to company performance and productivity. On the other hand, employees perceive it as a source of stress.
What do companies or managers need to do?
As has been discussed above, it seems obvious that companies tend to have a greater benefit than employees do from the scheme. Then, what can and should companies do in order to ensure they gain benefit and satisfy employees. As the Two-Factors theory has explained above, to motivate employees, company need to satisfy them. If companies focus only on ‘transactional remuneration’, financial reward and benefit, it will only fulfill their hygiene factors and give them ‘no dissatisfaction’. However, if company wants to motivate or satisfy employees, providing the total reward seems the right way to reward employees’ ability and performance. The total reward will include not only transaction remuneration but also non-financial recognition, responsibility, equal career opportunities and a work life balance (Armstrong and Murlis, 2004).
As far as improving motivation is concerned, consistency and employee involvement is the key factor to success in implementing performance related pay. Reward systems should be not only good in design but also need to be right in implementation process. Kauhanen and Piekkola (2006) found from their study that performance related pay could be a motivator when employers and employees establish the scheme together. Hickman (2000) argues that to balance between pay for performance and pay for the person will encourage them to be innovative and perform better. Wilensky (2007) states the scheme is only one of many other initiatives that will motivate employees. Those include improving employee engagement and communication. Rynes et al (2004) recommend five key general principles to implement the scheme; seriously handle the pay complaint; pay around and above market average; strong relation with performance; evaluate the strength of the system regularly and executive and employee pay increases move in the same direction.
.
Conclusion
Returning to the purpose suggested at the beginning of this essay, to examine the effectiveness of performance related pay scheme as a motivator, it is now possible to suggest that to a greater extent the scheme appears to be as a mechanism to achieve individual and company performance rather that to motivate employees.
As has been discussed, the motivation will related to the intensity, persistence and direction of employees’ effort toward goals. Whereas, from many studies as discussed above, it appears that the performance related pay schemes tend not to fulfill all those three aspects. The scheme seems to encourage employees to put effort toward their work in order to gain more incentives. Even worse, it also generated risk for employees because they might feel uncertainty, particularly in relation to their income. Hence, because of the absence one of more those components, then it can be argued the scheme cannot be classified as a motivator.
Although, the scheme has some issues and problems, such as generating risk for employees, small increments, lack of understanding of performance management, still gives benefits for companies in encouraging employees to put their effort toward work. However, such situations will have implications, which cause and increase the degree of employee stress level. It would seem therefore, it is important for a company to communicate and to help employee to be familiar with the scheme. So that, they will both have benefit. The company can achieve company goals and at the same time the scheme will also satisfy employees.
It is suggested that a broader study is also needed to examine other factors, that would determine the effectiveness of the scheme as a motivator tool.
Word count: 2751
References
Armstrong, M. and Murlis, H. (2004) Reward Management: A Handbook of Remuneration Strategy and Practice 5th edition, Kogan Page: London.
CIPD (2007) Reward Management. [online] available at http://www.cipd.co.uk/subjects/pay/_rewrdmansurv.htm?IsSrchRes=1 retrieved on [19-04-2007]
Harris, L. (2001) Rewarding employee performance: line managers’ values, beliefs and perspectives. International Journal of Human Resources Management 12:7 1182-1192 Routledge Taylor & Francis Group: London.
Heery, E., (1996) Risk, Representation and the New Pay, Personnel Review, Vol. 25 No. 6. pp. 54-65 MCB University Press.
Holbeche, L., (2005) The High Performance Organization: creating dynamic stability and sustainable success. Elsevier Butterworth-Heinemann: Oxford.
Hickman, E. S. (2000) Pay the Person, Not the Job. Training and Development Oct 2000, Vol. 54 Issue 10, p52, 6p, 2c [online] available at http://web.ebscohost.com/ehost/detail?vid=6&hid=101&sid=f162594f-3ad7-4d96-b151-4b6d7a8538d8%40sessionmgr107 retrieved on [05-04-2007]
IOMA (2006) Report on Salary Survey IOMA Business Intelligence Network [Online] available at http://web.ebscohost.com/ehost/pdf?vid=4&hid=114&sid=4e852bf5-4b1f-4027-afc7-c5f01204409e%40sessionmgr104 retrieved on [05-04-2007]
Kersley, B., Alpin, C., Forth, J., Bryson, A,. Bewley, H,. Dix, G., Oxenbridge, S., (2006) Inside the workplace: Finding from the 2004 Workplace Employment Relations Survey. Routledge Taylor & Francis Group: London.
Kauhanen, A. and Piekkola, H. (2006) What Makes Performance-Related Pay Schemes Work? Finnish Evidence Journal of Management Governance Dordrecht: 2006. Vol. 10, Iss. 2; pg. 149.
Lewis, P. (2006) Reward Management: Contemporary Human Resources Management Text and Cases, Second Edition, Editor Redman, T. and Wilkinson, A. Pearson Education, London.
Mitra, A., Gupta, N. and Jenkins, G. D. Jr, (1995) The case of the invisible merit raise: How people see their pay raises, Compensation and Benefits Review; May/Jun 1995; 27, 3; pg. 71 [online] available at http://proquest.umi.com.ezproxy.nottingham.ac.uk/pqdlink?Ver=1&Exp=04-03-2012&FMT=7&DID=6653530&RQT=309 retrieved on [05-04-2007]
Redman, T. and Wilkinson (2006) Reward Management: Contemporary Human Resources Management Text and Cases, Second Edition, Pearson Education, London
Robbins, S.P. (2003) Organizational Behavior 10th ed., International edition. Prentice Hall: Upper Saddle River.
Rynes, S. L., Gerhart, B., and Minette, K. A. (2004) The Importance of Pay in Employee Motivation: Discrepencies Between What People Say and What They Do. Human Resources Management. Wiley Periodicals, Inc.
Wilensky, G. R., (2007) Eye on Washington: Pay for Performance and Physicians-an open question Healthcare Financial Management. Westchester: Feb 2007. Vol. 61, Iss. 2; pg. 40, 2 pgs [online] available at http://proquest.umi.com/pqdweb?index=0&did=1220186251&SrchMode=1&sid=4&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1177403624&clientId=35492 retrieved on [05-04-2007]
Performance related pay schemes have been growing since the early 1990s (Lewis, 2006). The purposes of companies adopting such schemes were to motivate employees and to reward high performance employees in order to achieve the company’s goals (CIPD, 2007 and Kauhanen and Piekkola, 2004). However, there is also increasing concern whether it is able to motivate employees. Robbins (2003) suggests that there tended to be a weak link between pay and performance in most organizations. Similarly, Heery (1996) and Mitra, Gupta and Jenkins (1995) argue that the performance related pay scheme seemed to increase risk for employees. It, in theory, will improve employee motivation; however, there is evidence to suggest that, in practice, it appeared to fail to achieve the expected result.
The purpose of this essay is to discuss and evaluate to what extent the performance related pay will most likely motivate employees to achieve company objectives.
This essay has been organized in the following ways. First, it will review motivation theory and pay. Then, the trend and issues of performance related pay will be presented in next section. Finally, the rest of this essay will discuss companies’ reasons for implementing the scheme and present recommendations and conclusion
The Motivation Theory and Pay
Before discussing the performance related pay scheme, this section will review the motivation theory in order to provide the basic principle of motivation. According to Robbins (2003), motivation is related to intensity, direction and persistence of effort in order to achieve a goal in general. In this context it will focus on the company’s goal. Intensity is how hard an employee will work to achieve the goal. Direction is the alignment between the individual and the organization’s goals and persistence means how long employees will put the effort in order to achieve the goal. So, the performance related pay could be maintained as a motivator if all those three respects are fulfilled. If one of those factors is absent, it can be argued that people are not motivated, although they put effort into working.
Despite the fact that there were some critics about the methodology, Frederick Herzberg’s two factors theory, also called hygiene and motivation theory, is significantly relevant to be used as a basic principle in examining the relationship between performance related pay and motivation. In brief, the theory explains that increasing a salary might only fulfill their hygiene factors and give them “no dissatisfaction” or make them happy but not give them satisfaction. Robbins (2003) suggests that to increase employee salaries might not directly motivate employees to perform better in their job. Likewise, Mitra, Gupta and Jenkins (1995) argue that even if employees are given a large increase in their salaries, it probably will make them happier at the time of the salary increase, and short term, but it does not mean that it improves their motivation. However, if companies want to motivate employees, they need to satisfy them. This includes providing employees opportunities for personal achievement, growth and recognition.
These theories indicate very important points for the pay scheme, particularly, for what factors companies should focus on in designing and implementing the scheme in order to motivate employees to achieve company goals.
Another theory that is also relevant to any review is equity theory, which emphasises equality in the treatment of employees. Robbins (2003) argues that people will be motivated when they are equally treated and rewarded. As an illustration, AA, a new graduate student, has just been accepted at an information technology company as a program analyst. He shows as a very highly motivated employee. However, after one year, the company recruits another new employee, called BB, whose ability is as same as AA but BB is paid much higher. As a result, AA decides to resign from the company because he feels that the company treats and rewards him unequally. This shows us that employees can be motivated in certain periods and can be unmotivated in the other periods, which is related to persistence as Robbins suggested. Therefore, it is important to design the pay scheme that ensures employees will be rewarded equally.
Regarding the direction in definition of motivation, the Vroom’s Expectation Theory suggests that to fulfill employees’ expectations may lead to improve their motivation. Therefore, it is essential to establish clear performance criteria and match company goals and employee expectations. Robbins (2003) argues that people will be motivated when they believe that they are rewarded the same as their effort, performance and expectations. Employees will most likely be unmotivated when performances are not measured based on the agreed criteria and the reasonable performance target. In addition, employees will also not be satisfied if the benefit or incentive scheme does not match with their individual need or goal. Despite the fact that it is virtually impossible to satisfy all employees’ needs, it important for companies to attempt to provide an accommodative reward scheme, which accommodates most of their expectations. It appears that expectation theory is relevant to what Robbins called direction, which means companies need alignment between company goals and employees’ expectations.
In summary, having reviewed the motivation theory above, it appears that in order to motivate employees, the company might need to focus on not only the employee hygiene factor but also motivator factors which include providing fair treatment and aligning employee expectations and company objectives.
The Performance Related Pay Trend and Issues
Performance related pay trend
Recently, performance related pay is gaining popularity. The findings from the Workplace Employment Relation Survey (WERS) 2004 indicates that the percentage of companies who adopted performance related pay schemes increased significantly by approximately 60% in the period of 1998 and 2004. In 1998, that was only 20% of the company, who participate the survey, adopted the scheme and in 2004, the percentage has increased to 32%. The survey involved over 20,000 employees, and around 3,200 managers in the United Kingdom (Kersley et. al. 2006). A similar trend was also shown in Finnish industry. There was a small proportion (10%) in 1990 of the Finnish industry who adopted the performance related pay, whereas, it became a majority of them (more than 50%) who had applied the scheme as their pay system in 1998 (Kauhanen and Piekkola, 2006).
The Performance related Pay as motivators?
Although performance related pay has gained popularity and been widely adopted, as mentioned above, there is also increasing concern whether the pay system relates directly to people’s motivation or whether the system might even demotivate employees. Holbeche (2005) argues that such pay schemes affect only a small proportion of employee performance and it tends to have an effect in the short term. Similarly, Herry (1996) suggests that performance related pay creates risk for employees in different ways; reducing the proportion of total remuneration, employees cannot control overall performance and employees feel uncertainty.
Regarding reducing the proportion of total remuneration, this occurs because the proportion of some its components are based on achieved performance. Armstrong and Murlis (2004) suggest the total remuneration, including base pay, contingent pay, variable pay and other forms of cash payment. Since the contingent and variable pay in the pay scheme will depend on company employees’ performance and company performance, the total remuneration will vary and depend on the achievement of both performance; individual and company. If they fail to achieve the performance, then total remuneration will be reduced.
As far as control is concerned, it is obvious that certain performance targets are not under the employees’ control. They might depend on many other aspects. On the other hand, the achievement of the target still affects the total employee remuneration, so that, Herry (1996) argues, that factor might also generate another risk employees will feel uncertainty about. As a result, employees, cannot secure their total remuneration for their income as a whole, because it might for some time be lower than expected.
If we refer back to the definition of motivation above, that motivation is related to direction, then, it can be argued that performance related pay could not be suggested as a motivator tool because it is a different direction. Employees may attempt to work hard not because the scheme motivates them but rather they try to keep the same amount of their total remuneration in order to secure their income, which might affect their mental state and behavior toward their job. On the other hand, the main objective of the company adopts the scheme is to motivate employees.
The Pay Increment Issues
The second issue is related to pay increments. According to Robbins (2003) and Mitra, Gupta and Jenkins (1995), the most common issue in performance related pay is around pay increments. A similar argument is also maintained by Wilensky (2007) that small increases will most likely demotivate employee. With a small pay increment, employees will see the pay does not relate to their performance. The Mitra, Gupta and Jenkins’s study result suggests that the merit increment should be a least around 6% to 7% to keep employees motivated. On the other hand, based on that similar study and three other different surveys, conducted by Hewitt Associates, Buck Consultants, and ORC Worldwide, as summarised by IOMA (2006), suggest that the average salary increase in most companies is only between 3.9 to 4.4 %.
To this point, the evidence above shows that the performance related pay would not be able to be a motivator if the salary increment is not high enough.
Concern about Performance Management
Another concern about performance related pay schemes is performance management because, in most companies, its result will determine some component of employees’ remuneration. However, Armstrong and Murlis (2004) maintain that, some companies only focus on appraisal, which is the last path of the performance management system. They tend to avoid paying attention to planning, reviewing and giving feedback. The common reasons for such responses are that they are time consuming and involve many resources, include administration and management focus. The other problems are lack of understanding and inability to appraise fairly (Wilensky, 2007). Those problems can lead to demotivated employees because they will perceive unfairness and cannot fulfill their expectation, as mentioned in expectation theory above.
According to Redman and Wilkinson (2006), the other criticisms of performance management were as a source of conflict and its subjectivity. The former has a potential for disagreement between superiors and employees in the performance management process. In the early stage of the process, setting targets, it can be argued, the superior will try to set a high target because the target will also relate to their own targets. However, employee will attempt to have the job targets as low as possible, because the achievement of the target will determine their reward. The latter, as human beings, appraisers or superior also have their own human relationship in their workplace. Consequently, they might be biased in the performance management processes; they will probably give a little higher mark for close friends and they will give a normal mark for the other employees. That is also called ‘crony effect’
It appears that the performance management process could also become a source of problem in implementing the pay scheme.
Company Attitude and Recommendations
The reason for implementation and implication
As has been discussed above, performance related pay tends not to improve employees’ motivation but rather it generates risk for employees, yet the system is increasingly adopted by companies. The most common objectives of the company introducing the performance related pay scheme were productivity related (Kauhanen and Piekkola, 2006). According to Harris (2001) there are two agendas for the company implementing the scheme; official and hidden. The former agenda is aimed to increase employee motivation. The latter is to manage the company effectively and to reduce costs while raising workload. Harris’s study conducted in 1998-9 shows that majority (above 55%) of respondents identified the benefits of the pay system and were able to recognize individual contributions, as tools to manage work and to have a formal appraisal system. Interestingly, the majority of respondents (68%) said that the system does not work as a motivator.
Therefore, it can be argued that the scheme is implemented as a mechanism to encourage employees to contribute toward company goals rather than to improve employees’ motivation. A number of studies, as cited in Rynes et al (2004), argue that performance related pay would increase productivity and product quality. It is obvious that from a company’s point of view, there is a tendency to focus on the company’s achievement rather than employee satisfaction. Consequently, those factors would be most likely to increase stress levels among the employees. Based on the Management Agenda survey, many employees feel much stressed at their workplace because their superiors set unrealistic targets and give them almost no help when the employees have difficulties in achieving their target (Holbeche, 2005).
It is obvious, that there are different agendas. The main purpose of the company in implementing the scheme is related to company performance and productivity. On the other hand, employees perceive it as a source of stress.
What do companies or managers need to do?
As has been discussed above, it seems obvious that companies tend to have a greater benefit than employees do from the scheme. Then, what can and should companies do in order to ensure they gain benefit and satisfy employees. As the Two-Factors theory has explained above, to motivate employees, company need to satisfy them. If companies focus only on ‘transactional remuneration’, financial reward and benefit, it will only fulfill their hygiene factors and give them ‘no dissatisfaction’. However, if company wants to motivate or satisfy employees, providing the total reward seems the right way to reward employees’ ability and performance. The total reward will include not only transaction remuneration but also non-financial recognition, responsibility, equal career opportunities and a work life balance (Armstrong and Murlis, 2004).
As far as improving motivation is concerned, consistency and employee involvement is the key factor to success in implementing performance related pay. Reward systems should be not only good in design but also need to be right in implementation process. Kauhanen and Piekkola (2006) found from their study that performance related pay could be a motivator when employers and employees establish the scheme together. Hickman (2000) argues that to balance between pay for performance and pay for the person will encourage them to be innovative and perform better. Wilensky (2007) states the scheme is only one of many other initiatives that will motivate employees. Those include improving employee engagement and communication. Rynes et al (2004) recommend five key general principles to implement the scheme; seriously handle the pay complaint; pay around and above market average; strong relation with performance; evaluate the strength of the system regularly and executive and employee pay increases move in the same direction.
.
Conclusion
Returning to the purpose suggested at the beginning of this essay, to examine the effectiveness of performance related pay scheme as a motivator, it is now possible to suggest that to a greater extent the scheme appears to be as a mechanism to achieve individual and company performance rather that to motivate employees.
As has been discussed, the motivation will related to the intensity, persistence and direction of employees’ effort toward goals. Whereas, from many studies as discussed above, it appears that the performance related pay schemes tend not to fulfill all those three aspects. The scheme seems to encourage employees to put effort toward their work in order to gain more incentives. Even worse, it also generated risk for employees because they might feel uncertainty, particularly in relation to their income. Hence, because of the absence one of more those components, then it can be argued the scheme cannot be classified as a motivator.
Although, the scheme has some issues and problems, such as generating risk for employees, small increments, lack of understanding of performance management, still gives benefits for companies in encouraging employees to put their effort toward work. However, such situations will have implications, which cause and increase the degree of employee stress level. It would seem therefore, it is important for a company to communicate and to help employee to be familiar with the scheme. So that, they will both have benefit. The company can achieve company goals and at the same time the scheme will also satisfy employees.
It is suggested that a broader study is also needed to examine other factors, that would determine the effectiveness of the scheme as a motivator tool.
Word count: 2751
References
Armstrong, M. and Murlis, H. (2004) Reward Management: A Handbook of Remuneration Strategy and Practice 5th edition, Kogan Page: London.
CIPD (2007) Reward Management. [online] available at http://www.cipd.co.uk/subjects/pay/_rewrdmansurv.htm?IsSrchRes=1 retrieved on [19-04-2007]
Harris, L. (2001) Rewarding employee performance: line managers’ values, beliefs and perspectives. International Journal of Human Resources Management 12:7 1182-1192 Routledge Taylor & Francis Group: London.
Heery, E., (1996) Risk, Representation and the New Pay, Personnel Review, Vol. 25 No. 6. pp. 54-65 MCB University Press.
Holbeche, L., (2005) The High Performance Organization: creating dynamic stability and sustainable success. Elsevier Butterworth-Heinemann: Oxford.
Hickman, E. S. (2000) Pay the Person, Not the Job. Training and Development Oct 2000, Vol. 54 Issue 10, p52, 6p, 2c [online] available at http://web.ebscohost.com/ehost/detail?vid=6&hid=101&sid=f162594f-3ad7-4d96-b151-4b6d7a8538d8%40sessionmgr107 retrieved on [05-04-2007]
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