The Value of Performance Related Pay

The value of performance related pay Currently, many companies are utilizing the performance related pay (PRP) scheme. The PRP is often regarded as an effective method to achieve a better performance in both individual and collective terms. In the study of Cutler and Waine (1999), PRP affords employees with opportunities to increase return after the performance appraisal. It is quite different with certain salary schemes, such as those offering an automatic increase in pay but despite employees’ real performance.

The PRP scheme is usually designed to increase employees’ commitment and motivate employees through implementing an incentive system and assessing employees’ work performance (Varone and Giauque, 2001). The reasons for utilizing PRP scheme are various. Apparently, it is vital for the management layer to maintain a high level of consistency between employees’ and employers’ interests. Unless the two originally separate interests being aligned, can the corporation operate normally.

Since it is difficult to attribute the output to individuals, PRP is an appropriate approach to make the incentives of the company and employees consistent (Kruse, 1996). Besides, the intent to maintain the stability in the employment acts as another reason for the utilization of PRP schemes. The research by Chelius and Smith (1990) indicates the fact that the enterprise with a PRP scheme can have a higher level of stability in the workforce. Also, PRP’s effect on the enhancement of individual employee’s effort towards tasks and the corporate productivity promote its implement to a rather large extent.

PRP’s effect on individual employee, team, organizational motivation and productivity The PRP scheme can affect a wide range of subjects. In terms of individual employees, the company with a PRP scheme tends to be more attractive and it is more probable for them to increase the input (Lazear, 1986). Since the pay level is related to the different levels of work performance and employees believe better performance would be accompanied by a desirable return that is valued by them, staff may be more willing to exert an effort towards the task allocated. Moreover, the staff is more motivated to better the work performance due to the financial incentive and further achieve a higher level of job satisfaction. However, the function of PRP on a team-based task is often argued by different studies. For example, it may be difficult to distinguish the individual contribution levels when the job is completed as a consequence of the teamwork (Campbell et al, 1998), so the effect of PRP on the integral team can be weakened.

Apart from that, Gielen et al (2006) state that it is possible for the team members to become a free-rider, due to the difficulty in evaluating the individual performance in a team and thus the a group-based PRP scheme may just have little effect on individual performance. In contrast, Varone and Giauque (2001) argue that the problem can be resolved if the reward is on a collective basis rather than an individual one. The reason is that if the reward can be important to the entire team, the team members’ involvement and motivation would be improved.

Also, the PRP has an effect on the organizational motivation, but the situation is very complex. According to the expectancy theory proposed by Vroom (1964), when the management can meet the requirements, that employees have enough capacity to fulfill a task and the fulfillment of the task is related to certain outcomes that are valued by employees, staff can be motivated to accomplish the job. Therefore, if the PRP system is carefully designed and associated with returns which are needed by the staff, the company can achieve the goal of motivation.

However, since the process of performance appraisal involves other subjects, the assessment outcome may be subjective. If the employees do not believe outcome of performance assessment, the aim to motivate employees may fail. Therefore, whether the PRP’s impact on motivation can be achieved or not depends on the objectivity of the performance appraisal. Many scholars believe PRP can produce positive outcomes towards organizational productivity. The enhancement of organizational productivity is fulfilled through the increase in individual or team productivity.

The reasons for PRP improving the labor productivity are: in the case of asymmetry information regarding employees’ capacity and effort, the PRP can encourage the staff to exert an appropriate level of effort (Prendergast, 1999); besides, when employing new staff, the PRP scheme can act as a screen, merely attracting the able employees to compete for the job vacancy (Lazear, 1986). With the employees of high quality and their expectations about the rewards generated by accomplishment of the task, the organizational productivity can be increased to a higher level.

Two classic PRP models Talking about the PRP models, the profit sharing plan and the merit pay plan tend to be the most influential. In terms of the profit sharing plan (PSP), it is defined as an agreement that can be freely entered into, through which staff can get a fixed amount of shares from the profit of the company in advance (Schloss, 1907). To be more precise, PSPs are usually designed and implemented for a variety of purposes.

The PSP can be used to induce the staff to work for enhancing the corporate remuneration, thereby acting as a replacement for the employee monitoring system. For instance, with the use of the PSP, the staff may be motivated to monitor the co-workers’ performance in order to ensure the higher earnings (Bradley and Estrin, 1992). Besides, the management layer may utilize PSP as a tool to enhance the corporate outcomes, such as motivation and productivity (Art and Turner, 2004). However, despite the various expectations on the PSPs, its effectiveness is argued for a long time.

Although some corporations may think that the increase in its productivity and profitability is due to the use of PSP, no one can give clear evidence to establish a link between PSP and the organizational performance. Besides, the PSP is often criticized by the fact that, due to the profit increase covering a large number of employees, the enhancement in individual rewards generated by the personal effort is usually of rather small amount and can be nearly neglected. So to exactly confirm the effectiveness of PSP, more studies and researches need to be completed in the future.

When it comes to the merit pay plan (MRP), it is defined by Heneman (1992) as the procedure of distributing pay increase according to the individual work performance, which is often determined by the outcome of performance assessment. The MRP is a tool frequently used by the company to induce staff to exert a higher level of effort and achieve the organizational motivation to increase the amount of corporate earnings. Theoretically, poor performer would either be discouraged or attempt to enhance the performance to acquire the merit pay (Brody et al, 2001).

By contrast, able staff would get a clear perspective of the relation between performance and rewards, and maintain a high level of productivity (Brody et al, 2001). However, being similar with the case of PSP, the function of MRP is also arguable. McGinty and Hanke (1989) suggest that the MRP can increase the corporate performance, but they do not work all the time. Researches have indicated that the criticism against the MRP is not related to its design in most cases but is linked to the process of performance assessment.

Due to the involvement of the supervisor as the third party, the assessment outcomes can be subjective and unfair to certain employees being assessed sometimes. Although the company attempts to avoid the disadvantages, the subjectivity during the assessment process is somewhat inevitable due to some elements, such as leniency (Brody et al, 2001) and favoritism (Salimaki and Jamsen, 2010). PRP plan utilized by Suning Appliance The best example to support my arguments may be Suning Appliance, a retailer of electronic products in China. The reason to use this company is that my father previously worked there as a salesman.

As he told, in the year of 2000, a certain amount of first-line salesmen were dissatisfied with the salary they received, since they thought they work much harder than others but merely got a same amount of pay. The motivation of the staff decreased dramatically and the sales of company were also affected. The thorny problem was not solved until the introduction of a new merit pay system in which the employees’ financial return was related to the work performance. Although the performance appraisal was sometimes criticized by the employees, it never triggered a big issue like the one happened in 2000.