Reward and Fairness Issues in Performance Related Pay free essay sample

Performance related pay (PRP) is a financial rewarding system which is directly associated with the work accomplishment of employees. It seems that the basis of this process is cash or bonus payment: employees will be awarded cash or bonus when they achieve a greater performance. In the late 1980s and early 1990s, the system of payment by performance was widely applied in both private and public sectors in many organizations in the United Kingdom. Brown and Armstrong (1999) claimed that there are more than 50 percent of the UK companies had implemented this method to motivate their employees during that time. However, in fact, Kohn (1993) indicated that there are not quite much research existing which explicitly indicates that performance related pay is an effective procedure to encourage employees to improve their work. Furthermore, there are even some studies indicating that this system could be a de-motivator when workers distrust it. This article will explore the ineffectiveness of performance related pay from two perspectives and then try to provide possible solutions as well as evaluations for managers who are facing similar problems. The first perspective is the reward issue which may not attract employees to work harder. This problem may occur as a result of the different expectation of each individual in rewards. Secondly, the fairness issue, the transparency of organizations to measure their employee performance could cause the curiosity among employees. Once employees feel unfair, the PRP system will become meaningless. 2. Reward Issue Performance related pay relies on the expectancy theory that the sufficient size of rewards can motivate people (Wood and Maguire, 1993). When organizations apply this concept to the payment system, which is a financial reward, they have an assumption that workers may improve their performance if a high amount of salary or bonus is offered in return. However, according Brown and Armstrong (2000), some workers claimed that the extra pay was too low and it could not motivate them. Cannell and Wood (1992) even claimed that if the extra money is lower than six percentage of worker’s basic salary, employees might feel that they were insulted and it could de-motivate them. Consequently, the performance related pay tends to fail nd company could not motivate employees. In fact, the real problem in this issue might not be the amount of the reward offered to workers but might be the type of the provided reward that does not match employees’ preference. The following sections will discuss about the improvement of this scheme by using non-financial rewards and allowing employee to design their own rewards. Solution 1) Non-financial Rewards It may be concluded from the above information that insufficient financial rewards might not improve the performance of individuals. In other words, it could be said that money would not attract every employee, managerial staff in particular. Williams (2002) noted that the majority of upper managers felt the most significant factor which motivated them should not be the money. The authentic motivator is probably the achievements in their career path and their high self-esteem. All of those things could be called as non-financial rewards. Furthermore, there are some evidences illustrating noticeably that the majority of employees in both private and public sectors value non-financial rewards higher than money rewarding. The information that was provided by Institute of Personnel Management (1992) clearly showed that the respondents from both private and public organizations rated the importance of promotion higher than that of pay. The score of pay method from public employees and private employees are 3. 67 and 4. 11 respectively, whereas, they regarded promotion aspect as 5. 07 and 5. 78 on the same scale. The non-financial reward is one of the ways of organizations to award employees in terms of motivation. There are many interesting contents of non-financial rewards such as job enlargement, freedom concerning job duties, formal commendations and promotion. Job enlargement is to assign more jobs to workers in order to enhance their responsibility that allows them to complete the whole cycle of work process instead of one part concerning. As to freedom concerning job duties, it increases more independence in decision making that relates to the responsible tasks of employees. The formal commendations could demonstrate the appreciation of employees’ performance and value the importance of works they have done. In addition, the promise of enhancing the chance of promotion can be used as reward when workers accomplish a certain standard or present best performance in certain periods. Generally speaking, the main purpose of these rewards is to improve the satisfaction of employees by building up their self-recognition and personal achievement. The attractiveness of non-financial incentive could be illustrated clearly by a simple example of the dedication to adored leisure activities or hobbies of individuals. Even though they would not receive any money from those activities, they still keep doing them. Evaluation of Non-financial Rewards Each person could be motivated by different things. Therefore, matching rewards with every employee’s expectation needs to be realized as Williams (2002) suggested. Moreover, factors that motivate employees really well in one level might de-motivate or create dissatisfactions in other levels. Consequently, to realize the real motivator of each employee, organizations should have effective communication between workers and the employers. This communication scheme will be discussed in the following section. 2) Employee Involvement Thorpe and Homan (2000) suggest that involvement of employees can be one factor that makes performance-related pay succeed. This involvement, for example, can be a feedback about appraisal system or a performance target they have to achieve. This section will focus on one aspect of involvement which is discovering employees’ preferred rewards in performance related pay. Finding this preference can be applied to both financial and non-financial rewards. For financial reward, organizations may negotiate with employees and reach an agreement on how much amount of pay should be offered. Nevertheless, this strategy can only be done in the precondition that organizations have enough budgets to offer when the workers require more pay. For non-financial reward, according to previous section, employers need to understand factors that can motivate their workers and therefore use them as rewards in performance related pay. For example, organizations such as National Health Service in UK may need to find the real motivators of its employees, because in a research some respondents from NHS expressed they were not working for the money (Cannell and Wood, 1992). Apart from finding the preference which is a main target of this involvement, a company may gain another important benefit from this communication by implicating the recognition into the rewards. To illustrate this, Cannell and Wood (1992) argued that the recognition might motivate employees more than monetary reward if that individual has already been satisfied with their current level of salary. Cannell and Wood explained that employees might feel greatly motivated when they get rewards because their hard work was recognized widely in workplaces. This recognition may also occur when managers provide opportunities for employees to express their feelings. It may send a message to the workers that they are parts of the organizations and the organizations are really caring about how to satisfy them. When organization actually provides that promised reward, the same reward can be more meaningful to the workers as they has been recognized both designing state and rewarding state of performance-related pay. As a result, this involvement system may motivate workers and could lead to better performance eventually (Gennard and Judge, 2002). Evaluation of Employee Involvement Having discussed some main benefits of employee involvement, this activity also possesses some drawbacks that companies should consider. Firstly, it requires time and budgets to add this scheme into performance related pay. For example, managers may have to be trained on how to communicate with their subordinators in order to find their preferred rewards. Moreover, after training, managers may also have to spend necessary time to question and allocate those rewards. These might result in loss rather than profit of companies. Due to the fact that employee involvement relies on communicating skills of managers, therefore, another problem is that relationship between managers and subordinators might become bad if negotiating fails. On one hand, if a manager can satisfy employees, their relationship might improve. On the other hand, if a company could not provide the required rewards, the manager may send negative messages to employees and their relationship may be worsened by this scheme. These can de-motivate workers and have an effect on company’s performance as a whole. 3. Fairness Issue Apart from reward problem in the previous section, another important area that always provokes debates is how performance can be measured fairly. In fact, motivating employees and tapping their potentials are probably the main purpose for many businesses to introduce PRP. According to Adams (1965), equity plays a significant role in motivating people. Therefore, if organizations fail to achieve equity in the process of performance appraisal, PRP system can be totally undermined. In this article, two main fields which make PRP system easily to become unfair will be discussed. 3. 1. Lacking Satisfied Standard In order to measure people’s performance, there must be a standard which explicitly indicates which level of performance will be awarded. For example, in sales department, certain amount of sales is usually used as a standard above which employees can receive cash bonuses or increases to basic salaries. However, if the standard is not clearly defined or not satisfied by some employees, staff is likely to feel unfair. Such inequity will de-motivate those employees and then influence the whole morale of that organization (Adam, 1965). In reality, it is difficult to have an appraising standard with which all employees are satisfactory. To illustrate this, a company may face some difficulties when including some departments in which employees’ performance can not be easily measured though quantitative norms. Moreover, qualitative factors in those sectors, such as after-sales service, might be more valued than the quantitative outcome. Meanwhile, coordinating different criteria within different departments is also difficult. Yorkshire building society, a case study in New Dimensions in Pay Management (Armstrong and Brown, 2001), once paid its IT staff separately. The consequence is that its staff felt unfair and became divisive. Then, they strongly demanded a new arrangement. Therefore, more effort should be invested into creating a full-scale satisfactory standard. Due to the potential de-motivation followed with introducing PRP, some researchers have explored several key changes that need to be considered when adopting PRP (Armstrong and Murlis, 1991). Within these changes, some may provide the solution to the standard issue. Solution 1) Introducing Qualitative Standards Combining quantitative measures with qualitative elements is the first change that Armstrong and Murlis mentioned. This can probably relief numerous employees who are suffering from unequal assessment. If PRP focus only on quantitative factors, this may suit a few sectors such as sales department which has been mentioned before. In order to improve equity, however, some qualitative input factors such as knowledge and skills as well as output factors like innovation, team-work, customer service and delivery should be included in the assessing criteria. As a result, good performers can be measured in details and other employees will possibly feel those good performers deserve the bonuses. Moreover, it can also provide a perspective into â€Å"bad performers† to examine whether they are really bad. Evaluation of Introducing Qualitative Standards The qualitative performance might be difficult to set the criteria for assessment; therefore, encouraging employees to involve in the design of assessment process may reduce discrepancies between different standards in the same organization. The discrepancies may not be avoided but can be reduced to an acceptable extent. For example, if one employee feels considerably dissatisfied about certain department’s salary level or even about certain individuals, a line manager may take that opinion into account and the assessment’s standard could be amended by that gathered information. Nevertheless, the standard may be designed appropriately but the assessment still relies on managers who may use that standard subjectively. This reliance on line manager is another field that can easily generate favoritism and inequity and it will be discussed in the next section. 3. 2. Reliance on Line Managers In the process of implementing PRP scheme, line managers take most responsibility for evaluating their subordinators. Although such managers are possibly carefully selected and well trained to be fair appraisers, it may be inevitable for some to have their own favoritism and prejudice. For example, managers might pay more attention to employee who was judged as a diligent and intelligent worker and that one tends to receive higher scores than others. According to Kessler and Purcell’s research (1993), there indeed exited those managers who treated and accessed staff by their own way. In addition, as Kessler and Purcell found, managers had a tendency to mark people moderately. Therefore, those employees who work very hard may feel unfair if line managers do not score them high. As a result, mutual respect and trust will probably be destroyed during this process. Moreover, relationship between managers and employees is likely to become a controlling style which will de-motivate people’s performance significantly. (Norgaard, 2001) Solutions 1) Increasing Contact with Subordinators Holbeche (1998) claims that employees tend to be fairly motivated, if they are given opportunities to contact with their supervisors. This technique might extremely suitable for those employees whose positions are far from their line managers. Therefore, managers are more likely to establish a full understanding of each staff’s capability, intelligence and contribution. As a result, the assessment of each individual would be fairer. †¢Evaluation of Increasing Contact with Subordinators Increasing contact with subordinators might be one of the suitable strategies for solving the problem about the reliance on manager in PRP because it may improve the relationship between manager and workers. Consequently, this may generate trust and respect within organizations and this trust and respect may make employee feel that the assessment is fair. On the other hand, if workers do not trust and respect in their manager, employees might not feel fair even the manager assesses them objectively. According to Jaques’ â€Å"felt-fair† principle (1961), he argues that there is no recognized criterion of fairness within an organization. Therefore, if something is felt fair by staff, it will be fair. The instance for this concept is a case study of Tesco which treated its employees with trust and respect and Tesco try to create a satisfaction in their working environment. In return, most of its employees expressed that they felt fair and empowered to progress (Cranwell-Ward, Bacon and Mackie, 2002). 4. Conclusion Since the late 1980s when PRP was firstly introduced in organizations, performance related pay was widely used among numerous pay systems in United Kingdom and many criticisms related to PRP has been turned up. (Brown and Armstrong, 1999) Two problems in this article that was explored are parts of those criticisms. If rewards of PRP lose its motivation function, it tends to become meaningless. Similarly, if fairness was a problem in the perception of employees, PRP will also probably be destroyed. Therefore, it seems clear that if the performance related pay could not motivate workers due to these two factors, it has to be revised and improved. That improving is to find the suitable standard and suitable rewards as well as to increase the communication between managers and workers so as to know their real motivators and to increase the fairness in assessing process. When these weaknesses of PRP have been covered, it might increase the performance of each individual and then the outcomes could contribute to the overall performance of the company.