HUMAN RESOUCE MANAGEMENT CONTENTS 1. Introduction1 2. Literature review2 2.
1Emergence of PRP2 2. 2Concept of PRP3 2. 3Relevant theories of PRP4 2. 3. 1Maslow’s hierarchy of needs & Herzberg’s motivational theory4 2. 3. 2Equity theory in PRP5 3. Case study6 3. 1Case one: “Why Do Companies Use Performance-Related Pay for Their Executive Directors? ” (Bender, 2004)6 3. 2Case two: “Evaluating performance-related pay for managers in the National Health Service” (Dowling & Richardson, 1997)9 4. Analysis and Evaluation of PRP Theory in Business Organisations11 4. 1Comparison11 4. Contrast12 4. 3Performance related pay theory in business organizations13 4. 3. 1Motivates employees and improve their performance14 4. 3. 2Facilitates change to organizational cultural14 4. 3. 3Encourages the internalization of performance norms15 4. 4Problems of PRP in practice15 4. 4. 1Setting performance objectives16 4. 4. 2Assessment and ratings17 4. 4. 3Reward17 5. Conclusion18 Reference19 Appendices21 1. Introduction Nowadays, Human Resource Management has become a strategic and coherent approach more than just managing the competencies and skills of employees in an organization.
Armstrong (2002) noticed that HRM is much more focus on people not jobs, and so does business organization (Lewis, 1998). Yet, people have been placed as an important role of business. To this extent, this essay will take a critical look at PRP which is based on people, and also considered as an essential and sensitive part of the HRM in organizations today. The paper starts with a brief review of recent literature which reports studies of PRP systems. It continues with describing two case studies related to the practical discrepancy to PRP theories.
It goes on to our own independent critical analysis by comparing the PRP theories and practice in real world. Finally, there are conclusions being drawn about the appropriateness of PRP in a research environment. 2. Literature review 2. 1 Emergence of PRP Performance-related pay (PRP) emerged in the early 1980’s which attempts to relate individual performance at work to reward, aiming to motivate people ad develop performance-oriented cultures. Besides business organisations, some public institutions such as governments and universities also adopt PRP as an essential level for championing values.
By comparing with other payment schemes, the PRP idea was whole-heartedly accepted by employers and played a much more positive effect on improving employees’ behaviour and organisations’ culture. According to the IPD research into performance management practices in 1997, 43 per cent of respondents had PRP; additionally, IBS research in 1998 showed that 61 per cent of answers satisfied their merit pay. These figures make it easy to see that PRP have been widely applied among organizations whatever businesslike or public facility (Armstrong, 2002).
There are a variety of reasons why organization may applied PRP. Armstrong and Murlis (1994) stated that ‘it is right and proper for people to be rewarded in accordance with their contribution’. According to Pilbeam & Colbridge (2002), there are a number of factors contributing to the emergence of PRP, which is identified in Figure 1. The Thatcher legacy and ‘enterprise’ values in the public sector Increasingly competitive environment and concern with employee performance Unitary and neo-unitary employment relations perspectives
Reassertion of the ‘right to manage’ and increasing managerial control Influence of HRM demagogy & Strategic integration of reward Trends towards individualism and the weakening of collectivism Emergence of PRP Figure 1: Factors contributing to the emergence of PRP (Pilbeam & Corbridge, 2002) 2. 2 Concept of PRP ACAS (1990) defined individual performance-related pay (PRP) as “a method of payment where an individual employee receives increases in pay based wholly or partly on the regular and systematic assessment of job performance”.
Additionally, Murlis (1996) claimed a significant distinction between the use of PRP to managing performance straight from the motivational stimulation of financial rewards (motivation) and the use of PRP to identify different levels of performance (reward). Based on these points, PRP can be commented as a combination of three key factors: motivation, performance and rewards, which work in two ways that motivating people to achieve expected performance; and rewarding these people who have achieved successful performance.
Based on these three factors and their relationships, Pilbeam and Corbridge (2002) identified three stages for PRP application: Firstly, setting individual performance criteria by imposition, discussion or agreement firstly; secondly, assessing performance against individual performance criteria which established in stage1; thirdly, allocating pay to the assessment of performance by the exercise of managerial prerogative. 2. 3 Relevant theories of PRP 3. 2 2. 3. 1 Maslow’s hierarchy of needs & Herzberg’s motivational theory in PRP Maslow’s (1943, 1987) hierarchy of needs and the two factor theory of Herzberg (1959) indicated that pay can be considered as the most effective way to satisfy human’s need and further to motivate people to work more effectively, which means appropriate payment can stimulate employee to achieve successful performance that maximizing organisation’s benefits.
Kessler and Purcell (1922) noted that employees will be easily motivated if there is a direct and close relationship between performance and reward. Therefore, PRP schemes could motivate the employees to increase their efforts to accomplish good performance. 2. 3. 2 Equity theory in PRP The Equity theory of Adams (1965) identified that employees have a strong need to be treated fairly which can be balanced by an equity between their input like work performance and output like rewarding.
Compared to other types of pay like non-incentive pay which is based on collectively-negotiated rule, PRP associates employees’ productivity with their behaviour, rewarding employees for their successful performance, which is much more fair and reasonable. From these theories, we can see that PRP has brought a lot of potential benefits on improving HRM efficiency of organization. However, there are some shortages in PRP application in practice, which will be discussed in following two empirical case analyses. 3. Case study 3. Case one: “Why Do Companies Use Performance-Related Pay for Their Executive Directors? ” (Bender, 2004) The paper focused on the issue of rewards to the listed companies’ executive director. There are variable ways to pay the rewards. Thus the performance-related pay introduced to this paper. At the beginning of this paper prior research introduces three types of theory to explain why companies use performance-related pay: agency theory, motivation theories (expectancy, equity), and institutional and legitimacy theories.
Research designing utilized 12 companies’ interviews with 35 persons who stand in different positions. These interviews lasted for two years from December 2001 to May 2003. The interviews reflected different opinions about the influence of PRP. Some of the answers demonstrated PRP could motivate people to do work well: Alan Wilson, chief executive of Skandia UK regarded pay as a motivator; a HR director thought if everyone was paid the same base salary, they would always do the same.
But a part of the respondents denied that PRP made an effort in motivating people in the work. A CEO argued that whether PRP works depends on which market you were in and also on when the people were on flat salaries. Also another respondent held a neutral idea on motivation of PRP to managers. A CEO categorized his employees into two types: one type chased money and the other worked for vocational interests and he realized that PRP was in a position to exert influence on those who chased money and not on employees worked for vocational interests.
At the end of this part the author reaches the conclusion that lack of money is a de-motivator. Furthermore, interviews demonstrated some different ideas: a) Payment represents personal value of employees. The more contribution you have made, the more you can earn; b) Focus and fairness: according to the answers from interviewees, we can find that the company adopts PRP with the intention to make executives focus on their work efforts and fairness can improve employees’ performance; c) The need to provide alignment: here is a large number of factors influence performance in long-term and some of those cannot be observed currently; d) Other reasons to introduce performance-related pay: the requirement of government to adopt PRP and because of everybody has it so you has to have it; e) Problems with performance-related pay: a consultant pointed out that PRP system would bring unpredictable problems especially in long-term and it is difficult to select appropriate measure and targets. Market Practices Need for Legitimacy Need to Attract and Retain
Implement a performance-related reward scheme Set performance measures and targets and use it to communicate strategy Directors’ actions and behaviours Business performance Performance-related award Monetary award Increased human capital for future negotiations Effect on individual’s self worth Figure 2: Why Companies use performance-related pay (Bender, 2004) In the final part, the author summarizes this case study according to three theories mentioned at the beginning of our description and draws figure 1 to show why companies performance-related pay. . 2 Case two: “Evaluating performance-related pay for managers in the National Health Service” (Dowling & Richardson, 1997) This paper includes 4 sections. Section 1 explains the NHS system which means the performance related pay system for general management in 1989. Section 2 concludes the evaluation criteria and explanatory framework. PRP is introduced on the initiative of management. According to Cannel and Wood’s survey, PRP could be introduced to overcome problems with existing systems, o encourage employees’ motivation, to improve communication with work force, to reduce problems of recruitment. Kessler suggested that the PRP might also be used to improve the fairness of a payment system, to reduce union influence and the importance of collective bargaining, can also give additional influence to line managers. The purpose of PRP is said to reward those manage who achieve a more than competent standard of work and motivate managers to perform better.
Section 3 values the efficiency of the scheme and four measures are utilized to check the outcome of the scheme. Managers had to be assessed by their supervisors and receive reward based on their performance if they had finished targets set at the beginning of the year. In NHS, the HR department designed the PRP system in order to motivate managers. However, through self-reported data from the managers covered by the PRP system, a majority of respondents saw the scheme as having little or no effect on their motivation to do their jobs well.
Also the authors did not found solid evidence to show that there are corresponding negative consequences of PRP. The initial examination of the raw data clearly suggests that the three elements of the scheme achieved different degrees of success. The objective-setting elements seemed to be widely supported. It could be observed that the scheme’s rewards were either not appropriate or not sufficiently attractive to act as a motivator. PRP include the way in which performance standards are set and monitored.
Section 4 explains the effects of PRP in the NHS. About 85% respondents showed satisfaction with the objective –setting process. Furthermore, they also agreed that the challenge offered by the objective measures increase their determination to achieve their goal set before. On the other hand, there was also much critical comment on reward system such as subjectivity and appraiser bias. In addition, the PRP reward system was always cash limited. 4. Analysis and Evaluation of PRP Theory in Business Organisations 2 3 4. 1 Comparison
Both of the two cases are involved in the topic of PRP, and focus on the effectiveness of PRP scheme. In addition, both of the researches partly agree that PRP is successful in some areas or in some extend, however, PRP is still not a perfect scheme due to various reasons. As what has been pointed out to be the problems in PRP, among all of the reasons mentioned in the papers, the objective-setting process has been pointed out in both of the researches, which indicates that this might be one of the key points which should be considered to improve PRP scheme.
What is more, both of the papers mention that PRP is introduced in order to “attract and retain executives with the potential of large earnings”(Bender, 2004) and “to improve the fairness of a payment system, to generate employee commitment” (Dowling and Richardson, 1997), which can be considered as the positive points of PRP. 4. 2 Contrast The methods used in the research in the two cases are different. The case about PRP in the National Health Service used both quantitative and qualitative date from a questionnaire survey (Dowling and Richardson, 1997).
While, the case conducted by Bender (2004) used qualitative date from an interview survey. Moreover, the perspectives used in the two papers also vary. As to the reasons why PRP is not more successful, Dowling and Richardson (1997) consider that there are three kinds of employees as being particularly important: firstly, those who think that the objective-setting process of PRP is coped with terribly; secondly, those who think the assessments are handled badly; lastly, those who believe that the rewards are not attractive enough to encourage their motivation.
They hold the opinion that PRP has a less important influence on these people, which indicates that the improvement of objective-setting process, assessments and rewards might lead to improving the effect of PRP. While, the paper conducted by Bender (2004) indicates that the reason that PRP is not so successful is also related to the market in which directors are. Besides, salary and rewards are not the only recourses that could motivate managers. For instance, leisure can also play a significant role in the performance of managers. Additionally, PRP scheme has less important impact on those people who mainly work for vocational interests.
Meanwhile, this paper (Bender, 2004) pays more attention to the reasons that PRP is used by companies. The writer points out some more reasons from interviews with directors other than the strong points of PRP which have been mentioned above. To be exactly, pay can be deemed as a symbol of worth and how much one can earn is associated with the self esteem for the executives. In the end, we can see from the two papers that PRP has developed successfully from 1997 to 2004 because what are reflected in the papers shows us that PRP has been used much more and been recognized in a wider range.
As a result, we can conclude that with the use of PRP, this scheme has become and also will become more and more mature and contribute a lot to business organizations. 4. 3 Performance related pay theory in business organizations This section conducts analysis of two empirical cases critically and assesses the value of PRP theory and benefits it achieves in business organizations. The whole objective of pay related systems like the PRP and other HRM theories is obviously to bring or add to the value of business organizations. When we take a look at the first paper, it is obvious that on the average PRP increases an organization’s value.
The following are the perceived benefits of the PRP theory: 4 5. 1 5. 2 5. 3 5. 4. 1 Motivates employees and improve their performance The human needs hierarchy theory of Maslow (1943, 1987) and the two factors theory of Herzberg (1959) indicate that in modern society satisfying human needs like payment is in a position to motivate people to work harder. Furthermore, in business organisations payment related to performance can stimulate people to accomplish the performance that organizations want. Kessler and Purcell (1992) claimed that if direct relationship exists between effort, performance and reward, employees would be motivated.
PRP schemes act exactly as this direct link motivating the employees to increase their efforts. 5. 4. 2 Facilitates change to organizational cultural Kessler and Purcell (1992) argued that PRP refers to flexibility, dynamism, entrepreneurial spirit and careful allocation of resources, leading to a performance-orientated culture. Therefore, the introduction of PRP facilitates change in business organizations culture from collectively negotiated formula to individual contribution, which assists in solving problems, increasing value of organizations, and reducing problems of recruitment and retention. 5. 4. Encourages the internalization of performance norms “PRP can encourage the internalization of the organisation’s goal or norms of behaviour among the employees of the organization” (Geary, 1992). In the implementation of PRP, the organisation’s norms of behaviour can be enhanced by rewarding congruous work effects and by punishing incongruous performance. Thereby, it strengthens management control and clarifies job roles within organizations. 5. 4 Problems of PRP in practice Theoretically, PRP can produce many benefits for organizations, which have been demonstrated above. However, there are always gaps between theories and practice of PRP.
In this part data from the NHS case will be utilized to illustrate some problems of PRP. Figure 3 above shows that only 2 percent respondents consider PRP as the motivator for them to work harder while respondents with opposite idea accounts for 45 percent. Also 67 percent respondents embrace neutral idea on the question of whether PRP scheme affect motivation to do the job and 77 percent respondents did not feel more co-operation after the introduction of PRP scheme. Question| Negative Positive| Does PRP have effect on your motivation to do the job well? 2| 3| 67| 25| 4| You consciously work harder because of the PRP scheme. | 45| 26| 17| 10| 2| You focus on PRP objectives rather than other activities. | 34| 34| 20| 10| 2| PRP changes co-operation level among colleagues| 2| 12| 77| 8| 1| Figure 3: PRP in the National Health Service (Dowling and Richardson, 1997) 5. 5. 4 Setting performance objectives It is essential for organizations to set up clear and measurable objectives so that the behaviour of employees can be guided by objectives. However, imposition and narrowness of PRP in objective-setting could lead to failure of the implementation.
What’s more, short term approach stemming from narrow and misleading objectives could make employees ignore intangible aspects and long-term tasks. Therefore, the weakness of PRP in objective-setting could discourage behaviour that is not financially rewarded and prevent business organizations from functioning well. 5. 5. 5 Assessment and ratings Assessment and ratings are indispensable stage of PRP system. In practice, two crucial elements during these processes, scales of ratings and fair appraisals made by managers are difficult to achieved, which make employees not satisfied with ratings given to them.
As Belfield and Marsden (2002) argued that the use of PRP will do more harm than good if the right monitoring environment is not in place. 5. 5. 6 Reward PRP regards reward as the motivator for employees to work hard, which is often not the case in practice. Maslow’s theory of the Hierarchy of Needs (1943) stated that payment is not the only need of human beings. Besides payment, people also have mental requirements such as belongingness needs, esteem needs and self-actualization. 5. Conclusion
After critical analysis and assessment we can finally reach the conclusion that in theory PRP is in a position to provide business organizations certain benefits such as motivating employees, improving their performance, attracting executives, facilitating change in organizational culture and encouraging the internalization of performance norms. However, due to imposition and narrowness in objective-setting, unfairness and inaccuracy in assessment and ratings, and diversification of human needs, theoretical benefits of PRP cannot be reached.
Therefore, more attention should be paid on the gap between HRM theories and their application in practice so that HRM theories can assist business organizations in increasing their values. Reference ACAS, 1990. Appraisal-related Pay. London: ACAS. Adams, J. S. , 1965. Inequity in social exchange. In: Berkowitz, L. ed. , Advances in experimental social psychology. New York: Academic Press, 267-299. Armstrong, M. , 2002. Employee reward. 3rd ed. London: Chartered Institute of Personnel and Development. Armstrong, M. ; Murlis, H. , 1994. Reward Management, London: Kogan Page.
Belfield, R. ; Marsden, D. , 2002. Matchmaking: the influence of monitoring environments on the effectiveness of performance pay systems. Centre for Economic Performance, London School of Economics and Political Science, London, UK. Bender, R. , 2004. Why Do Companies Use Performance-Related Pay for Their Executive Directors? Corporate Government, 12(4), pp. 521-533. Dowling, B. ; Richardson, R. , 1997. Evaluating performance-related pay for managers in the National Health Service. The Intematioruil Joumal of Human Resource Management, 8(3), pp. 348-366. Herzberg, F. , 1959.
The Motivation to work, New York: John Wiley. Geary, J. F. , 1992. Pay, control and commitment: linking appraisal and reward. Human Resource Management Journal, 2(4), pp. 36-54. Kessler, I. ; Purcell, J. , 1992. Performance-related pay: objectives and application. Human resource management Journal, 2(3), pp. 16-23 Lewis, P. , 1998. Management performance-related pay based on evidence from the financial services sector. Human Resource Management Journal, 8(2), pp. 66-77 Maslow, A. H. , 1943. A theory of human motivation. Psychological Review, 50, pp. 370-396. Maslow, A. H. , 1987.
Motivation and Personality. New York: Harper ; Row. Murlis, H. , 1996. Pay at the Crossroads. London: Institute of Personnel Development. Pilbeam, S. ; Corbridge, M. , 2002. People Resourcing: HRM in Practice. 2nd ed. Harlow: FT Prentice Hall. Appendices Tow papers: Bender, R. , 2004. Why Do Companies Use Performance-Related Pay for Their Executive Directors? Corporate Government, 12(4), pp. 521-533. Dowling, B. ; Richardson, R. , 1997. Evaluating performance-related pay for managers in the National Health Service. The International Journal of Human Resource Management, 8(3), pp. 348-366.