The Concept of Performance Related Pay
Performance related pay is an ongoing trend within organisations for many years. This system is regarded in terms of upgrading performance of the employees within organisation. Due to the rapid globalisation and technological innovation, it becomes tough for the industries to survive without constant performance. Hence, the organisations badly need to increase their productivity. Employee performance is the main resource in this reference. Hence, the organisation needs to play a critical role in order to maximise the performance of the employees. In this context, it is an ongoing trend of performance management to pay incentives to the employees as reward for performance. In this system the employees can give up to minimum productivity in organisation, are eligible for getting incentives. This incentives scheme of organisation creates a competitive environment within workplaces. It is seen that this system is really effective to motivate employees in earning more. Hence, the employees want to increase their level of income, they automatically feel necessity of maximising their productivity. On the other hand, performance related pay (PRP) is also considered significant in terms of evaluating performance of the individual employees. It is a system which has been first introduced in the United Kingdom. As the field of business grow and a change a lot, it is also necessary to develop human resource strategies in terms of motivating employees as well as boosting production and marketing. However, it is seen that performance related pay leaves a negative impact on the morale power of a large number of employees. The employees who cannot give performance up to the minimum standard and cannot earn more, they may have inferiority complex. Sometimes, it is seen that employees feel insecurity in watching the high productive employees within organisation. That is the reason, it is also considered that performance related pay is an ongoing organisational issue. The motive of this assignment is to evaluate the concept of performance related pay critically. In this context the various aspects of performance related pay is analysed with the acknowledgement of a number of motivation theories. The impact of PRP system on employee performance is also necessary to discuss hereby. In this assignment the effectiveness of using PRP systems is going to be shown with the example of two different employment industries.
In order to sustain in the new global world, it is essential to consider new perspectives of managing human resources. In terms of sustaining in the competitive environment, it is necessary to consider the social Darwinism theory of Spencer. This theory can be taken into account in terms of understanding how much it is tough to sustain in business at global environment. The main principle of social Darwinism is ‘Survival of the Fittest’ (Hodgson 2014). As per this theory, the weak cannot sustain as they are not fitted with the eligibility criteria. It means the organisations which cannot compete are allowed to be drown in failure. For doing competition, the basic eligibility criteria of organisations are to give performance towards improving profitability constantly. In recent times a new perspective has been developed that financial performance of an organisation is increased based on the contribution of the employees. Therefore, it is necessary for the organisation to develop human strategies in terms of high engagement of the employees within the organisation. It is because the highly engaged employees are considered to put best contribution within an organisation. Incentive scheme is the best system to reward the employees for their dedication and contribution. This system is one of the vital part of performance appraisal. As per the effective human resource strategies, it is mandatory to reward the employees for performance. It is seen that the reward of incentives can motivate the employees the best for performance. It is because salary is the basic thing of motivation to the employees. Employees engage them into work because of fulfilling their economic needs. On the other hand, as per the corporate social responsibilities, organisations required to take care about throwing the economic and social condition of every individual employee. In considering this also, it is asserted that for every organization there is necessity to link performance with pay. Hence, today’s organisations consider incentive scheme in terms of taking competitive advantage. In this context it is necessary to take compensation and benefits into account. Most of the people in the world is not familiar with the real meaning of the terms, ‘compensation’. In this context, the question in the mind of most of the people is “what a person is paid”. Answering this question is argumentative. Compensation is not only related to salary. It is also regarded about providing direct and indirect reward to the employees in return for their contribution to the organisation. It is essential for an organization to determine compensation. Regarding this it is important for organisation to develop a compensation and reward program. This programme is regard for developing a justified process in terms of compensating every employee equally. It is considered that a well-structured compensation programme maintains a good balance of wages, benefits and rewards. This structure helps to remain an organisation to stay competitive in today’s labour market and sustain for long course of time. In considering this need of an organisation also, it is argued that every organisation requires to have a defined incentive structure. Hence paying incentives to the employees is an integral part of human resource strategies regarding compensation and benefits.
Evaluating Performance Related Pay
Alternative compensation systems regarding development of an organisation has link with the existence of foreign ownership of businesses and important management practices (Cascio 2018). In today’s world of business, multinationals play an important role in improving global economy and interconnection between diverse culture which leaves a great impact in the international human resource practices. Globalisation allows people to move freely across the globe and on the other hand, HRM practices tackle people in terms of managing across national boundaries (Shieldset al. 2015). The impact of this let the companies in USA and other countries in having initiation towards pay systems such as competency based and variable pay plans which are flexible and a better strategic suitability for a complex and changing business environment. Hence, it is argued that variable pay plans is considered as the most significant for ensuring organisational growth and development at global context (O’Learyet al. 2015). The trend of variable pay plan has grown recently. In addition, this plan includes bonuses, gain sharing when salary increment is considered as reward based individual or organisational performance. All these indicate that PRP is a critical factor in relevance of a firm’s competitiveness and it is also clear that the motive of PRP system is to increase employee motivation and effort in terms of aligning employee performance with organisational performance (Proelleret al. 2016). The trend of incentive schemes symbolises that money is the highly powerful motivator to the people. Therefore, it is meaningful to link pay with performance. PRP organizational system is the one of the vital evidence to prove that performance related pay is actually beneficial in motivating employees for high performance. In this perspective employees seek their job satisfaction to link pay to performance (Maltarichet al. 2017). Some of the motivational theories are imposed into line in terms of supporting this explanation.
In 1950, one of the premium psychologists Hertzberg has developed Two-Factor theory of motivation. As per this theory there are two factors which influence employees to seek job motivation and satisfaction such as motivator factors and hygiene factors.
- In considering the motivator factors, employees feel motivated to work harder when they literally enjoy work and employees enjoy work only when they feel recognised and flourished in career.
- Lack of considering hygiene factors in workplace affects employee motivation seriously. Hygiene factors include salary, compensation and benefits, company policies and the relationship between managers and co-workers.
Hence, as per the hygiene theory of Herzberg, salary increment and incentive scheme is highly regarded in order to provide employees satisfaction and motivation (Poutsma, Moerel and Ligthart 2015). On the other hand, employee can enjoy hard working only when they have a clear vision that they will be rewarded for putting their hard work into labour in improving whole organisational workforce (Spiegelaere, Gyes and Hootegem 2016). In addition, organisational reward to hard work will let them to achieve recognition and progression in career. Lack of having a standardising incentive plan in an organisation can lead employees to be demotivated in working within an organisation (Wenzel, Krause and Vogel 2017). Hence, an organisation needs to plan human resource strategies likewise.
Alternative Compensation Systems
Abraham Maslow has established a theory of motivation regarding hierarchy of needs in 1943. As per this theory, every human has five basic needs which need to be accomplished in terms of motivating. The five human needs are psychological; security and safety; love or belonging; esteem and self-actualisation.
- Psychological needs of human are fulfilled in order to ensure his sustainability to provide food, water and shelter. It is needless to say that without money no human can be secured in terms of food, water and shelter.
- One of the premium needs of human being is safety and feeling of security. In order to gain safety, for human beings it is essential to achieve financial security, health and wellbeing.
- Human beings needs to be loved in order to be motivated. Happiness of relationship is necessary to take into account in this context.
- Human beings needs to be respected by others to have positive energy into life.
- In addition, human beings need to gain encouragement to achieve what is possible for them to achieve.
This hierarchy needs of Hertzberg clearly indicates that employees in order to be satisfied in an organisation needs to be psychologically secure (Lindenet al. 2015). In addition, it is essential for an organisation to provide every employee economical security so that every employee can be the owner of good health in society. Good relationship between managers and staffs is also necessary to take into account in this reference. The good relationship between them will remain only when managers will encourage the staffs in bettering their performance for ensuring their economical as well as career growth within an organisation (Nyberg, Pieper and Trevor 2016). In the context of the need of esteem, it is asserted that performance appraisal or incentive schemes allows employees to be respected within an organisation. Performance related to pay fulfils employees the need of self-actualisation. It is because the vision performance related to pay helps employees to stay clear about what they can be within an organisation with good performance. Hence, with the consideration of Maslow’s Hierarchy of Needs, the growing trend of organisational’ performance related pay is completely justified in terms of encouraging employees for putting effort in organisational workforce.
In 1950, Henry A. Landsberger has introduced a theory named Hawthorne Effect. This theory said that some of the persons have a tendency to work harder when they feel that their performance will be observed (Bajorek and Bevan 2015). In this context, an organisation needs to provide justified evaluation and appraisal to individual performance of employees (Speklé and Verbeeten 2014). The performance related pay system is also justified in accordance with the theory of Hawthorne Effect.
Tesco is one of big retail organisations across the United Kingdom. In order to increase the sale rates of Tesco products, the company considers to give their employees a big amount of financial reward in terms of motivating their performance. Tesco thinks that it’s most important asset is none but the employees (Nyberg, Pieper and Trevor 2016). They also consider the fact that success of business depends on the performance and dedication of individual employees. Human resource management of Tesco is extremely thoughtful in order to develop integrated teams within their organisation. In addition, in terms of maximising productivity of team, Tesco Plc has a various form of financial and non-financial rewards. Every reward in Tesco reflects an individual’s role, performance, contribution and experience. It is also necessary to note hereby that reward is set with reference to external market price and internal relatively. It is also essential to mention hereby that each and every reward system aims to make Tesco work environment the most competitive. As a result, in Tesco employees are found to be highly focused in terms of ensuring maximum number of sales. Reward system of Tesco is unbiased and fair. Incentive schemes in Tesco is clear and easily comprehensive. In addition, reward scheme in Tesco enables to ensure consistent performance growth for every individual employee in their organisation. In this reason, Tesco is also able to retain their employees for longer terms. That is also a reason behind of Tesco’s being one of leading figures in the employment market in Tesco. The decisions of reward are trusted and effectively governed. The reward framework in Tesco is supple to accomplish the changing needs of the new business world. Tesco has recently declared a new plan to promote staff salary by 10.5% for the coming two years in fighting against inflation (Kato and Kodama 2015). The organisation also declared a maternity package of good amount and an additional 14 weeks’ half pay for every staff. Matt Davies, CEO of Tesco exclaimed, “This reward scheme is the biggest we’ve made for a decade” (Rouziès, Onyemah and Iacobucci, 2017). The present hourly rate in the UK Tesco stores is £7.62 pounds in every hour (Speklé and Verbeeten 2014). Based on that it is predicted that in November 2018, Tesco will experience an increase to £8.42 pounds per hour (Bajorek and Bevan 2015). Thus it is argued that Tesco ensures long terms sustainability in the market with the consideration of effective incentives scheme and other benefits such as pension and bonuses.
Link with Foreign Ownership of Businesses and Important Management Practices
One of the other important employment industry in UK and all the world is automotive industry. Such an automotive organisation in the United Kingdom is Bentley which also has effective participation in the recent trend of performance related pay. More than 1.4 million employees in Bentley is heated to save around £122.94 a month in 2014 by having participation in company share schemes as per its ProShare (Hameed, Ramzan and Zubair 2014). As per the record in 2013, 1.25 million employees could save around £107.76 in a month (Belogolovsky and Bamberger 2014). In Bentley, there are which employee share schemes are Share Incentive Plans (SIPs) and Save As You Earn (SAYE). This plans are effective for encouraging employees to purchase shares within the company. These schemes facilities employees to gain tax advantages in various ways such as belonging to this scheme employee do not need to pay income tax and the employees also can gain national insurance on the value of shares (Bajorek and Bevan 2015). The example of performance related pay in Bentley also supports the argument that performance related pay is not an organisational issue. It has a number of benefits in terms of preserving employee growth and organisational growth.
Based on the above discussion, it can conclude that performance related pay system develops a link between employee growth and organisational growth. This system is highly reliable for the organisation in order to execute their responsibility of thriving employee within organisation and society. In this way, the organisations carry out their most vital corporate social responsibility. On the other hand, with the above discussion and mentioned information it cannot be denied that performance related pay system is literally effective in terms of boosting employee performance within an organisation in terms of fulfilling organisational mission, vision and objectives.
Reference list
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Motivation Theories and PRP
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