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How Does Performance Related Pay (PRP) Work?

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Performance Related Pay (PRP) is not a new phenomenon as Beaumont points out, “it is important to recognize that “Performance Related Pay” is a very heterogeneous set of measures, some of which have been around for a very long time” (Beaumont 1993). Many variations like as work, payment by outputs, merit based merit-selective bonus schemes can be categorized under this.

“Merit pay systems are defined as those providing periodic increases in pay, which result from assessments of individual performance and personal value to the organization” (Murlis & Wright, 1993). “PRP is taken to mean individualized pay where movements in pay are determined in relation to individual performance against agreed targets” (Palmer, 1992). “Most of the recent debate has concerned Performance Related Pay (sometimes known as merit pay) the general principles of which are usually defined as the explicit link of financial reward to an individual, group or company performance (or any combination of these)” (Pilbeam 1995).

It appears from these definitions that although PRP may be considered a broad or a general term, the interpretation can be refined, and a working definition for the purpose of this dissertation is as follows: – Individual PRP has a straight association of payment within the contract of employment to an appraisal of performance based on the apparent contribution of an employee to its organization at one point in time.

Theoretical Basis for Performance Related Pay (PRP)

The fundamental theoretical basis for PRP is motivation theory. Kessler and Purcell spell this out, “The defining characteristic of PRP schemes is the attempt to link pay directly to individual performance and in this respect, underlying motivational theories come to the fore”. (Kessler and Purcell, 1992)

Other theoretical derivations, which have been discussed in previous chapters for PRP, consist of Expectancy, Reinforcement, Goal, and Equity theories. Equity Theory is based on the notion that employees want to be treated neutrally in relation to others. The theory attempts to enumerate ratios based on what an employee inputs in a job, and the overall benefits that the employee gets.

The suggestion is that some degree, perhaps at a subliminal level, of cognitive calculus, takes place which relates the ratio of inputs to outputs to the ratio of a ‘comparison other’. The individual verdict of the evenhandedness of the ratio relationships will largely decide the perception of equity, i.e. if it exists or not. The corollary is that perceptions of equity will maintain stability and symmetry. Perceptions of discrepancy will create a drive to take action on either your inputs or outputs or take action on the inputs or outputs of the ‘comparison other’. Alternative propensity in cases of apparent inequality includes perceptual distortion or even exiting from the unfair situation. Evidently, the degree to which equality or inequality is perceived to be present is puzzling with prejudice and a major contingency aspect is a degree to which a person values the notion of fairness.

However, the fundamental message in regards to reward systems is that of linkage of pay, as an upshot, to effort, aptitude and litheness as an input, can serve to accomplish fairness and preserve levels of motivation or not de-motivate. The linkage with PRP being that there must be a fair relationship between pay and performance.

Expectancy theory also has the capability to offer insights. Kessler and Purcell make reference to the collection of expectancy theories, although with immediate concerns. “… at the crudest of levels such (PRP) schemes are informed by the view that employees will be motivated if they perceive a direct relationship between effort and reward”. (Kessler and Purcell, 1992)

Emergence of Performance Related Pay (PRP)

Some of the current interest in PRP according to Beardwell and Holden in Human Resource Management – a contemporary perspective, is credited to competition; “due to competitive pressures organisations are constantly looking to augment the added value of their employees, by motivating them to increase effort and performance (Beardwell and Holden, 2004).

The strengthening and globalization of the competitive atmosphere being witnessed actually produce stronger interest in raising effort and performance. Many employers believed that their old, rather practical pay systems, to be too rigid, to meet the demands of a competitive market.

Personal performance was a rudimentary concern and PRP was perceived as an effectual method to put a performance message in an employee’s pay. The postulation being that PRP is quite influential in producing a cultural change which is very performance conscious.  Robinson, in Human Resources, comments on this, “instead of the previous paternalistic approach to employees whereby people were valued and nurtured regardless of their contribution, it put every individual’s performance firmly on the agenda” (Robinson, 1996). Yet, the competitive demand driver is only one of a number of interconnected stimulants to PRP enthusiasm. Others include the strategic incorporation of reward systems and the surfacing of HRM (Lewis,1991).

 

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