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The Effectiveness Of Performance Related Pay Commerce Essay

Impressive levels of staff performance are difficult to for many organizations to attain. Maintaining desirable levels of personnel performance is central to the objectives of most organizations. This is imperative as employee performance often translates to aggregate organizational performance. In a situation where employees are less motivated or less engaged to their job functions, there is a risk that such low employee morale will be reflected in an organization’s overall performance. There are two main types of motivational mechanism that can be employed to induce staff to desired levels of performance namely; intrinsic motivation and extrinsic motivation. Perkins & White (2008:8) defined extrinsic motivation as motivation that is derived from the use of tangible or transactional reward. Financial reward and incentive pay are examples of extrinsic motivation. Perkins & White (2008:8) defined intrinsic motivation as the motivation of staff that is derived from the nature of the work itself. Armstrong (2010) added that intrinsic motivation is intangible in nature. Examples of intrinsic motivation are career development, career progression, training and development e.t.c. Armstrong (2002) argued that while intrinsic motivational mechanisms tends to have a sustained and positive impact on personnel morale, extrinsic motivational mechanisms tend to have minimal impact on personnel morale.

For some organizations, they focus of their process of motivating staff is mainly extrinsic, while for some others, the focus is on use of mainly intrinsic motivational variables. In spite of this, Armstrong (2010) contended that both types of motivation can together be used to design mechanisms and processes for motivating important personnel. The use of performance-related pay (PRP) as a tool for motivating staff within organizations is what this research will be about. Before proceeding, it is essential to point out that PRP is an extrinsic motivational variable. Many firms, specifically firms that deal with financial services, use performance-driven pay to reward personnel for enviable performance. Before going into in-depth explanation of what PRP is, it is essential to gain an understanding of what ‘employee reward’ is. In the words of White & Drucker (2009), “employee reward involves the tools used to compensate employees for their contributions to the achievement of organizational objectives”. Employee takes into consideration how important it is to use the right reward schemes to compensate personnel, especially where there is above average performance. While employee reward mechanisms can be both tangible and intangible in nature, tangible reward schemes will act as the main emphasis of this research, most notably ‘pay’. The challenge of using pay to motivate staff is the difficulty of determining the right application of pay structures in a way that it enhances sustained and desired levels of staff performance. This difficulty has led to increased innovation in the use of pay to motivate staff. One of such innovations is the development of ‘performance-related pay’. Thorpe & Homan (2003) suggested that PRP deals with the correlation of personnel performance with financial rewards. Again, IDS (1998) defined PRP as the different types of incentive mechanisms, in exclusion of direct payments based on outcomes achieved. Some of these incentive arrangements are profit sharing, employee share ownership arrangements, bonus arrangements e.t.c. PRP is widely used in the financial services industry in the United Kingdom. Bonus schemes are usually used to reward for employees for additional business or revenue generated. The recent liquidity crisis in the UK’s financial services industry, in the wake of the subprime economic disaster, has stimulated a widespread debate on the effectiveness of (PRP) as an effective tool for influencing personnel behaviour. Most of these debates arose because of the role of bankers in fuelling the liquidity crisis which culminated into the recent global economic recession. Based on these observations, this emphasis of this study will be on assessing the usefulness of PRP as a mechanism for motivating employees, especially from the ethical perspective.

3. Preliminary Review of Literature

PRP acts as an added way that can be used by firms to reward their employees in tangible terms. Again, performance-related pay also refers to individualized mechanisms or processes in which pay rises are relative to the outcomes of performance appraisal (Heery & Noon, 2001). This is why CIPD (2009) referred to performance-related pay as ‘appraisal-related pay’ or ‘merit pay’. A great deal of debate has arisen in recent times about the usefulness of performance-related pay as a tool for motivating staff to sustained and desired levels of performance. Most of the recent debates have been fuelled by the role of rogue bankers in the recent global economic crisis. While money or pay provides an avenue through which an employee’s value is assessed, there is a failure by most organizations to recognise that people tend to differ when it comes to being motivated by pay. Human beings are complex creatures and as such will respond to motivation through the use of pay in differing ways (Corby et al., 2009). Another problem derived from the application of PRP is the failure of most organizations to distinguish between awarding financial rewards based on behavioural criteria or based on the achievement of results. There is a broad difference between these two criteria. In most cases, the application of PRP by most organizations is more focused on the achievement of results and less focused on behavioural criteria. While result-oriented performance-related pay can be effective in terms of the achievement of an organization’s objectives, there are pitfalls in the use of this particular approach. The role of bankers in the recent economic crisis acts as a useful example of how result-oriented performance-related pay can be damaging to overall organizational performance especially in terms of the intrinsic worth of a firm. The use of bonus schemes led to excessive risk-taking by most bankers, especially bankers in the investment trading arm of most banks. Such excessive risk taking was largely driven by the desire to earn bonus payments; as a result, proper risk management mechanisms were often ignored as most banks became excessively leveraged. The decision by RBS to acquire Dutch bank, ‘ABN Amro’, was done in ignorance of appropriate corporate governance mechanisms; a decision that would not have been taken in retrospect as it led to accumulation of huge losses by RBS in the wake of subprime bust in America (Owen, 2009).

Most of the criticisms against PRP is derived from its failure to recognise the significance of the need to control behaviour. This is because the application of result-oriented performance-related pay process tends to encourage employees to engage in discretionary efforts and behaviours that are mainly based on their desire to earn additional pay incentives as opposed to engaging in behaviours that bring about added value for shareholders. Kessler (2005) noted that another problem with the proper implementation of performance-related pay mechanisms is the difficulty of measuring inputs as they are generally more qualitative in nature. On this specific note, performance-related pay is more likely to be based on individual targets than team or group targets. Another issue with the implementation of PRP is that since in most cases, it is reliant on individual targets, there is a potential for it to become discriminatory in nature. The banks in the United Kingdom again act as useful examples; bonus schemes tend to be given to bankers in the investment banking and trading arm of most banks while back office staffs seldom have access to such bonus schemes. What makes this appalling is the fact that most of the ill decisions taken by the bailed out banks was done by bankers in the trading arm of most these banks (FSA, 2009). Armstrong (2007) noted that discriminatory application of performance-related pay systems only leads to decreased intrinsic motivation and decreased co-operation between employees. This undermines every sense of an equality-based organizational culture. Again, Perkins & White (2008:165) were quick to point out that discriminatory bonus schemes only leads to low aggregate employee morale. Such a scenario only serves to undermine overall intrinsic interests within the organization. These observations help to highlight the undemocratic nature performance-related pay schemes especially as it tends to leave little room for the protection of entrenched collective employee interests. In spite of the multiple criticisms against performance-related pay (PRP), it is only fair to acknowledge that there are also perceived benefits that can be derived from using PRP schemes. For one, Lawler (2005) argued that relating individual pay tom performance possesses a potent motivational effect since it creates room for differentiating between the behaviour of employees and how they are rewarded.

3.1 Need for this research

Firstly, I decided to conduct this research because of one of the subjects of my international human resource management module. That topic, in particular, was about how culture determines the way people react to financial rewards and non-financial rewards. Again, this research will help to examine the rationale for use of PRP schemes as a way of influencing personnel behaviour.

4. Research Questions

1.) Can performance-related pay be used to create a dichotomy between the need to protect collective employee interests and the need to inspire above-average of performance among personnel?

2.) What are the most effective ways that organizations can employ to reduce the pitfalls of performance-related pay?

3.) Why did use of performance-related pay schemes fail to control the excessive ris taking attitudes of personnel in the investment banking arm of the Royal Bank of Scotland (RBS)?

5. Research Objectives

1.) To establish the best way of implementing performance-related pay in such a manner that entrenched collective employee interests will always remain protected.

2.) To establish the value of performance-related pay as a tool for enhancing performance of key personnel.

3.) To establish veritable options to the application of performance-related pay systems as a tool for motivating personnel to sustained and desired levels of personnel performance.

4.) To ascertain reasons for broad criticisms against use of performance-related pay to reward employees, especially personnel in financial services institutions in the United Kingdom.

6. Research Perspectives

The research philosophy that I will use in this research is ‘interpretivism’. Collis & Hussey (2003) posited that, “interpretivism suggests a broader philosophical paradigm and avoids misunderstanding with the phenomenological research paradigm”. In some aspects, there appears to be a like for like similarity between interpretivism and phenomenology. Any research that employs interpretivism is often times than not ‘inductive’. The subject of ‘pay-driven performance’ is a subject that entails qualitative information as both direct and indirect observations both by the researcher and other researchers will form the basis for most of the information collected by the researcher. The study of the effects of financial rewards on personnel performance, to a lesser degree, involves quantitative information except when measuring output-driven target for target-oriented jobs. Such measures can apply to certain jobs in the financial services sector, like investment banking jobs. The potential lack of access to such quantitative or target-driven information has informed the decision to use more qualitative-oriented information. Previously conducted empirical research on this research’s subject matter will be used to create the theoretical framework for this study.

7. Research Design

Collis & Hussey (2003) noted that the research design serves the main purpose of giving focus and direction when conducting a research. The research design forms the skeletal framework of the different methodologies applied during the conduct of a particular research. The research design that will be used in this research is the case study research design. Saunders et al., (2003) noted that the usefulness of the case study research design is that it enables the researcher to narrow the focus and scope of a research such that unnecessarily work is prevented. In this research, the case study for examining the effectiveness of performance-related pay is the Royal Bank of Scotland (RBS). This bank will form a useful case for investigating the key variables of this study especially when taking note of the fact that the actions of some of its employees were culpable in some of the excessively risky decisions that almost contributed to its demise in the wake of the subprime market disaster (Owen, 2009). As a result, findings from the cross-examination of RBS’s PRP arrangements can be used to determine the best ways of implementing PRP schemes in other similar organizations.

8. Data Collection Methods

In order to achieve the necessary requirements for this particular research, data or information will be obtained from both primary and secondary sources. Under-listed is a concise description of some of the tools that will be used to gather both forms of data.

8.1 Primary Data

Collis & Hussey (2005) defined primary data as ‘raw data or information’. The usefulness of primary data stems from the fact that it provides the researcher with original perspectives when investigating a particular problem. Primary data will be used to a considerable degree in this research. There are different ways for gathering primary data. In the context of this particular research, the researcher will gather primary data through three anonymous open-ended interviews with personnel of the Royal Bank of Scotland (RBS). The researcher expects that the interviews will take approximately forty minutes for each of the proposed interviewees. One of the proposed interviewees is a friend of mine and has promised me access to the other two interviewees. This friend of mine is a customer service representative in one of RBS’s offices in London. Feedback from these three open-ended interviews will help the researcher to meet most of the objectives of this research and also conclude this research.

8.2 Secondary Data

Secondary data, on the other hand, will be obtained from academic textbooks and academic journals. Collis & Hussey (2005) noted that secondary data is information assembled by other researchers and are available in public domains. Some of the peer reviewed academic journals that will be used in this research are the human resource management journal, CIPD articles and the reward management journal. These journals will be accessed from academic databases like the CIPD website, Ebscohost, and Emerald. Journal entries sourced from these databases will help to create the theoretical framework of this research. The value of the secondary data to be utilized in this research is derived from the assumption that it will also be used by the researcher as a ‘support mechanism’ during analysis of the primary data gathered by the researcher for this researcher.

8.3 Analysis of Data Gathered by the Researcher

Most of the data that will be analysed in this research will consist of the primary data gathered by the researcher. As mentioned earlier, the primary data for this researcher consisted of feedback from the three open-ended interviewees that will be carried out. The researcher will make use of content analysis during analysis and interpretation of feedback from the three interviewees. The content analysis will involve using the secondary data gathered as a support mechanism for analyzing feedback from the three interviewees. The use of secondary data during analysis of the primary helped to reduce subjectivity, which is one of the main limitations of the qualitative research approach.

9. Limitations of this Research

One of the main limitations of this particular research is the fact that the researcher will only use one research approach as opposed to use of a mixed-methods research approach; in this case, only the qualitative research approach will be used. The qualitative research approach is not without its limitations. One of the main limitations of this particular research approach is that analysis of data gathered tends to be subjective since it is largely based on the researcher’s perspectives and viewpoint (Collis & Hussey, 2005). To reduce subjective analysis and interpretations, the secondary data gathered will be used during analysis of feedback from the interviews that will be carried out by the researcher. Another constraint of this research is the fact that the sample size of just two interviewees may be regarded as too small to generate considerable primary data. To address this particular constraint, the researcher will ensure that considerable secondary data will be gathered so as to ensure that a concise analysis is conducted. Another constraint of this research is the use of just one case study; in this case, the Royal Bank of Scotland. The use of just one case study may make it challenging to generalize findings or results from this research. This is where the secondary data gathered by the researcher will be crucial; the secondary data will offer further perspectives on the underlying subject matter of this research, especially where the primary data appears deficient.

10. Ethical Considerations

The process of conducting this research will be based on the stipulated requirements of Coventry University. In this regards, the Coventry University Ethics Manual will be studied by the researcher before inception of the research. All external information that will be utilized in this study will be properly referenced using Coventry University’s recommended referencing style; in this case, the Harvard referencing style will be used by the researcher. The use of this particular referencing style appears to be in accordance with the plagiarism regulations of Coventry University.

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