The Value of HRM to Business Organizations



In the face of competitive business environment, companies today are attempting to identify innovative and efficient reward systems to improve organizational performance. Performance-related pay (PRP), known as performance-related income or pay-for - performance, has been a popular tool across industries in the 1980's for motivating employees. Although PRP have many questioned voices in recent years, the improvement and innovation of PRP is still a valued issue to argue. Performance related pay system would offer bonuses to employees who perform especially well through meeting particular criteria or receiving a high performance evaluation from supervisors. This paper sets out the results of two empirical papers to compare and contrast the contributions of PRP to individuals and organizations. The positive impact on both individuals and organizations in using PRP is explored.

Section 1 Literature Review

PRP is suggested to be "one of the most dynamic issues in human resource management and arguably the most topical component of reward policy today"(Brady and Wright, 1990). A recent survey on the management process of organizations indicates that around half take PRP as the most important feature in their process (Armstrong and Baron, 1998). Other likely survives support the advantages of PRP in actual practice whilst others result oppositely. This section could analyze the PRP based on variable theories of its advantages and disadvantages, aim to find out the characteristics of a contributive PRP.

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"PRP is usually based on a systematic salary structure, a formal appraisal system and a more or less systematic link between appraisal, performance and individual rewards."(Snape et al, 1994). It can be any system relates the reward of an individual employee to the performance of the organization (Hindle & Tim, 2008). Aimed to "increase both quantitative and qualitative input of workers to the production process" (Whitfield & Poole, 1997), PRP links the pay to performance by specific critical objectives including attendance, customer satisfaction, effort and more important the sales targets (Tom & Adrian, 2002). It could be subjective and arbitrary, but it still considered as an effective contrast of behavioral traits in rewarding output instead of input. PRP focuses more on a job qualitative rather than its quantitative, which ends to a general performance increasing of the whole organization.

In this case, PRP is taken to fulfill an organization's expectation: Managers assume PRP would tie the advantages to the organizational needs and bring benefits to both the company and individuals.

1.1 Advantages

Compared with traditional incremental pay systems, PRP owns a more systematic appraisal system and provides higher expectations of employees. This encourages people to involve more in the company and hold more individual initiative in practice. Keep this in mind; PRP can attract workers to work with higher productivity and greater effort (Lazear, 1996). That is because PRP gives managers a manner to encourage the employees in their behaviors and performance rather than simply using the motivation through recognition and feedback (Mick & Adrian, 2000).

What's more, Stephen et al. (1993) addressed a strong point to PRP that it removes both external and internal influences on management, for pay is only associated with the performance and profitability of the firm. In a business communication, PRP also helps in offering the message of each performance critically: it assumes that good performance should be paid more than the poor (Mick & Adrian, 2000).

Performance would be affected by many factors as mentioned above. Yet if we look specific into the individual advantages and ignore the working situation, it will only be affected according to the performance equation, which indicates PRP influences individuals strongly in their abilities and personalities (John, 1992):

P = f (abilities, experience, goals, energy, rewards)

Equation 1.1 John's Equation on PRP Factors

Last but not least, PRP obviously contributes the earnings of both individual and organization positively (Booth & Frank, 1999). This fits the satisfaction of both the employees and employers. In sum, PRP contributes the earnings, individual initiative and productivity. It removes both external and internal influences on management and emphasis on properly appraisement.

1.2 Disadvantages

Admittedly, PRP still has some drawbacks in questioning the objective level. It is hard to set some totally objective measurements for the employees' performance, which makes the appraiser bias unavoidable (Hindle & Tim, 2008). Although many suggested manners (e.g. multiple feedback, training and 360 degree performance appraisal) have been used to reduce or even to remove the subjectivity, it asks for extra operate costs. Even worse is that the poorly designed PRP would hurt the employees' working enthusiasm, because they were unfairly treated (Hindle & Tim, 2008).

1.3 Features of Effective PRP

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In a market circumstance, how to gain the maximize benefits from PRP is a raising question. Trying to avoid the disadvantages, managers are desperate to maximize the advantages as many as possible. This requires the high-qualified PRP features as Kessler and Purcell (1992) pointed out as followed:

Primarily, the performance criteria in PRP should be established. Standard appraisal in PRP balances the individual earnings by reducing subjectivity, and this makes individuals meet their needs. Employees are motivated to believe they can affect the outcomes by themselves and build up their own "image" through the organizational process (Antti & Hunnu, 2006). Secondly, the establish standards above can appraise individuals properly in actual practice. The performance appraisals should be easy understood by the employees especially when they participate in the PRP decision making process. By making the standards and appraisals themselves, employees are more likely motivated in improving their personalities and abilities (Antti & Hunnu, 2006).

In addition, the PRP definition indicates that PRP can be linked to individual performance, group performance and corporate performance respectively (Stephen & Keith, 2000). The combination of these PRP schemes can bring both employees and companies more benefits than only using one.

Section 2 Case Descriptions

2.1 Case 1: The impact of varying types of performance-related pay and employee participation on earnings (Robert McNabb and Keith Whitfield, 2007)

The paper uses matched employer-employee data from a nationally representative sample of British establishments, and the analysis bases on the 1998 Workplace Employee Relations Survey (WERS98). The paper extends into two significant respects. Firstly, it focuses on the use of particular PRP scheme related to earnings (production output). Secondly, it provides evidence to the existence of conditional factors on the use of other pay systems.

PRP has been widely recognized as an important human resource policy to improve the output of employees. The traditional PRP schemes adopt two types, either based on individual or group performance. And some organizations combine the two. The different measures taken by companies would have different impacts on earnings. The paper examines the impact on different PRP schemes of earnings, on employee participation schemes and on financial participation schemes.

As a result, it suggests that employees earn the most under a combination of PRP schemes in workplace. The relationship between the employee involvement schemes and compensation mechanisms is showed to be very complex.

The result shows companies under PRP scheme are profitable; those under both individual and group-based PRP schemes are even more profitable. To individuals, employees under a PRP-PP (Profit Related Pay) combined scheme earn more than those under a PRP-SO (Employee Share-Ownership) combined scheme.

2.2 Case 2: Performance Pay and Productivity (Edward P. Lazear, 2000)

This journal based on the data collected from Safelite Glass Corporation which has implemented a piece-rate performance payment (PPP) instead of hourly wages and mainly discusses the influences of performance payment on productivity, sorting, ability of employees, profit and quality.

According to the author, PPP is designed to increase workers' effort. It sets an output level of e*, which means when output per hour is greater than e* the worker will earn more. Moreover, to reduce the pressure of piece-rate payment on less skilled worker, the new plan also offers a guarantee at approximately the former hourly wages with the same minimum standard of e0. Figure 2.1 shows the relationship between hourly wages and PPP (Line B). In PPP method, workers with output level between e0 and e* will get the same wages as before. The red line C in Figure 2.1 stands for the traditional performance-related pay (TPRP).

In PPP, to lower-ability workers, additional outputs must be compensated by more income than the higher-ability workers. So the compensation-needed curve of lower-ability workers is the blue curve E. In the same way, the dotted curve through A is compensation-needed curve of higher-ability workers. So according to Figure 2.1, lower-ability workers will still choose to work at the e0 level because if they work harder, their compensation-needed will be higher than the PPP curve. On the other hand, the higher-ability workers will choose to work exceed the e* to get more remuneration. Under this deduction, in the new way of payment, the productivity of the company will grow because of the higher-ability workers (According to the data, the productivity has risen by 44%).

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To prove this result, the author compares data collected both during hourly wage period and piece-rate period. As a result, the average output has risen in the new way of payment. The growth of the two factors addresses that average worker ability has risen.

To find out if there are other factors caused by PPP which contributes to the risen of productivity, linear regression method is used to find the influences directly caused by performance payment, other factors such as the whole economical environment are avoided. As a result, tenure effects on productivity are found to be significant, as it is found out that the PPP helps to retain higher-ability workers and induces them to learn more. However, there is no strong evidence on the increasing of separations among lower-ability workers. On the side of workers, wages grow to 10% due to PPP.

At last, the author discusses the influences of PPP on the profit and quality factors. Though profit of Safelite in the case has grown, the author also highlights the importance of consideration in the cost of measurement in. To the quality of product, the product was assumed to be low for the workers' incentives in improving the outputs, Safelite proves an opposing result. [1] 

Section 3 Cases Analyzing

Comparing and analyzing these two cases above, this section will primarily deal with the main effects of PRP on the individuals and organizations based on literature review.

3.1 PRP Affect Individuals

3.1.1 Individual Earnings

Some findings about the contribution of PRP on the employee's individual earnings will be depicted as followed.

I. Individual Earnings be increased by PRP but varied in its schemes.

As mentioned in Case 1, most of the previous works indicate that employee earnings in PRP scheme will increase. This statement can also be evidenced by the practical example in Case 2. It is said that 90% employees received higher pay and the average wages raised 10%, for the payment scheme had switched from hourly wages to piece-rate pay (a PRP scheme).

However, Case 1 argued that the previous work ignored the differences of the PRP schemes (individual, group, etc.), and these schemes would have different impacts on employee earnings. Case 1 admitted that the employee earnings in both individual PRP and group-based PRP are more than fixed salary. While the earning increaser of the employees in group-based PRP scheme is less than those in individual scheme. That because the measurements of output focus on the group output rather than individual, and the phenomenon of free-riding would take place in group work. Case 1 also suggests that employees earn the most under a combined PRP scheme. In addition, payment linked to firms' financial performance dose not impact employee earnings directly.

II. High skilled employees cannot always get more earnings.

Case 2 addresses that "a piece rate allows the more able to work harder and receive more from the job". Yet, according to Case 1, the employee earnings are not "as clear-cut as the standard models suggest", especially in group-based PRP.

As discussed above, PRP focuses more on output rather than input. High skilled employees without high performance output will earn less than other work labors. Under group-based circumstance, output measurement mainly depends on group achievements rather than individual abilities, so all the members in the same group are paid similar. There won't be a distinguish earning between high skilled and low skilled work labors.

Overall, earnings for individual worker will increase and high skilled employees will earn more in individual PRP scheme, whilst under different PRP schemes, this situation varies.

3.1.2 Individual Abilities

Individual Earning is not the sole expectation of employees. They assume PRP could help them to build up their own image and goals, and to suggest what they should improve in the future. Case 1 doesn't clearly address that individuals would obviously improve their skills in a PRP system, yet it indicates that individuals would guarantee emotion and effort to a process.

P = f (abilities, experience, goals, energy, rewards)

Equation 1.1 John's Equation on PRP Factors

In John's equation (1992) in Figure 1.1, the experience and goals should be stable for they're the most unique individual characteristics, which couldn't be easily changed in a short-term. Abilities are not that unique but still dependable. Therefore, in a long-term management the well known equation will be predigested into:

P = f (Energy Ã- Rewards)

Equation 3.1 John's Equation on PRP Factors Logogram

As is widely accepted, individuals are more likely to put the minimized energy for a maximized reward in an organization process whilst the managers expect oppositely (Brandy & Wright, 1990). We assumed that the principle of Energy (E) stays, so the Performance (P) and Reward (R) will be directly proportioned: A higher reward asks for a higher performance. As the individual expectation is the max reward, the only factor they could change in a short-term period will be the abilities.

Case 2 supports the analysis above. Look back to Figure 2.1, the traditional incremental pay is Curve A whilst the C is the traditional PRP Curve and B as the Very Curve of Piece-Rate Performance Pay. Under the same circumstances (e.g. point e0), employees in PRP system show more intends in learning and improving skills. Also as it shown in Figure, b>c, which means Line B has a higher growth rate of compensation than Line C. Usually the point (which the additional compensation will be paid to workers if their productivity exceed, used in Case 2) will be set at an appropriate point. As a result, high-ability workers are more likely to achieve point D (where Line B and C meet). The Piece-Rate Performance Pay method shows a stronger incentive in inducing them to work harder and learn more.

3.2 PRP Affects Organization

As talked above, companies that adopt PRP could induce employees to work harder and have strong incentives to enhance employee's ability and knowledge. Also, in the process of pursuing high compensation, skilled workers will flow to the enterprises that can satisfy their requirement on higher compensation, so PRP method is more attractive to high-ability workers. With the factors and incentives above, PRP could efficiently promote the productivity of the company, which has been proven in both of the two cases.

Moreover, in Case 1, it has been proven that the adoptions of both individual and group forms of PRP at the same time have stronger impacts on the productivity. To be more specific, according to the analysis of Case 2, the growth of productivity is mainly caused by the promotion of the high-ability workers. So particular method of PRP, like PPP of Safelite in Case 2, could suit to certain companies more appropriately and be more attractive to high-ability workers than traditional PRP, which in turn will improve the productivity more efficiently.

In Case 2, it has been proven that the growing profit of Safelite is partly caused by the adoption of PRP method. Though the fact that the cost of PRP system which has a negative impact on the profit of company could not be ignored, the increase of the productivity which is caused by PRP surely contribute to profit improvement.


Contributions of PRP on individuals and organizations can be concluded to be very positive, despite of variations in some cases. Earnings of individual worker would be high as well as the emotion to improve their abilities and personalities, especially under the PPP. Reversely, the PRP compensation scheme would keep turnover and attract ambitious works. This will obviously increase the whole performance of organizations. The rise of productivity leads to increased earnings for employees as well. Compared PPP with TPRP, TPRP system induces low-skilled workers to learn more knowledge and skills, while PPP is effective to high-skilled workers. It is useful to balance advantages and disadvantages under accurate and all-round appraisal. In reality, the organizations with profitable compensation PRP scheme are more effective in competition.