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In any organization the role of workforce is very important and without a proper workforce, no organization or a small company can be survive in this competitive environment therefore the need of personnel management raised to fill the gap by recruiting talented workforce to achieve the company's strategic goals and retaining employees, effectively utilize them by compensating their services by different appraisal methods (Marsden, 1998). Gradually the concept changes from giving compensation on an organizational growth into employee performance which is now been known as performance related pay (PRP).
General understanding about PRP is the money paid to someone on the bases of their performance at the work place. Connecting pay with employee performance is something organizations increasingly seek to attain. PRP once known as a private sector's brand but now this approach is widely used in public sector also to motivate the employees and focus them to achieve organization's goals (French, 1998).
There was a time when employees only considered an extra contribution towards manufacturing the products and services. This way of thinking has been changed when Elton Mayo carried out a research about employees known as Hawthorne Studies from 1924 to 1932. Elton researched that employees need more than money to get motivated in which their behaviour and attitude is also very important (Dickson, 1973). The Hawthorne Studies began the human relations approach to management, whereby the needs and motivation of employees become the main focus of an organization (Bedeian, 1993).
Performance Related Pay:
Performance based pay methods join pay to assess of individual, Team or an organisational performance. Sustaining employee's focus and enthusiasm is very important in this matter if they have to make complete contribution in the business. Performance appraisals passively engage employees in understanding what an organization wants from them, by deciding fixed objectives and afterwards reviewing the overall performance. Each employee is liable for his or her own performance. There is large variety of techniques used, but all methods suppose to assure pay increase will be provided as an incentive to greater performance (Wikipedia, 2009).
According to Marsden (1998) there was number of reasons to introduce performance related pay but three of which stand out:
To encourage a change of management culture, and in particular, to get staff to think more about the objectives of, and cost limitations on, their organisations.
To motivate staff better by making annual salary increments dependent on performance rather than length of service.
To introduce a greater element of pay-cost flexibility and discretion more appropriate to management of smaller units.
Share the success with the people who make it happens. It makes everybody think like an owner, which helps them build long-term relationships with customers and influences them to do things in an efficient way (Emily, 2003).
The Most General Types of PRP:
Performance related pay has been defined in several types as it is really hard to give it one name these types can be used in any organization individually or in a combination are as followed (UNISON FACT SHEET, 2001).
Result based payment
Organisation Wide Incentives
Merit based pay
Individual Performance related pay
Competence based pay
Profit based pay
Commission based pay
Payment by time and output
Measured day work
The purpose of managing the system of rewards within the organization is to attract and retain the employees, the organization needs to achieve its objectives by motivate them in various ways. To understand what motivated employees and how can they motivated was the focus of many scholars. There are five major theories which can make us understand about motivation which are Maslow's hierarchy of need theory, Herzberg's two-factor theory, Vroom's expectancy theory, Adams' equity theory, and Skinner's reinforcement theory. I will discuss Maslow's Theory in context to understand the how level of motivation of employees can increase.
Maslow's Hierarchy of Need Theory
According to the Maslow's theory of need there are five levels of any person, he defined them as physiological, safety, social, ego and self actualisation (Maslow, 1943). According to the Maslow if you need to motivate the employee than you need to fulfil the lower need first and then proceed for the upper need in the hierarchy. Maslow also explained that "man is a wanting animal, only an unsatisfied need can motivate its behaviour and the dominant need is the prime motivator of behaviour" (Maslow, 1954).
All the factor of performance based pay is to increase the motivation of an employee and full the physiological need as well as their to fulfil their social need which is linked in a shape of incentives in pay, increment or other sort of benefits with make them stratified by the organizational system towards them. An individual is ready to act upon the growth needs if the deficiency needs are met (Maslow, 1943).
Three Major reward systems implemented by the organizations:
In an organization sector either it is private sector or a public sector, three major reward system been seen by the researchers and the categorize them as
Individual Performance Related Pay Reward system
IPRP is essentially retrospective in that it measures performance over the past pay period of the employee. This type of reward system is more applicable in the public sectors.
Team Performance Reward system
Team performance reward system is based on the whole team performance on some pre defined criteria. Team have been awarded the bonus on the bases of team effectiveness based on the core values of the organization and having a proper competition for the agreed target to achieve.
Organizational performance Reward system
In this reward system, reward is based on the overall performance of the whole company; here individuals and groups are rewarded in a way of buying share of the organization to make them feel like an owner. This help to unite employer and worker interests and increase the worker satisfaction which leads to production increase.
Many organizations have implemented these systems to increase the productivity and to motivate employees for the good of the organization. Here I will discuss the about the different organizations which implemented the above mentioned systems. According to the research conducted by Marsden and French in 1998 about the performance related pay and its effects in public sector, In their research they discussed various organizations and their reward system but here I will discuss some of them to have a clear picture of PRP.
Inland Revenue reward system towards employees
The British tax service company named The Inland Revenue, had been one of the first government department implementing PRP systems within the Public sector introduced by the 1988 pay agreement. It is one of the largest department holding more than 56000 workers. It has more than 10 regional Executive offices and many small executive offices including Northern Ireland to deal with taxation and rating the property.
In this company it has its own grading and pays structure before pay delegation in the 1990s. Workers were controlled by mainly by self-regulating departmental trade union and then Inland Revenue Staff Federation. In Inland Revenue PRP scheme is based on performance appraisals for individual worker by their line manager and on annual goal achieving. Appraisal depends upon the results it could be a larger or a smaller annual pay increment for the worker.
The survey conducted by Marsden and French in 1998 they come to a conclusion that Inland Revenue workers are in favour to the concept of joining pay with the performance many refused that it is fundamentally unfair.
However, the common recognition of the performance related pay does not come to an agreement that all the pay should be linked with performance, about two third of the workers said that there are number of other important issues are there to determine the pay of the employee not only the performance.
Starbucks' HR Polices towards Employees
Starbucks' is one of the well-known companies in the café business. In one of the fortune survey has rated Starbucks the second largest multinational company to work for. If we look at the quote `Treat people like family and they will be loyal and give their all` (Schultz, 2002) tells us about the culture of the company towards their employees. In any business employee plays a very crucial role in the success of an organization.
Starbucks' puts their employees first and create different benefit programs to fulfil their employee's individual needs. Apart from the wages Starbucks' offers monetary and non-monetary benefits like health insurance including vision dental care, stock options, perks, work-life balance to their employees. Any one over the 90 days of service was eligible for the health insurance. Human resource Management experts said that these benefit programs were designed to attract and retain top people who were eager to work for the company (Shirishi, 2005).
Starbucks' appraisal system is determined on the organisational growth and overall performance. "The relationship we have with our people and the culture of our company is our most sustainable competitive advantage" (Schultz, 2002). According to Howard Schultz statement, if organisations have a positive relationship with your employees and give them proper appraisal on their work then they become more loyal and give you an edge in the market.
PRP Advantages and Disadvantages:
Main objective joining pay with the performance to assess an individual's work progress in a certain time frame usually a year. The incentive may be an extra amount of money rewarded in the shape of an additional benefit with original salary. Assessing an individual is related to the achievements made against the decided targets, their outputs and value of the work. The assessment may also include the personal characteristics of the individual such as flexibility, their initiative towards work (Mullins, 2004)
Any appraisal related pay has some advantages according to the programme and it also has some negative effect on the employees
Advantages of performance related pay in individual, Group, Organization:
Performance may increase in the organization as a result of PRP.
It may provide a 'felt fair' system of rewarding people according to their contribution.
It offers material funds as a result of recognising accomplishments.
Worker realizes the performance essentials of the organization.
The connection among added pay and extra performance is unambiguous.
Improved skill and flexibility in the workforce.
It reduces usual demarcations.
It increase efficiency in workforce
It can encourage team-working and cooperation among staffs.
Organization objectives can be incorporated with team goals.
It encourages workers to improve team performance and less effective performers to work properly.
It helps self management within the group.