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To understand performance related pay we require understanding link between performance management and performance related remuneration. Performance management is to maintain high level of individual and organizational performance. Performance related remuneration is important element in a performance management system. The basic purpose of any system of performance related remuneration is to establish a correlation between the work performance of the individual employee, or group of employees, and their subsequent level of remuneration. By doing so, the intention is that the employee will be motivated to behave in such a manner that high levels of performance will be given in return for an enhanced level of remuneration. (Hume.D 1995)
The tensions that may exist for an organisation attempting to design and implement an equitable performance related pay system will be to ensure fairness and equity regarding payment for service to the organisation. Another tension is to correlate reward to performance, responsibility, skills, achievement and loyalty, furthermore to establish a clear link between effort and reward. There can be tensions in motivating employees to work towards the achievement of objectives. There is a possibility, while motivating few with merit pay others may get de-motivated. What would be the most appropriate payment system to be used while implementing PRP system, which permutation will prove best for an organisation while restructuring the pay system?
The challenge for PRP is to establish a pattern of pay which is seen as fair by employees, which uses reasonably objective measures of performance, which can stand the strain of change, which sustains the object of the system, is not too large a portion of the pay packet and is not too costly to administer. (Isaac.J.E 2001). People measure their worth in relation to others. The basis of the notion that there should be given 'a fair day's wage for a fair day's work', is that every man who is up to the usual standard of efficiency of his job in his own neighborhood, and exerts himself honestly, ought to be paid for his work at the usual rate for his trade and neighborhood; so that he may be able to live in that way to which he and his neighbors in his rank of life have been accustomed. Fairness is important in relation to enterprise bargaining, which enhance a sense of loyalty and identification with enterprise. Here the benefit is of employee being attached to the organizational identity when given appropriate share of his job rendered. Hence it is helpful in performance of enterprise. If fairness is not felt by employees it will have negative effect on the performance. (Marshall.Alfred 1887) It has been discussed earlier that pay is relative to pay of others; it can generate feeling of pride, status, fairness and unfairness. When considering requirement of fairness, the benefit of PRP will not be encouraging for all employees, it can be encouraging for some. PRP is also based on nature of occupation and industry. PRP has system of payment by result. While introducing PRP the dilemma would be on what basis the remuneration of employee is based. Should the PRP be entirely based on payment by results, or it should be based on basic wage plus payment by result element. Second problem to deal with is how to equate productivity level and payment level. Other issue regarding payment by result is that does PRP require having a ceiling, or cut -off-point or should there be no limits placed upon potential remuneration levels. Few more aspects that create botheration in PRP are that at times it is difficult to create a consistent relationship between the performance and the reward; It may result into individualistic approach rather than team or group effort. It is difficult to apply this remuneration system to employees who do not have easily quantifiable output. (Hume.D 1995). To implement PRP the tension is that signiï¬cant differentials in favor of people doing the same job but doing it better than others, would it be an acceptable pay system. Tension is whether payment of such differential would constitute an incentive for better performance leading to enterprise bargaining, or may result into the feeling of unfair treatment leading to negative performance. (Isaac.J.E 2001)
Challenge in pay management is in making employees feel that they are fairly paid. The problem faced in making decisions on pay can be, that what employees perceive to be the pay and benefit can prove not to be aligning with organisations perception, thus the satisfaction would not be optimal. Perceived pay fairness is an important determinant, not only of pay satisfaction. (Berkowitz.L 1987). A change in consumer price increase is a problem to be tackled in PRP. Employees at the lowest level find absolute amount as fair whereas those at higher level look at this issue as one of maintaining real differentials by uniform percentage adjustment. (Isaac.J.E 2001). The money illusion does not last for long. There is uncertainty about appropriate form of wage adjustment to compensate for rising prices. The above mentioned aspect of wage adjustment creates tension among organisation when implementing PRP.
PRP system is directly productivity -oriented. Problem in productivity distribution at the enterprise level through pay increases is to distinguish between two sources of productivity improvements. On one hand the productivity would increase due to better labour performance whereas on other hand it may increase because of technology, product design, thus to distinguish between two sources of productivity improvements is difficult (Isaac.J.E 2001). According to (Pfeffer.j 1998) the problem of individual PRP face is that subjectivity among managers result in rewarding employee's political skills or 'ingratiating personalities', rather than their performance. This is one of the reasons of tension for organisation to implement PRP. Secondly PRP has undermined team working by promoting individual success. Pfeffer argues that due to PRP there is absence of concern for organisatonal performance the focus is on individual objectives the wider organizational need is overlooked. The focus is on short term performance and discourages long term planning. By implementing 'PRP management is signaling that 'it is they -not the individual-who is in control'. Consequently PRP may lower the individual's feeling of competence and self determination and run counter to intrinsic reward policy. (.Brown.william 1989) Comment on this issue 'There is in practice and in theory no necessary relationship at all between productivity change and wage change' at the enterprise level' . PRP may not work and may well prove counter-productive if the appropriate management context is not in place. The change in pay system on basis of PRP finds this issue a big problem. The PRP system needs to be easily understood by employees, otherwise a lack of conï¬dence and perceptions of unfairness will emerge especially when changes occur in the pay system. (Isaac.J.E 2001) . Establishing fair and equitable pay practice is important aspect with which organisations have to deal with. What pay is to be given to a particular job is important to organisation because of its impact on morale, retention and the ability to attract capable employees. (Frederick.s.Hills 1980) . Organisation,s success will rely on the basis of the right analysis of pay system.
A tension related to PRP is where oganisation does changes in pay system. The problem could be that the measurement of work performance, especially following change in work. It is difficult to do assessment where qualitative aspects are predominant. The PRP system is required to be easily understood by employees, otherwise there will be perception of unfairness. The performance of individual or group is affected by number of variables, economic fluctuation, interruption to workflow, absence of key personnel from workstation, poor management, poor machine material, and many other factors. When implementing PRP if such problem effect in lack of performance and employees are penealised it can creep feeling of unfairness (Isaac.J.E 2001). Problem the organisations face in implementing PRP is where the employee attitude on the pace and application of work, has effect because of wage differential. This is due to peer pressure which leads to implicit collusion to reduce pay differences and hence reduce performance. When PRP is implemented allotment of job and development of vested interests particularly in group assignments would result into unfair practice. There would be few free riders in such cases. PRP after some time lose its magic as incentive and would be considered integral part of pay (.Brown.william 1989).
There is a view about PRP that it can be unethical. This can cause tension for organisation to consider PRP as part of pay system. The argument is PRP poses a threat to employee security (by putting their income at risk) and hence undermines employee commitment. It can lead to gender and other form of discrimination. Furthermore PRP does not leave scope of collective employee involvement in pay decision (Heery.E 2000). Gender may influence perception of equity. Individual's gender may influence that individual's equity perceptions. The notion that wage differential between men and women may result from beliefs about the relative worth of men and women. (Norwood.J.L 1982).
After the above discussion if we sum up what tensions an organisation face when introducing PRP it has various reasons. PRP is dependent on assessment done on the basis of individual performance, which has the probability to be subjective and inconsistent (Hume.D 1995).When assessing pay justice, managers do not view the different concepts of equity as being equally relevant (ie internal equity ,external equity, self equity) (Summers.T.H.Hnedrix 1991) There is possibility of inconsistency because there is effect of personalities and relationships and the fact is that different managers may give the same employee different performance rating.
Another problem organisation has with PRP is merit payment. Merit payment becomes permanent increase in salary. Performance level varies on a year by year basis. There is a possibility one year performance may be exceptional and may result in high salary increase which can be followed with low performance the following year, but the salary which was increased is retained. This is a matter of concern for organisation that merit payment becomes permanent increase in salary irrespective of decline in performance. Another reason for causing tensions while implementing PRP pay can be demotivation among employees. De-motivation could be where merit payment increases the motivation level of high performers whereas the averge employees get negatively affected. The average employee may not be delivering high level of performance but they are vital to the smooth running of organisation. It is a matter of concern for the organisation and need to be handled carefully, when payment is done on the basis of merit, because it could lead to additional salary costs for the organisation on an on -going basis. In implementing PRP the link between performance and remuneration should be clear to have the identifiable benefit of merit pay system.
As discussed it is a difficult task for organisation to create a consistent relationship between the performance and the reward, it may create individualistic approach, as well as there is difficulty in quantifying few jobs. Difficulties the organisations are facing in relation to implementing PRP have few aspects related to making decision on payment system, on what basis of payment should be done, how to correlate particular productivity level to a particular payment level, and what would be the limit to setting up the remuneration (Hume.D 1995). To conclude it can be said that with the help of PRP the correlation between performance level, employee, and remuneration is created. When PRP is implemented it should match organisational needs and be flexible to internal and external pressure. PRP should be fair and consistent in rewarding employees.
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