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It is widely believe that human capital gradually becomes one of the few resources to provide a sustainable and competitive advantage for the organization in a marketplace (Barney and Hall 1993, Wright et al, 1994, cited in Robert, Cardy, Lengnick-Hall, 2011). As a result, reward has been emphasized to be a strategic tool to manage corporate performance and to influence corporate values and beliefs. Meanwhile, there are many reward schemes which have been presented, for instance, payment according to time, payment by results, skill based pay and performance-related pay (PRP) (Marchington and Wilkinson, 2005). Marchington and Wilkinson also pointed out that there is one feature indicating that it differentiates performance-related pay from the other ones, which means PRP is designed on an individual and personal basis while others are collectively-negotiated and based on standard formulae. In addition, PRP appears to be more effective approach to motivate the employees among those reward schemes. Therefore, this report mainly focuses on the PRP system in three sections. First is relevant literature review about PRP, then two empirical case studies about two distinct occupations will be described for the following discussion about the values of PRP to business organizations in two kinds of different industries finally.
Section 1: Literature Review
Definition of PRP
PRP system has not grown in popularity until in the1980s, although it has been established since at least the late 1940s, pointed by Gilman (n., d.). PRP is the method that provides the link between rewards or salary progression and some forms of performance rating. ACAS (1990, cited in Lewis, 2001) defines performance-related pay (PRP) as "a method of payment where an individual employee receives increases in pay based wholly or partly on the regular and systematic assessment of job performance".
Effects and Benefits of PRP
Lewis (2001) mentioned that the principle of PRP: "the person who is industrious and competent should be reward munificently than others who provide poor performance" was approved by most workforces in Kessler's research. He even claimed that in many areas of white-collar employment such as local government and financial services, PRP system was advocated. Indeed, PRP reward system has some benefits. For instance, Lewis (2001, P106) indicated "PRP was introduced in many organizations to change the culture and it reflected the 'new' values which senior managers considered necessary". According to Armstrong (2004), organizations that adopt PRP system believe it will offer potential benefits as follows:
The progress of individual and organizational performance would be seen when the workforces was motivated by PRP system.
It acts as a benchmark for change.
Management control of departments would be reinforced which results from the line manages that would be encouraged to familiar with objective-setting.
The message of considerable payment is based on the good performance would be emphasized.
Achievement of organizational goals would be benefited from the link between reward and the achievement of specified result by the PRP.
PRP facilitates recruitment and retention of better workforce.
To be rewarded for achievement-a basic human need attains through PRP system.
Association with Job Performance
Performance-related pay is one of Variable Pay Systems that is closely related to the individual or firm performance in organizations. Employees' salaries wholly or partly depend on the systematic assessment of their job performance (Redman and Wilkinson, 2009). However, although job performance is such an abstract concept as the actions and behavior that are under control of employees, it contributes to organizations' objectives (Rotundo and Sackett, 2002). For this reason, companies are more willing to utilize the performance related pay scheme to assess the inputs and outputs of employees to meet firm goals and social objectives. Therefore, job performance is a critical criterion in the reward assessment. Reciprocally, employees are motivated by performance related pay contracts, which means, they will much more focus on their job performance to generate profitability for organizations to get rewards. The exchange relationship between organizations and employees is mutual. Thus, performance related pay is positively associated with job achievements of employees.
Association with Procedural Justice
As mentioned above, the major element about effectiveness of performance related pay system is combined with employees' job performance. Apart from it, it appears that procedural justice is also one of the key factors when implementing performance related pay scheme in that reward can be seen as an external resource to be allocated (Chien, Lawler and Uen, 2010). For example, Tornblom and Vermunt (1999) indicated that if organizations ignored the perception of procedural fairness, it was difficult for organizations to find an appropriate and meaningful approach to distribute the resources such as rewards. In addition, it is expected that appraisal politics could be more lessened by the perceived procedural justice (Maheshwari and Singh, 2010). Furthermore, It seems for employees whether the pay arrangements are fair could be more important than actual pay (Armstrong, Thompson, Brown and Cotton, 2006). In the end, procedural justice is an indispensable element for both organizations and employees which contributes a moderating effect on PRP scheme.
Implementation Weakness and Limitations of PRP Reward System
Even though PRP presents enormous advantages and benefits in organizational and managerial functions, however, there have been a large amount of criticisms concerning about implementation weakness and limitations of PRP system. Procter (1993, cited in Lewis 2001) illustrated that some employees concerned that due to favoritism which played a role in PRP, management criteria and distribution would be applied more arbitrarily in particular. According to Gielen, Kerkhofs and Ours (2008), PRP system would render the rewarded activities be focused on by the employees only while others would be neglected. They also pointed out that it is difficult to measure individual work of some jobs, such as teachers and artists. From Armstrong (2004), first of all, experienced managers are needed during the process. The incompetent people would de-motivate the employees due to the fact that they tend to consider the operation of PRP to be subjectivity and inconsistency. What is more, over-emphasizing incentives for the individual is likely to lead to the negative effect of the teamwork, sometimes jealousy may occur during the team. Sex discrimination also cannot be undeniable. For example, the study of the Trade Union Congress the Association of First Division Civil Servants (Armstrong, 2004) showed that bias in both pay and training was found in gender during the appraisal process, particularly in the women. Thompson's study (1992) indicated that PRP needs a lot of money to implement and this would add huge burden of organization's finance.
2. Case study
Case study 1: Teacher Performance Incentives And Student Outcomes
In this case, the writers focus on performance-related pay (PRP) system which has been applied in USA school teaching in 1996. Due to student performance badly, the PRP system has been increasingly utilized. The objective is to reward on improvement of student retention. There are two purposes of this paper: to review the evidence on the effectiveness of PRP on student achievement; to propose new evidence on the subject.
A teacher needs to finish multiple tasks, not only about teaching. On the other hand, a single teaching program involves several teachers and they respond on same one target in a program. Thus, it is hard to measure the overall performance of individual person. The reward finance problem is the school of administrators just can use a little revenue as the reward.
The data acquired in 5 years (1994-1999) in two community high school which one operated with merit pay (School A) and the other pay in traditional method (School B). Teachers received a base wage for 60 minutes class that they teach. Teachers with higher qualification are paid a 5% higher in basic pay. There are two bonus pay methods. A bonus was given if 80% of pupils assigned to classes were still attending at the end of term. The second bonus is based on student survey. The teacher who received a rating of 4.65 or higher on the 5-piont from the survey, will have performance bonus (5%) and retention bonus (10%).
Both schools investigated had open enrolment within the county. The paper used a difference in differences analysis and both were compared in respect to attendance, grade point average, course completion, and passing rates. The results shown the course completion increased in both school and all raised over 15%. The Daily attendance rate decline for the two schools in general. School A's (merit pay)attendance rate stayed the same, and school B's(traditional pay) rate increased slightly.The GPA and passing rate were both declined in two schools during the five-year investigated period, because the student survey lead to teaching quality decreased through enticing student rating high to obtain performance bonuses, then it cause the GPA and passed decline significantly.
In summary, the higher student retention was achieved by implementing of PRP and the implementation of PRP had a negative effect on student daily attendance.
Case study2: PRP, procedural justice and job performance for R&D professionals: evidence from the Taiwanese high-tech sector
The article is to test the effectiveness of PRP (Performance related Pay) by expounding the relationship between PRP and research and development professionals' job performance in Taiwanese high-tech organizations. Research and development professionals are a key factor in strengthening high-tech organizations' competitive advantage.
As a high technology occupation, the main characteristic of R&D professionals is that the organizations use outcome-base to pay. To establish a fairness allocation procedure will combine a compensation structure which pay and performance better. On the contrary, it will result in negative outcome for employers. Accordingly, the authors explored the influence of procedural justice on job performance and moderated effects of procedural justice on the relationship between PRP and job performance.
The study was concerned with theoretical background and hypotheses. Task and contextual performance are two factors of performance and each independently contributes to overall performance. Organizations rely on task and contextual performance to maintain management effectiveness.
There are six hypotheses in this journal and all of them are base on Harman's single-factor test to minimize potential effects of common method variance. There are 1000 questionnaires sent to R&D professionals in high-tech organizations. Then they incorporated questionnaire items and applied a Likert 5-point scale (1 'strongly disagree' to 5 'strongly agree') to find the relationship between PRP, procedural justice, and task and contextual performance. The study show that PRP can both associated with an R&D professional's task performance and contextual performance, as the regression coefficient were all significant and positive through hierarchical multiple regression analysis. The relationship between procedural justice and task performance are supported. But it does not support between procedural justice and contextual performance by negative regression coefficients. Procedural justice positively moderated the both relationships between performance related pay, task performance and contextual performance. On the other hand, by testing the research in Harman's single - factor module, all the reliability coefficient is very high and close or over 0.9, it shows all the test process and number are sufficient reliable.
Finally, the article infers that the performance related pay can stimulate professional's job performance effective, especially in the task performance. Also procedural fairness would affect employee citizenship behaviour.
Section 3: Independent Analysis
Both the high technology company in Taiwan and U.S high school implemented PRP aim to improve the staffs' motivation and performance. According to Chien et al. (2010), the successful of PRP application in the high technology professionals' job performance is base on the procedural justice. In contrary, without a fair treatment may create rifts among employees and leads negative effect in business organizations, such as unclear stipulations and performance appraisal. However, for other complex organization, such as school which requests multiple tasks and outcomes may lead to misdirected and unintended. Thus, PRP in different field may have different effects. Redman and Wilkinson (2009) found that PRP can be used for cost control and development( although these two are in conflict). According to the discussion in part one, there is very little evidences can prove PRP is a successful approach for motivating people. Most of researches show that pay for performance tends to result demotivational rather than motivational effect on the whole (Redman and Wilkinson, 2009)
It seems that performance related pay successfully applied in high-tech sector on reinforce R&D professionals' job performance. Performance related pay only shows its advantage in the R&D professional's task performance (Chien et al, 2010). Because in such industry, higher reward usually more attractive for those task-oriented employees. Therefore, it cannot be applied to entire work process in an organization. There has other situation. The employees could be mislead that outcome is equal to reward and result employees unquestioning to increase performance quantity rather than quality. When employees perceive that their organization applies performance related pay as motivation, they will have better job performance. The consequence of better job performance not only can improve organization's competitive advantage, but also reduce its monitoring cost on R&D professionals. Chien et al. ( 2010) found that performance related pay may also be applied to motivate employees of less programmable. The special example is salespersons that working for a store and their target cannot be pre-specified. Salesperson needs to satisfy every customer's needs and better sales will results higher pay. Chien et al, (2010) found that procedural justice is only positively related to task performance when R&D professionals perceive that procedures used to determine inducement distribution are fair and the task performance increase. It is crucially important that professionals feel that the PRP scheme is being fairly assessed and they can get proper feedback support. If this is not happen then PRP will have negative effect on motivate professionals.
The case of teaching industry first introduces the test base on the outcome of course completion, daily attendance, GPA point and passing rate. There are multiple targets related with teachers' performance. The result shown the retention of students was successful but student performance. PRP can stimulate teachers to improve teaching style to attract more students stay in class but it cannot equivalent to better teaching quality.
By testing the attendance throughout the last week of term is defective. Even the course completion was improved, though passing rate of pupils dropped can prove that, the influence of PRP in teaching outcome is difficult and hard to define it is good or bad in an organization. If bonus is mainly decided by student's evaluation, it could drive teachers decrease their standard of requirements in study to attract higher rating from students. Thus, the improvement of attendance cannot explain whether the performance of students has been improved.
The study of Eberts et al (2002) did not realize the appraisal of teaching performance could be involve others factors. Forest (2008) claim that there are others factors affect performance and motivation stronger than PRP. When targeting a teaching industry which with complex task, PRP might not be the best approach to promote education quality even though it could motivate teachers. To discuss the reasons which lead PRP is not useful in education area, the hierarchy of needs could be introduced. As an education industry the funding might supported by government majority, school will more focus on the reputation because it is the most important factor to attract students. To achieve this object, the achievement of teachers from public academic research and journal could obtain more respect from others. In the theory of Maslow's hierarchy of needs, there are some people not just satisfied in their basic salary and a stable work, this is the reason why non-financial achievement is a self- actualization need for the people which want to establish self fulfilment from challenge tasks (Buchanan and Huczcynski, 2010). The achievement recognized from school and academia is a non-financial reward for teachers. (See Maslow's hierarchy of needs in Appendix 1)
The objectives of performance related pay scheme must be measurable, realistic and achievable, so that staffs can clearly focus on their individual target and achieve it with motivation. It also is conductive with the purpose of organization. The teaching industry might not suitable in implementation of performance related pay in their reward system. The Graded system is seems that worked well than performance related pay in teaching area. In Eberts et al (2002) case, PRP could improve the course completion rather than better performance of study, such as passing rate. However, in this case for measuring course completion only limit on the last two weeks of term, so the objectives were misguided. Accordingly, attendance should be measured throughout the whole year rather than the last two week of term.
The difference of implementation of performance related pay between Taiwanese high-tech company and teaching industry in USA is their background is different. The relationship between the actions of teachers and the learning of students is too complex and difficult to measure, and the potential for demoralization and breakdown in cooperation is too great. These are the reason of efforts to introduce PRP into public education have made little improvement (Ballou, 2001). It is difficult to define merely the PRP effects in an organization, because the managers would apply others strategy or reward system aims at improving motivation and performance of employees.
In conclusion, PRP is not a panacea for every situation. Accordingly, it would be recommendable that both academic researchers and managers of organizations should pay more attention to real situation and potential problems of the application of HRM theory. By using PRP in different types of organization must be abided by procedural justice and clearly target. There are a range of limitations shown in these two cases. To implement PRP is a challenge for the complex organization, and meanwhile, it cannot spread well in all position of a business organization. This essay also discuss the non-financial factor can affect PRP operates in education organization. Generally, it is hard to say PRP is good or bad.
Maslow's hierarchy of needs.