Payment by Results (PBR), Performance Related Pay (PRP), Profit Sharing
Be aware of the advantages and
disadvantages of PRP Reward Management Defined Reward management is concerned with the formulation and implementation of strategies and policies the purposes of which are to reward people fairly, equitably and consistently in accordance with their value to the organisation and to help the organisation to achieve its strategic goals (Armstrong and Stephens; 2005:3) The Importance of Reward Management It constitutes an economic exchange Reward is important in forming an employees notion of fairness What employees believe is expected from them and what they expect in return Reward systems teach employees what is valued For example by incentivizing particular types of performance, eg increased sales Reward Policy Addressing the Issues Level of reward which may depend on: Levels of performance Competition Employee benefits External competition versus internal equity Job evaluation may be used to determine internal equity Will market supplements be paid in addition? Achieving equal pay Is it necessary to undertake an equal pay review? Reward Policy Addressing the Issues Approach to total reward Scope for contingent rewards related to performance, competence, contribution or skill Role of line managers To what extent is responsibility for reward devolved? Transparency To what extent is pay secret?
(Ref: Armstrong and Stephens; 2005)
Selection of Pay System Should be Based on 3 Questions Below What are the organisations pay objectives? Organisational commitment through profit sharing? Team ethos through group bonuses? Individual performance through merit pay?
What pay system furthers these objectives?
Is the payment system right for the organisation? Technology Nature of work Organisation culture Individual Payment by Results Positive impact of linking financial reward to quality and/or quantity is recognised by many motivational theories Arguments in favour: Increase in management control? Less supervision needed? Opportunities to achieve high earnings Create a joint appreciation of the need to increase profit for mutual benefit Criticisms of Payment by Results Relationship between effort and reward is portrayed too simplistically Workers can develop routines of resistance Changes in working practices may be resisted if bonuses are threatened Collective Payment by Results Collective schemes seem to be most effective when: Groupings are stable and mature Identifiable as a performing unit Autonomous Composed of people who are interdependent Made up of people who are flexible, multi- skilled and good team players Problems with Collective PBR Demotivation of high performers Resistance to transfers out of high- performing teams Resistance to change from an individualistic culture Performance Related Pay (PRP) Individual performance related pay relates pay progression to the assessed performance of individuals (Armstrong, 2003) Torrington, Hall and Taylor divide PRP schemes into Merit based schemes based on performance appraisal Goal based schemes based on achievement of objectives Individual Performance Related Pay- Reasons for Introducing PRP To increase the motivation of employees To encourage certain behaviours To help in recruitment and retention To facilitate change in organisational culture To encourage the internalisation of performance norms To weaken trade union power Increased control of line manager Moral justification Possible Problems with PRP Motivation is influenced by factors other than pay Employees may focus only on certain objectives Cohesion of the work group may be undermined Financial constraints may limit PRP increases See article by Lewis (1998)on financial services, Marsden and Richardson (1994) on Inland Revenue, Brown (2001) on public sector Questions to be Answered Before Installing PRP (Armstrong, 2003) Will the proposed scheme motivate people? Is there an effective performance management process in place? Can managers be trained to rate performance fairly and equitably? Will there be enough money available to provide worthwhile rewards? Flexible Benefits Offering benefits on a job for life assumption is unrealistic How do employees perceive benefits? Are benefits valued and appropriate to company and employee needs? Offer choice within and between benefits Options Increase some benefits and decrease others Use pay to buy new benefits Decrease benefits and take cash released Flexible Benefits Advantages Disadvantages Addresses needs of Benefits must be different sections of the accurately costed workforce Administration Spend money on benefits problems perceived to be valuable Individuals may Employees gain make wrong appreciation of the value choices of the benefit package References Armstrong, M.(2003) A handbook of Human Resource Management Practice. Kogan Page, London Armstrong,M. and Stephens,T. (2005) A handbook of reward management and practice, Kogan Page, London Brown,M. (2001) Merit pay preferences among public sector employees, Human Resource Management Journal, Vol 11, No 4, pp38-54 CIPD (2006) Reward Management Survey, CIPD, London Lewis,P. (1998) Managing performance related pay based on evidence from the financial services sector, Human Resource Management Journal, Vol 8, No 2, pp66-77 Marsden,D. and Richardson,R. (1994) Performing for pay? The effects of merit pay on motivation in a public service, British Journal of Industrial Relations, Vol 32, no 2, pp243-261