Insight - Performance Related Pay

Are you looking to study HR in your MBA or PGDM programme? Performance-Related Pay (PRP) is a very important topic not only for HR professionals, but also for sales & marketing professionals, who aspire to extract exceptional performance from a team. Remember army does not march empty stomach, and likewise teams don’t perform without motivation. Read a brief about PRP, and for more reading you may visit Wrest Corp’s website. You may also consult our HR experts to make HR as a career.


The adoption of performance-related pay schemes (PRP) is part of the wider market-type reforms occurring in service sector today. However, these “PRP schemes” have initiated a wide debate for & against these initiatives. The main questions raised above mainly revolve around the effectiveness of these practices, to which this paper attempts to respond. 


The article argues that the value of a PRP (performance related pay) scheme is a function of the organizational environment, objectivity of work quantification processes and perceived fairness of the establish scheme. The research uses data from in-depth interviews and questionnaires regarding performance-related pay schemes in the UK hospitality sector. The evidence signals a strong support for the use of PRP scheme, and which increases the overall out of an organisation.


Various incentive schemes, like salaries, auxiliary benefits, elusive rewards, or recognition have generally been used to inspire and motivate staff members to enhance their performance. Motivators could be positive and/or negative. Reducing incentives schemes that favour non-conducive actions can often be more important than devising new incentives schemes.


Incentive systems are integral part of organizations, their framework, human resource management, opportunities, profit, etc. Organizational incentive schemes have considerable impact on employee s performance which obviously enhances the organizational performance. 



Performance related pay (PRP) is not a new phenomenon. "It is important to recognize that “Performance Related Pay” is a very heterogeneous set of measures, some of which have been around for a very long time" 


Many variations like as work, payment by outputs, merit based pay and collective bonus schemes can be categorized under this. "Merit pay systems ... are defined as those providing periodic increases in pay ... which result from assessments of individual performance and personal value to the organisation". "PRP is taken to mean individualised pay where movements in pay are determined in relation to individual performance against agreed targets" 


"Most of the recent debate has concerned Performance Related Pay (sometimes known as merit pay) the general principles of which are usually defined as the explicit link of financial reward to individual, group or company performance.


It appears from these definitions that although PRP may be considered a broad or a general term, the interpretation can be refined, and a working definition for the purpose of this dissertation is as follows: - Individual PRP has a straight association of payment within the contract of employment to an appraisal of performance based on the apparent contribution of an employee to its organisation at one point in time.




The fundamental theoretical basis for PRP is motivation theory. Kessler and Purcell spell this out, "The defining characteristic of PRP schemes is the attempt to link pay directly to individual performance and in this respect underlying motivational theories come to the fore". 


Even though we can converse about Maslow, Herzberg or other content theorists in relation to PRP, they are in certain ways too simplistic and arguably dated, while citation will be made to Herzberg's motivating factors. The main contribution of content theories being, according to Crombie in Topics, that they "... have shown, at best, pay is only one of many potential sources of motivation for employees and even the importance of pay to the individual will vary with circumstances" 


Crombie also brings into light the other theoretical derivations for PRP, that consists of Expectancy, Reinforcement, Goal, and Equity theories.


Equity Theory is based on the notion that employees want to be treated neutrally in relation to others. The theory attempts to enumerate ratios based on what an employee inputs in a job, and the overall benefits that the employee gets. 


The suggestion is that some degree, perhaps at a subliminal level, of cognitive calculus takes place which relates the ratio of inputs to outputs to the ratio of a 'comparison other'. The individual verdict of the evenhandedness of the ratio relationships will largely decide the perception of equity, i.e. if it exists or not. The corollary is that perceptions of equity will maintain stability and symmetry. Perceptions of discrepancy will create a drive to take action on either your inputs or outputs, or take action on the inputs or outputs of the 'comparison other'. Alternative propensity in cases of apparent inequality includes perceptual distortion or even exiting from the unfair situation. 


Evidently, the degree to which equality or inequality is perceived to be present is puzzling with prejudice and a major contingency aspect is the degree to which a person values the notion of fairness. 


However the fundamental message in regards to reward systems is that of linkage of pay, as an upshot, to effort, aptitude and litheness as an input, can serve to accomplish fairness and preserve levels of motivation or not demotivate. The linkage with PRP being that there must to be a fair relationship between pay and performance. 


Expectancy theory also has the capability to offer insights. Kessler and Purcell make reference to the collection of expectancy theories, although with immediate concerns. "... At the crudest of levels such (PRP) schemes are informed by the view that employees will be motivated if they perceive a direct relationship between effort and reward".