Unit 2 Performance-related pay systems

2.6 Performance-related pay systems

Performance-related pay (PRP) systems are sometimes known as incentive pay systems. These terms cover a number of different types of approach including, for example,

1.       payment by results (PBR), where pay is determined ‘objectively’ by amount or number of items produced or work done;

2.        and merit pay, where pay is related to subjective assessments by a supervisor or manager.

Advantages and disadvantages of PRP.

The claimed advantages of performance-related pay are that it focuses (or rather can perhaps be made to focus) effort on key organisational objectives or targets; it underpins a performance-oriented culture, and so on.

The disadvantages (risks) are that performance-related schemes can distort effort: people may overly focus on only those aspects which are measured for reward and thus neglect other tasks which are also necessary for customer service. Additionally, it may undermine teamwork, and also individuals learn how to play the system to their advantage. Another risk, especially in the public sector, is that individual performance-related pay schemes may be perceived as introduced for mainly symbolic reasons – that is, in order to give the appearance of a commercial edge – and they may be counter-cultural and ineffective.

Mitigation of these risks might be sought through continual review and refreshment of the pay systems; there may be some attempt to introduce team-based performance pay; employees may be consulted about what a fair system would comprise.

The criticism of much current practice concerning individual PRP does not mean that it should never be used. However, it does mean that careful attention needs to be given to assessing its applicability – for example, whether employees are likely to put a high value on any extra pay, whether the work is such that performance can be measured in a reliable, meaningful and acceptable way, and whether there is a danger that it might undermine team or group performance.

The advantages of group pay are:

•        It can fit with important performance measures which often make more sense at a group level, such as quality, cost reduction, output or sales.

•        Unlike individual PRP, it fits with team working.

•        Group schemes are an effective means of communicating with employees about key issues such as quality, costs and productivity.