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Pay is always the main topic of discussion in any hiring process. The human

resource managers know the market value of each employee with respect to their skills

and experience. Every company has its own practice on how to pay an employee. Some

would pay below market rate, others would pay at the market rate and yet some

companies are willing to pay slightly above market rate. The way each company pays is

closely related to the size of the company. In recent years, there has been a lot of debate

on how company should pay the employee. Should the company continue to practice the

traditional pay or adopt performance-related pay (PRP)?

The modern human resource management argued that PRP is the way to pay

employees as it is a new way to pay, they believe new pay is the way forward and it is

also a way to motivate employees to perform in their job.

There has been a lot of debate what should be done about motivation. Some

people think that PRP is a motivator. However, other people think that PRP is not a

motivator. This is not an easy question to answer but in this article, I will discuss if PRP

is a motivator or otherwise. As there is no straight “Yes” and “No” answer to this

question, it really depend on the company and employee relationship. I will also discuss

on how managers could mitigate if PRP is not a motivator.


What really is a motivator? According to American Heritage Dictionary,

motivator means “to provide with an incentive; move to action; impel”. To a human

resource manager motivator is a tool that is used to encourage the employees to give
more than hundred per cent of their skills and experience to the company in order to

achieve efficiency in the company productions.

Performance-related pay (PRP)

Performance-related pay is a new pay system that is an additional payment system

on top of the base pay. This payment system is typically based on how an individual

perform in his or her job, team performance or even how the company is performing in

financial context. There are many forms of PRP, strategic pay, flexible pay, and variable


Strategic pay is “a pay-design process that starts with business strategy and

organizational design. It argues against an assumption that certain best practices must be

incorporated into a company’s approach to pay” (Lawler 1995).

Flexible pay is a form of payment system where the pay of the employee is tied to

the market situation. In this pay system, measurement like customer satisfaction,

customer retention and repeat revenue will dictate the pay of an employee in the

company. The employee will be pay based on his skill and experience rather than job-

based. By doing so, employees can be deployed to any projects that require their

particular skills.

Variable pay is a payment system where employees are offered with financial

incentives when they display behaviors that are favorable to the business strategies of a

company. “The most important recommendation is that the proportion of pay which is

contingent on performance should increase as a proportion of total remuneration” (Heery

Is PRP a motivator?

Now we are ready to answer this question. From the perspective of management,

PRP is indeed a good tool to motivate employee to perform the day-to-day tasks to the

maximum efficiency. But in reality is this a valid tool. Unfortunately, not all the

companies that adopted this approach manage to motivate their employees to perform in

their job. We will look in more detail why this is so and which companies are able to

make PRP a motivator and which companies failed to motivate employees with PRP.

PRP as cost cutting tool

There are more and more companies that measure performance by profit make

year-over-year. Companies that perform poorly in a quarter compare to the same quarter

on previous year may react to the poor performance.

There are evidences that company in this situation have chosen PRP as a way to

reduce cost. For example, Yahoo!, it was reported in Personnel Today, Yahoo introduced

PRP to reward “only its best staff while recession looms” (Anonymous 2008). In this

scenario, Yahoo’s HR is facing a challenging task to relay a lower pay expectation to the

employees. Yahoo has decided to manage recession risk by deploying HR practices such

as PRP across the board. The problem with Yahoo’s practice is only the top performer

will be motivated. A majority of the employees will not be motivated by PRP since only

top five per cent of the employees are considered as top performer. With this in mind,

only the top performers are motivated and the rest of the company will suffer de-

“In the latest SM poll of 100 procurement professionals, 52 per cent said they

were in favour of the idea and 48 per cent were not.” (Barton 2007). More than half of the

buyers think some of their salary should be made up of PRP. The idea is to reward buyers

who manage to save cost on the equipment purchased. The amount of money buyers

saved would then be credited into their pay to motivate them to save more.

In the examples above, there is no clear evident whether PRP is indeed a

motivator. For Yahoo, which face future recession chose to opt for PRP but only for the

top performer, this may not be a good motivator to the rest of the employees. Whereas, in

the buyers case, PRP could be a motivator since those buyer who are able to help

company reduce cost by proper controlling of quantity purchase may enjoy financial

benefits. There is no easy solution in these cases, as business strategy changes everyday,

so company hope to maximize the labour cost by strategic payment in the hope to make

some saving. In the case of Yahoo, it would be better for management to consider

reducing some labour and use the money from the reduction of labour to promote PRP to

all the employees.

In view of cost cutting measure, HR managers have been called upon to think of a

solution that could motivate employees and at the same time help company to reduce

cost. It is now the duty of the HR manager to tailor made a complete remuneration for

different employee where they will receive the reward they desire if they work hard and

PRP as a tool to de-recognize union

Union is a powerful organization that comes together for the benefits of the

workers. In Singapore, there is a National Trade Union Congress (NTUC) for the whole

nation and there is a Union of Telecoms Employees of Singapore (UTES). These are well

known Union in Singapore. Union has been playing the collective bargaining role for

workers in the area of pay and benefits. The method of negotiation is many to employer.

As employer adopts PRP, there is no more room for Union in this role. As each employee

will be paid according to his or her skills and experience, everyone will have different

pay. Furthermore, individual performance-related pay (IPRP) looks at the performance of

each and every individual and not a collective as a whole. This in turn disregards the

existence of Union. Heery argued in his paper, “IPRP forms part of an initiative to foster

employee commitment then management may choose to exclude unions from a belief that

they are incompatible with labour-management co-operation.” (Heery 1997).

When management is using IPRP as a tool to de-recognize union, IPRP will no

longer be able to meet the whole idea of motivation. As Unions and their workplace

representatives are becoming weaker this day, individual bargaining power has become

more and more important. Marsden noticed that “renegotiation has emerged as a latent

rather than an explicitly stated goal of PRP” (Marsden 2004) as it is always expected that

PRP is a motivator. In the event where PRP failed to motivate employees as in this

scenario, managers could put them on goal-setting and appraisal.

PRP does not meet employees’ expectation

Vroom’s expectancy theory stated that there are three relationships, effort-

performance relationship, performance-reward relationship and rewards-personal goals

relationship (Judge, Robbins 2008). From these relationships, employees will perceive if

their hard work means valuable reward. Of course, their hard work must first be

perceived by managers as good performance and this performance must lead to valuable

reward. Every single reward to an employee is different. The reward must be large

enough if it is in monetary term and “the reward must not come at an unacceptable cost”

(Griffin 1992).

According to expectancy theory, not everyone is motivated by pay itself. Some

people are motivated by recognition, career advancement, working environment or even

relationship with colleagues. It is very crucial for managers to find out what really

motivate his or her employees before deciding on PRP. For employees, especially fresh

graduates, they may prefer career advancement over pay. While for mature employees,

who have family commitment, they would prefer a stable base salary over PRP.

Employee must be able to see the value of PRP to them. If managers reward

employee who desired career advancement with more pay, the employees will be de-

motivated because the reward he received is perceived as lower value compare to career

advancement. Similarly, employees who just want more and more money would not want

added responsibility as a reward for their hard work.

Then, the question is; who is fit for PRP? I would suggest those who are Type A

personality. These groups of people are very aggressive to achieve more and more in very

short time. These are people who would appreciate PRP because they are high performer.

They also must value pay as a motivator, otherwise may result in adverse effect.
PRP procedural injustice

It is unclear how managers decide who gets the highest ranking in an appraisal

process. Studies have shown that managers tend to be biased in appraising his staff. It is

evident in a company I used to work in. There are a lot of middle managers who do

nothing but only manage his or her boss. These groups of people get promotion and

higher bonuses each year even though they have failed to execute their day-to-day duty.

Women too suffer discrimination from male managers. “Research by Bevan and

Thompson indicates that sex discrimination is particularly likely to arise where reward

management is nimble and line managers are accorded substantial discretion in making

pay awards (Heery 1996). Male managers may appraise a female worker with lower

ranking compare to average male workers.

A study carried out by the Institute of the Study of Labor and the University of

Bonn found out that only 44 per cent of all women taking part in the experiment chose

the PRP option, whereas for the men 68 per cent would opt for PRP option (Dohmen and

Falk 2006).

As women who are paid lower than men perceived sex discrimination is real in

work place, they have decided to avoid PRP and stick to fixed pay system. Even though

theoretically they may be able to earn more in PRP but due to discrimination, they may

earn less if they chose fixed pay system. As a result, the study done by Professor Falk and

Dr. Thomas Dohmen, of lesser women choose PRP is consistent.

To overcome procedural injustice, the target set by the manager for each

employee must be achievable yet must reflect the company’s overall target. Target must
also be specific; an unclear target will lead to perceive unfairness during performance


An appraisal session is very critical in this case. Manager ought to give employees

time to response on the ranking given for their appraisal. Feedback by the employees

must be taken into consideration in order to avoid procedural injustice.

PRP in a cultural diverse company

As businesses becoming more and more global focus, so does a company need to

become a global company. This means that company no longer employs people of the

same race, same culture and same nation. A company with headquarter base in America

may hire employees from Europe, Latin America, Africa and even Asia Pacific. This

means that human resource manager too needs to be able to handle diversity.

Unfortunately, human beings are full of bias. They may prefer to clique with people from

the same race especially those who are the majority and in controlling power. Managers

too fall into this trap. A manager from majority group would tend to rate an employee

from the same group with higher ranking whereas those from minority group would


An emerging trend in healthcare services in United States sees that more and more

minorities and immigrants employed in view of cost reduction and better qualities of

services. “In fact, minorities and immigrants will comprise forty per-cent of the

workforce by the year 2000.”(Roeder 1994). As such line managers will need to foster

team work among the employees from different cultural background in order to achieve
higher level of performance and the company can fully capitalize on a diverse work


PRP may work very well in a capitalist country; it may or may not work in a

socialist country. This is because in a capitalist society, people are motivated by financial

rewards, benefits or even career advancement. On the other hand, in a socialist society,

people tend to be more motivated by personal friendship.

Managers have to learn how to manage employees as company move into a

diverse cultural human resource. There is a whole area of managing diversity and training

such work force. Training could be one of the rewards to motivate minorities and

immigrants to perform in their jobs. As they progress in their current roles, manager

could entice them to work harder by giving them more training.


Motivation is not a new topic. It has been around since the existence of mankind,

it may not be called motivation then. There will never be a best practices especially

comes to motivating people. No doubt pay may be one of the factors but not all the

people are motivated by pay. Look at those sportsmen; I guess besides the million dollars

price money, they are motivated to receive the world title. Unfortunately, in a company

setup the money that a company can pay may not be million of dollars and there is no

title to be chased.

Operating cost is still a major part of any company and pay is the largest part of

that operating cost. Company will continue to look for methods to reduce operating cost

and yet at the same time motivate employee to work harder. Regardless of what employee
think, this is an employer world where their decision is always final. It is therefore the

role of HR managers to tailor made a complete package that would suit an employee in

any hiring process.

Union would require reformation, Union could no longer operate as a collective

bargaining power house as each individual would have their remuneration tailor made.

Transformation of Union into partnership may be the future for Union to continue to

exist. It would be better if HR managers could approach Union to form partnership with

the company for the well-beings of both employer and employee.

As each individual would have a tailor made remuneration, this would means that

their expectation of reward would be met hence would motivate them to work harder for

the company. As the relationships explain in expectancy theory, if the reward is desirable,

employee would work hard for it assuming that hard work will result in performance

which will result in the desirable rewards.

HR managers need to train line managers to be able to set a more specific goal;

goals must be realistic, achievable and measureable in order to avoid procedural injustice.

Women too could choose to stay in fixed base pay or PRP as long as they are motivated.

Each of them would be able to receive package that would suit their need. For women

who choose PRP, it is the duty of HR manager to make sure that their appraisal is fair and


Finally, as company have a more diverse workforce; HR managers are required to

understand the culture of each race and nation. This would help them to tailor made a

more effective remuneration for each of the employee.


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