000new Trends in Performance-Related Pay

Paying for Performance
New trends in performance-related pay

Paul Suff
Peter Reilly
Annette Cox
Publishedby:
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Contents
Background
Overview
IsPRPaliveandwell?
Motivationandreward
PRPandfairness
DoesPRPwork?
1
2
4
5
6
ImplementingPRP
10
Overview
Rewardalignment
SuitableconditionsforPRP
MovingPRPon
Differentgroupsrequiredifferenttreatment
Continuingchallenges
Overcomingthechallenges
10
11
13
14
18
23
25
Conclusions
30
References
32
iii
Institute for Employment Studies
Background
Overview
Performancerelatedpay(PRP)rewardsemployeeswithafinancialpayment,either
consolidatedornonconsolidated,followinganassessmentoftheirperformanceand,
typically,theachievementofobjectives.ItwasfirstintroducedintheUKonawidescale
inthe1980sandmanyorganisationshadhighhopesthatPRPwouldbringabout
culturalchangeandencouragehigherlevelsofindividualandorganisational
performance(KesslerandPurcell,1992).PRPnowformsakeyelementofmany
organisationsrewardstrategiesparticularlyinsectorssuchasfinancialservicesbut
isincreasinglymorelikelytobeappliedaspartofabroaderapproachthatdoesnotrely
onperformancepayalonetoencouragehigherlevelsofmotivationandcommitment.
SinceitsearlyintroductionontheUKrewardscene,rewardspecialists,organisational
psychologistsandacademicshavedisputedwhetherornotPRPisaneffective
motivationaltool.SomeofthepotentialadvantagesofPRParethatitcanprovidea
directincentive,isatangiblemeansofrecognisingindividualsachievements,and
providestheflexibilitytoretainkeystaff.Onthedownside,criticsofpayingfor
performanceinthiswaysaythatitcanbediscriminatory,demotivatethemajorityof
employeesattheexpenseofafewhighperformers,andunderminefeltfairperceptions
ofequity.
PRPisbuiltonthepremisethatrewardcanfostertherightbehaviourandmoneyisa
potentiallypowerfulincentivetoinfluencetheamountofeffortthatemployeeswillexert
onbehalfoftheorganisation.Sometheoristsbelievethatmoneycanactasagoalinitself
andcanbevaluedbyemployeesasasymbolofexternalstatusandinternalrecognition.
ButotherscontendthatearlyproponentsofPRPfailedtoappreciatethecomplexityof
thewideremploymentrelationshipandtheextenttowhichfinancialrewardcanactasa
longtermsatisfier.NeedstheoriessuchasthosedevelopedbyMaslowandHerzberg
placeagreatdealofemphasisontheintrinsicaspectsofthejob,andarguethatpeople
cangainthegreatestsatisfactionfromworkfactorssuchasresponsibility,achievement
andrecognition.OthercriticsofPRPcautionthatsuchpayschemesarecoerciveandcan
encouragethewrongtypeofbehaviour,forexample,byfocusingonindividualeffortat
theexpenseofteamworking.
Paying for performance
ThetheoreticalargumentsrelatingtoPRParenotadequatelysupportedbyempirical
evidence,whilethepracticalresearchstudiesthathavebeenundertakenarealso
contradictoryandtheirconclusionsoftendependonthechoiceoftheparticularsample
group,beitmanagers,employeesorHRpractitioners.Forexample,surveysof
managementtypicallyfindthatmostmanagersareinfavourofrewardinghigh
performersandfeelthatIndividualperformancerelatedpay(IPRP)doescontributeto
organisationaleffectivenessperhapsbecausethisfitswiththeirownvaluesand
successfulexperienceofPRP.Evenwherepracticalresearchhasidentifiedbenefits,itis
clearthatnotypeofperformancerelatedpayschemeisuniversallysuitableforevery
typeoforganisationandPRPwillnot,onitsown,bringaboutorganisationalchange.
Is PRP alive and well?

MarkTwainsfamousstatementthatreportsofmydeatharegreatlyexaggerated
issuedafterhisobituaryhadbeenmistakenlypublishedintheUScouldbeappliedto
performancerelatedpay.Initiallyhailedasthesolutiontomotivatingstaffand
encouraginghigherlevelsofproductivity,PRPsubsequentlysufferedareactiona
decadelaterwhenitbecameapparentthatitmaynotliveuptoexpectations.As
Armstrong(1999)notes:Inthepostentrepreneurial1990stherehasbeenabacklash
againstperformancerelatedpay.Firstgenerationschemesintroducedinthe1980swere
notdeliveringtheexpectedresults.Anumberofresearchstudiesfailedtodemonstrate
anycausallinkbetweenmeritpayandperformanceandproductivity.But,sayBrown
andArmstrong(1999),performancerelatedpayisneitherdeadnordying;thespreadin
incidencehasundoubtedlyslowed,butitiscontinuingtobeappliedandgrow.
Furthermore,thepracticalproblemsinimplementationandoperationareincreasingly
wellrecognisedanddocumented.
IPRPisdefinedasapayprogressionsystemwhereindividualsreceiveafinancial
rewardbasedontheirperformance.Lawson(2000)definesthediversityofschemesthat
mightbecalledperformancerelatedasfollows:
whereindividualperformancecriteriaareestablishedsothatactualindividual
performancecanbejudgedorassessedagainsttheperformancecriteriaestablished
wherelinksareestablishedbetweenthelevelofindividualperformanceasassessed
andthelevelofrewardreceivedbytheindividual
wheretheactualrelationshipbetweenpayandperformanceisestablishedbya
managerialassessmentofperformancewhichmaybebasedoneitherobjectiveor
subjectivecriteria
whereitisassumedthattheselinkswillleadtoincreasedorganisationalperformance
throughimprovedindividualperformancewhicharisesfromhigherrewardsfor
improvedperformance
whereaformalperformancemanagementsystemisusedtoestablishthelinkage
betweentheperformanceoftheindividualandtheperformanceoftheorganisation.
Thedeliveryoftheperformanceawardmayeitherbethroughbasepay(sometimes
calledmeritpay)orthrougha(usuallynonconsolidated)bonus.
Sinceitsintroductioninthiscountryovertwodecadesago,therehasbeenan
increasinglypolariseddebateabouttheefficacyofperformancerelatedpay.Intheearly
daysIPRPwasindeedregardedbyitsadvocatesasthepanaceathatwouldencourage
greaterlevelsofemployeemotivationandcommitmentandfosterhighperformance
workcultures.Ithasbeensuggestedthatitisthenaivetyoftheseinitialexpectations,
andalackofsophisticationinhowIPRPschemeswereimplemented,thatexplainthe
subsequentrevoltagainstperformancerelatedpay.
Whenitwasfirstintroducedtotheremunerationsceneinthelate1980s,IPRPquickly
becamethepayprogressionsystemofchoiceformanysectionsofwhitecollarworkers,
typicallyreplacingtraditional,acrosstheboardrises.Itsfirstfootholdwasintheprivate
sectorforexample,financialservicesbutitwasnotlongbeforeIPRPwasrolledout
acrosssignificantsectionsofthepublicsector,includingthecivilserviceduringthe
1990s.TheonlysectionoftheeconomywhereIPRPhasnotbecomecommonplace(forat
leastsomegroupsofemployees)istheshopfloor,mainlybecausesignificantsectionsof
manufacturingarecoveredbycollectivebargainingforpaysettingandbecauseofthe
proliferationandpersistenceofotherperformancetypeschemeslikeproductivity
bonuses.
ContrarytoassertionsfromthosewhoopposedtoIPRPinthe1990s,thatperformance
relatedpayhadhaditsheydayandwasnowonthewayout,alargescalesurveybythe
thenInstituteofPersonnelandDevelopmentin1998foundthatIPRPwasheretostay
(IPD1998).Contrarytothepopularbeliefthatorganisationsarebecomingdisillusioned
withIPRPschemesinparticular,theresultsstronglysuggestthattheuseofallformsof
performancepayisgrowing.Thesurvey,of1,158organisations,covering1.5million
workers,foundthat40%ofrespondentorganisationsoperatedmeritpaysystemsand
overhalfofprivatesectorcompaniesdidso.Nearlysixintenoftheseschemeshadbeen
introducedinthepreviousfiveyears.
MoreuptodatesurveyevidenceshowsthatthepremiseonwhichIPRPisbasedthat
is,rewardingpeopleaccordingtotheirlevelofperformanceremainsafundamental
principleofmanyorganisationsrewardstrategies.Forexample,theannualreward
managementstudybytheCharteredInstituteofPersonnelandDevelopment(CIPD)
(2007)identifiesrewardinghighperformersasthesecondmostimportantreward
strategygoal(aftersupportingbusinessaims).Whereorganisationsoperateacashbonus
schemeorincentiveplan,thereisafirmindicationthatemployersareincreasingly
individualisingthesenonconsolidatedpayments,with64%oforganisationsusing
individualperformanceasafactoronwhichtobaseawards,upfrom56%ayearearlier.
Asurveyof431organisationsbytheIRS(2006a),meanwhile,foundthatensuringthe
companysrewardofferingpaysforperformancewasthemostcommonreasoncitedfor
operatingarewardstrategy,mentionedby29%ofthoseorganisationswithastrategy.
AnotherannualsurveybyIRS(2006b)recordsperformancerelatedpayasthemost
commonlyusedrewardstrategy,with55%ofrespondentssayingthattheyhadusedit
foratleastsomeemployees.Butthissurveyalsomarksthesecondconsecutiveyearthat
IRShasrecordedafallintheuseofmeritpay.ThemostrecentlargestsurveyofBritish
workplaces,the2004WorkplaceEmploymentRelationsSurvey(WERS),meanwhile,
findsthatmeritpayalonewasusedinjust9%ofworkplaces.Thesedifferencesinresults
canbeexplainedbydifferencesinthesamplesusedandthequestionsasked.
BrownandArmstrong(1999)assertedthatperformancerelatedpayisnotdying,butit
ischanging,andthispredictionisborneoutbythefindingsofmorecurrentreward
studies.TheCIPD(2007)annualrewardsurveyindicatesthat,whenitcomestopay
progression,themajorityofemployers(79%)takeintoaccountanumberoffactors
whatittermsthecombinationorhybridapproach,withseniormanagersandabove
morelikelytobeassessedsolelyontheirperformancethanotheremployeetypes.Of
thoseemployersthatuseacombinationapproach,themostcommonprogressioncriteria
isindividualperformance(80%),followedbymarketrates(65%)andindividual
competence(47%).
IPRPhasalwaysdominatedtherewardsceneinsomesectorsmorethanothers,andthis
trendcontinues.Forexample,asurveyoffinancesectorpaybyIRS(2006c)foundthat
performancerelatedpayisstillthekeyrewardtool,withfourfifths(79%)ofpay
awardscontainingameritbasedelementand72%ofawardsbasedsolelyon
performance.Inthepublicsector,whereIPRPenjoyedasomewhatlaterdebut,
accordingtoIRS(2006d)only16%ofpaysettlementsincludedanelementof
performancebasedpay,comparedwith29%ayearearlier.
Motivation and reward

Theunderlyingrationaleforperformancerelatedpayisbasedontheoriesofmotivation
andthedegreetowhichfinancialrewardcaninfluenceanindividualsperformance.The
viewthattherightbehaviourcanbeencouragedthroughrewardanddiscouraged
throughpunishmentsderivesfrommanyyearsofpsychologicalthinking.For
behaviouristslikeSkinner(1974),learningonlytakesplacethroughexternalpositiveand
negativereinforcementthecarrotorstickapproachtoreward.Taylorismappliedthis
thinkingtofinancialrewards,contendingthatmoneywasthesolemotivatorforworkers
toperform.Thisisanessentiallyemployercentricviewofreward,basedonthepremise
thatbehaviourcanbecontrolledandmouldedtosuitemployerneeds.Itisaviewthat
takesnoaccountofemployeerewardpreferences.
Thisperspectivehasbeenhotlycontestedbyothermotivationaltheorists.Forexample,
expectancyandgoaltheoristsputtheemphasisoncognitionthoughtprocessesthatis,
thedecisionspeoplemakeabouthowfartoparticipateandperformintheworkplace.
Forgoaltheorists,futuregoalsoranticipatedoutcomescanbeusedtoinfluence
behaviourandmotivation,andthemereexistenceofgoalscanleadpeopletobehavein
waysthatmeantheywillattaintheirgoals.Thisdoesnotevennecessarilyimplythat
financialrewardisneeded;rather,thereisastrongindicationingoaltheorythat
objectivesettingisapowerfulmotivationaltoolinitsownright.
Expectancy theory and pay satisfaction
Expectancy
Instrumentality
Valence
Pay
satisfaction
Goal setting
Performance
evaluation
Reward
Motivation
Source: Ducharme, Singh and Podolsky, York University, CBR, 2005
Goaltheorywasrefinedinanumberofwaysthroughexpectancytheory.Porterand
Lawler(1968),buildingonearlierworkbyVroom,developedthecentralhypothesisthat
motivationisdependentonwhethertheoutcomesholdpsychologicalvalueorvalence
fortheindividual.Effortwouldbemadewherepeopleexpecttoberewardedforit,but
thereneedstobeaclearlineofsightbetweentheeffortandexpectedreward.The
rewardneedstomatchtheeffortexpendediftherewardistoosmallorunimportant
fortheeffortinvolved,anindividualwillnottrythathard,sovalencehasboth
quantitativeandqualitativedimensionswhethertherewardisoftherightkindand
whetherthereisenoughofit.Thistheoryhasimplicationsforthelevelofawardsthat
arepaidunderPRPschemes.ThereisalsothecontentionmadebyAdams(1965)that
peopleareuncomfortableaboutbeingbetterrewardedthanothers,althoughthisseems
todependonthesocialsetting.
Needstheories,suchasthoseputforwardbyMaslowandHerzbergalsochallengethe
moremechanicalmotivationaltheoriesofSkinnerandTaylor.Herzberg(1958),for
example,identifiedpayasahygieneordissatisfactionavoidancefactormeaningthat
moneycannotcreatesatisfactionbutcancausedissatisfaction.Incontrastsatisfiersor
motivators,suchasachievement,responsibilityandrecognition,areintrinsictothejob
andcanbringmuchlongertermsatisfaction.Inshort,payisbutashorttermmotivator
andthegreatestsatisfaction,andthereforepotentiallymotivation,canbederivedfrom
theintrinsictaskitself.Thisisalsomorelikelytobetruewhentheindividualinitiateshis
orherbehaviourandfeelscompetenttoperformthetaskconsistentwithMcGregors
TheoryY.
PRP and fairness

TylerandBies(1990)suggestthatitisproceduraljusticetheprocessofhowsomeoneis
treatedthatisthekeyelementinfeltfairness.Distributivejustice,ortheoutcomeof
therewards,islessimportant.ThisisborneoutbyresearchdonebyFolgerand
Konovsky(1989)andMcFarlinandSweeney(1992).Bothstudiesshowedthatreward
systemprocesswasmoreimportantthanrewardsystemcontent.Perceptionsof
distributivejusticeonlypredictimmediatesatisfactionwithrewardoutcomes,whereas
perceptionsofproceduraljusticeareassociatedwithabroaderrangeofattitudes,like
organisationalcommitmentandthequalityofemployeerelationshipswithbosses.This
holdstrueregardlessofwhetherornotrewarddecisionsarefavourabletoemployees.
Proceduraljustice,thatis,thefairnessoftherewardallocationprocesswasfoundtobe
moreimportant.Indeed,whereproceduraljusticeisratedashigh,thereisevidenceto
suggestthatdistributivejusticehaslessimpactonemployees(McFarlinandSweeney,
1992).Thishasimportantimplicationsforemployers,whomightdowelltofocustheir
investmentintimespentgettingrewardprocessesrightratherthanonthesizeofreward
atstake.
However,furtherresearchhasemphasisedthatfairproceduresalonearenotenough.It
pointstotheimportanceofinteractionalorinterpersonaljustice.BiesandMoag(1986)
emphasisethatprocedurescannotexistwithoutbeingenactedandthatpeoplemay
regardthewayinwhichproceduresarefollowedasequally,orindeed,moreimportant
thantheexistenceoftheproceduresthemselves.Firstly,thereisthesinceritywithwhich
proceduresarefollowed,forexample,thedegreetowhichmanagerstrulyconsider
employeesviewsonpaywhenconsultingthem.Secondly,interpersonalsensitivity
comprisesthepolitenessandcourtesywithwhichanindividualistreatedwhena
decisionisbeingmadeorimplemented,whichaffectsthemaintenanceoftheirsenseof
dignityandselfworth,oftenreferredtonowasinterpersonaljustice.Thismayinclude
subtleandintangibleaspectsofcommunicationsuchastoneofvoiceandbodylanguage
infacetofaceinteraction.
Does PRP work?

Thereismuchdebateonthequestionofwhetherornotmoneycanactasaneffective
motivator.Someresearchers(egWallaceandSzilagyi,andShawetal)contendthat
moneyisindeedamotivator.Thisisbecauseitcanbeseenbyindividualsasagoalin
itself,asameansofgivingsatisfactionandasasymbolof(internal)recognitionor
(external)status.Bycontrast,Kohn(1993)isafirmopponent,arguingthatincentives
succeedatsecuringonethingonlytemporarycompliance.Accordingtohim,thereis
nofirmbasisfortheassumptionthatpayingpeoplemorewillencouragethemtocarry
outbetterormorework.Atworst,asimplisticpayforperformanceapproachiscoercive
andcouldencouragethewrongtypeofbehaviour.Forexample,saysPfeffer(1998),IPRP
focusesonindividualcontributionwhereasthetaskmayrequireteamwork;itmaylead
toshorttermismwherealongertermviewisneeded,oritmayencourageconformity
whenyouneedchallenge.McHenry,similarly,arguesthatsoftermanagement
approacheshaveagreatereffectoneffortthancarrotandsticktechniqueslikePRP.This
maybebecausecontrollingbehaviourisnoteasy(anorganisationshouldnotexpectits
employeestoappreciatehavingtheirbehaviourmotivatedwitharewardprogramme
toquoteHansen,SmithandHansen)andthattryingtodois,accordingtoProfessorJohn
Hunt,basedonafalseassumption:thatorganisationscanbeadministeredscientifically,
thatemotionsandinequitiescanbesqueezedoutbyapplyingacommon,objective
system(quotedinBrownandArmstrong,1999).Moreover,asBarryLeskinshas
suggestedPRPisusuallyazerosumgameforthosethatbenefitothersloseout.
Thedebateonmotivationandpayhasitslimitationsasthemajorityofpsychological
theorieslackanyfirmempiricalsupportbasedonorganisationalfindingsandmanyof
theargumentsandcounterargumentsaremoremattersofassertionthanfact.Indeed,
therelationshipbetweenmotivationalfactorsandothervariablesintheworkplacemean
thatitisnoteasytoconductpracticalresearchontheeffectivenessofIPRPitisdifficult
toisolatetheimpactofthatelementofthepayschemeandthereforeestablishacausal
link.AsaManagementTodayarticleputit:Noonecanprovethatperformancerelated
payimprovesperformance,butnoonecanproveitdoesnteither(Oliver,1996).
TheresultsofstudiesexaminingPRParealsotypicallyinfluencedbythenatureand
attitudesoftherespondentgroup,forexample,whetheritisHRprofessionals,managers
oremployeeswhoaregivingtheiropinions.Forinstance,formanyseniormanagers,
PRPfitswiththeirideaofanindividualandflexibleculturethatrecognisesandrewards
achievement.Theyfindthesuggestionthatpaydoesnotmotivatecounterintuitive,
partlybecausetheythemselvescouldbemotivatedinthiswayand,bydefinition,if
thesemanagershaveprogressedintheircareerstoreachmanagement,theymaynot
haveexperiencedthemorenegativeconnotationsofIPRP.ChipHealthatStanford
University(quotedinMorse,2003),forexample,findsthatmanagersaregenerallypoor
atjudgingwhatmotivatespeopleandtheytendtohaveanextrinsicincentivebias.This
pointhasbeenputmoregraphicallybyanAmericancommentator(AndrewLebby):
justasitiseasierforsomeparentstoshowlovewithgiftsratherthanhugs,itisoften
easierfororganisationsandmanagerstoshowgratitudewithmoneythanwithwords
(1993).
Whereresearchhasbeencarriedoutinaworksetting,theevidenceisascontradictoryas
thetheoreticalargumentsforandagainstPRP.Onthemorepositiveendoftheresearch
spectrum,the1998IPDstudyfoundthatthreequarters(74%)ofrespondentsbelieved
thatPRPimprovesindividualandorganisationalperformance.However,lessthana
thirdofthesemanagershadconductedaformalevaluationtoassesstheeffectivenessof
theirmeritpayschemes.Whethertheirsuccessorshadcarriedoutsuchanevaluationis
opentodoubt.Theriskhereisthatmanagerialperceptionsofmotivationmayturnout
tobeinaccurate:toquoteGrahamWhite,HRdirectoratSurreyCountyCouncil,thecat
bringingyouadeadratasarewardshowsthatthecatknowsnothingofwhatinterests
you.
IntheUS,Huselid(1995)foundacorrelationbetweenhighperformanceworkpractices
(includingcloselinksbetweenappraisalandpay)andorganisationalperformance.A
smallerscalestudybyThompson(1998)of400companiesintheaerospacesector,based
onamoresophisticatedmeasurementapproachofaddedvalueperemployee,also
identifiedapositivelinkbetweenIPRPpayschemesandthismeasure.
Therearealsoanumberofstudiesthatlookedattherelationshipbetweenpeople
managementpractices(includingreward)andorganisationalperformance.Thereis
evidencetosupportthecontentionthatrewardaffectsperformance.Forexample,
financialincentiveshadthegreatesteffectacrossawiderangeofmotivationallevers
training,workdesign,etc.accordingtoresearchdonebyGuzzoetal.Severalpapers
werealsoabletopointtoapositivelinkbetweenrewardandperformance,butthetype
ofrewardinvolvedvaried.So,forexample,Kruse(1993)1identifiedanincreasein
productivitylinkedtoprofitsharing;whereasKaufman(1992)2sawthesameeffectvia
gainsharing;Ichniowskietal.(1994)3focusedonteamawards;andincentivepay
benefitedprofitabilityinastudyundertakenbyBankeretal.(1996).Ametaanalysisby
Kling4onUSstudiesconfirmedthisgeneralpointbyfindingthatcompensationlinkedto
eitherworkerorfirmperformanceliftedlabourproductivity.DavidGuestalsofound
thatIPRPisassociatedwithhighperformanceorhighcommitmentHRMandTheWork
FoundationreportedthatthehighertheproportionofstaffinreceiptofPRP,thehigher
theorganisationaladdedvalue.
However,otherresearchoftencontradictstheresultsandpointstotheopposite
conclusion.ThusincontrasttoGuestandTheWorkFoundation,FernieandMetcalf
reportedthatIPRPandmeritpaywereinsignificantlycorrelatedwithfirmperformance.
Inamorespecificexample,MarsdenandRichardson(1994)lookedatmeritpayinthe
InlandRevenueandfoundthatithadonlyaslightmotivationalimpactonstaff,largely
becausepeopleperceivedthesystemasunfair,withratingsnotnecessarilyreflectingthe
levelofperformanceduetothequotasystemandfavouritism.AstudybyThompson
(1992)indicatedthathisinitialfindingsfailedtoprovideconvincingevidenceofalink
betweenIPRPschemesandimprovementsinproductivity.Brownetal,comparing
WERSdatafrom2004and1998,foundnoassociationbetweenPRPandjobsatisfaction,
ratherperceptionsofjobsecurityandemployeerelationsclimatehadmoreofaneffect.
Havingsaidthat,bundlesofHRpractices,includingPRP,didaffectsatisfaction(2006).
McCauslandetal(2006)usedBritishHouseholdPanelSurvey(BHPS)datatoexamine
therelationshipbetweenreceivingPRPandjobsatisfaction.Theyfoundapositive
impactofreceivingPRPoccurredonlyformorehighlyeducatedworkers,while
controllingforthepossibilitythatworkerswillselfselectthemselvesintojobsand
organisationswhichhavetheirpreferredpaysystem.Thisshowsthedifferentialeffects
ofPRPandpointstoapotentialneedtochoosecarefullybetweenrewardsystemsthat
maybemoreorlessappropriatefordifferentgroupsofworkers.
Kruse,1993citedinTamkinP,GilesL,CampbellM,HillageJ(2004),SkillsPay:TheContributionofSkills
toBusinessSuccess,SSDA
Kaufman,1992citedinTamkin P,Giles L,Campbell M,HillageJ(2004),SkillsPay:TheContributionof

SkillstoBusinessSuccess,SSDA
Ichniowski, et al., 1994, cited in Tamkin P, Giles L, Campbell M, Hillage J (2004), Skills Pay: The
ContributionofSkillstoBusinessSuccess,SSDA
Kling, cited in Tamkin P, Giles L, Campbell M, Hillage J (2004), Skills Pay: The Contribution of Skills to
BusinessSuccess,SSDA
AnanalysisoftheavailableempiricalevidenceledBrownandArmstrong(1999)totwo
importantconclusions:
PRPcannotbeendorsedorrejecteduniversally,outofhand,asaprinciple.Thereare
situationalvariablesthatindicatePRPschemesarefoundtoworkinsomesettings,
andforsomeemployeegroups,andnotinothers.
Notypeofperformancepayschemeisuniversallysuccessfulorunsuccessful.Thekey
issueformanagersisnotonlytopicktheappropriatepayschemefortheirown
situation,butalsotoworktomaximisethepotentialadvantagesandminimisethe
potentialdisadvantages.
BrownandArmstrong(1999)quoteBoweysresearchindicatingthattheperformance
payschemedesignborenocorrelationwithsuccessfuloutcomesrather,successwasfar
moredependentontheschemessupportandcommunicationssystems.
TheunrealisticexpectationthatPRPcouldactasamajorleverfororganisationalchange
wasbased,accordingtoArmstrong(1999),onoverlysimplisticassumptionsaboutthe
instrumentalvalueofmoneyasamotivatorwithouttakingaccountofthelessonsfrom
expectancytheory,theproblemswithadministeringPRPfairly,andthefactthatitmay
workbetterinsomeorganisationsthanothers.AccordingtoArmstrong,whenPRPfails,
itisoftenbecausetheassessmentprocessisflawed.Inotherwords,aPRPschemeis
onlyaseffectiveastheperformancemanagementsystemonwhichitrests.Itwasthis
growingunderstandingofthepracticalapplicationofPRPthathasledtoamore
sophisticatedapproachtoitsuseinmanyorganisationstoday.Italsoexplainswhy,for
manyemployers,PRPformsjustonepartoftherewardstrategy.Forexample,the
conceptoftotalreward,wheremeritpayorincentivebonusesareviewedasjustone
elementaffectinganindividualsemploymentexperience,ishavingmoreresonance
withemployerswhoareattemptingtomeetemployeesrisinganddiverseexpectations
ofwhattheywantfromwork.
Table 1: The pros and cons of individual performance-related pay
Advantages
Disadvantages
Provides a direct incentive
Reduces pay equity
Tangible means of recognising achievement
Contaminates development aspects of performance

reviews
Generates a performance culture
May be discriminatory
Improves goal setting
Demotivates if goals are too hard to achieve
Improves individual performance, productivity,

quality of work etc
Relies on quality of line managers assessment
Focuses employees on improvement
Undermines cooperation and teamwork
Rewards best performers
Focuses attention on activities (often short-term

quantifiable goals) that attract financial reward
Can support organisational change
Raises expectation of continual payout
Identifies poor performance
Does not work well (in terms of motivation) in low

inflation climate
Flexibility may help retain valued staff
Awards may be seen as arbitrary
Source: Suff P (2001a), The new reward agenda, Industrial Relations Services
10
Implementing PRP
Overview
Thefailureofsomeoftheearly,unsuccessfulPRPschemesinthe1980shasbeenpartly
attributedtothemechanisticwayinwhichtheywereimplemented.Insufficientaccount
wastakenoftheorganisationsuniquecharacteristics,itscultureandthereward
schemesrelationshipwiththebusinessstrategyandHRpractices.Theresearchcarried
outonsomeofthefirstgenerationPRPschemesrevealedarangeoforganisational
factorsthatareeitherfavourableorunfavourabletotheintroductionofPRP.For
example,PRPismorelikelytobesuccessfulandfitwiththeorganisationifthereisan
entrepreneurialculturewithanemphasisongrowthandtheachievementoffinancial
objectives,iftopmanagementisconvincedoftherewardschemeseffectiveness,andif
theorganisationcanfundperformanceincreasesthataresignificantenoughtomotivate
people.
MorerecentresearchevidencepointstotheevolvingnatureofPRPovertheyears,with
manyorganisationsnowhavingamoresophisticatedunderstandingofperformanceand
usingavarietyofdifferentapproachestomotivateandrewardstaff.Forinstance,some
employershavefinetunedtheirperformanceappraisalsystemstoensurethatstaffare
notmeasuredonhardobjectivesalone,butareassessedontheircompetence,skillsand
behaviourcontributionrelatedpay.Otherorganisationshavemovedtoatotal
rewardapproach,wherebymanydifferentelementsoftheemploymentexperience
combinetoencouragegreaterlevelsofcommitment,andPRP,whilestillimportant,
formsjustoneelementoftherewardpackage.OtherchangestoPRPincludethemove,
particularlyinsectorssuchasfinancialservices,topayingperformancerelatedincreases
asbonusesorvariablepaytopreventarewardofoneyearsgoodperformancebeing
consolidated.
ThefactthatPRPis,byitsverynature,moresuitableforsomeorganisationsand
employeegroupsthanothers,hasbecomeevidentinrecentyears.Itisforthisreason
thatPRPisnotwidespreadinthepublicsector,forexample,despitestronggovernment
endorsementofitacrossthesector.Itisalsofromthepublicsectorthatmuchofthe
researchevidenceagainstPRPemanatesonesurveyofcivilservicePRPschemesfound
11
thatthelowlevelofawardfailedtomotivateandPRPwasdiscriminatory.Otherstudies
havereinforcedtheviewthatpublicsectorworkersmaynotbebestmotivatedby
financialrewardandhighlightedtheimportanceofmoreintrinsicmotivatorssuchas
qualityrelationships,goodcommunicationanddelegationofresponsibility.PRPcan
alsobeproblematicforknowledgeworkers:itisoftendifficulttomeasuretheiroutputs
and,again,manyknowledgeworkerstendtobemotivatedbypracticessuchas
professionaldevelopmentandachievementintheirrole.
Clearly,PRPisbettersuitedtootheremployeegroups,suchassalesstaffandcustomer
serviceoperators,asitismorestraightforwardtodeviseclearandmeasurableobjectives
againstwhichtoassesstheirperformance.Butevenforthesegroupsofstaff,itis
necessarytoincorporatemeasuresthattakeintoaccountthequalityofthecustomer
serviceprovidedandemployeesrelationshipswithclients.
Itiswidelyacknowledgedthat,wherePRPdoesfail,itismorelikelytobebecauseof
ineffectiveimplementationandmanagementoftheschemeasopposedtopoordesign.
Forexample,theUSConsortiumforAlternativeRewardStrategies(CARS)concluded
fromtheirresearch,implementationratherthangooddesignwasthekeytosuccess
(reportedinThompsonandMilsome,2001),butMcAdams(theDirectorofCARS)also
concludedthatthebottomlineissimple:rewardplansworkwhenproperlydesigned
andsupported(1993).
Thereareanumberofnecessarystepstoaneffectiveplanningandimplementation
process,suchasclearlydefiningandjointlyagreeingtheschemesobjectives,developing
arobustperformancemanagementsystem,providingtraining,andcommunicatingwith
thewholeworkforceontheschemesoperation.Transparencyandgood
communicationsshouldcharacteriseanyrewardscheme,butareevenmorecrucialin
PRPschemeswheresomeemployeesreceivehigherawardsthanothers.Theconfidence
andcompetenceoflinemanagerstomanagePRPanditssupportingperformance
managementsystemonadaytodaybasisisakeydeterminantoftheschemessuccess.
Linemanagersneedtoprovidehonestandongoingfeedbackonperformance,havethe
abilitytodifferentiatebetweenvaryinglevelsofperformance,andfeelthattheyown
thePRPsystemifitistobesuccessful.
Reward alignment
AccordingtoBrown(2001),eventhequestionDoesPRPwork?isthewrongstarting
pointandreflectstheoverlysimplisticapproach,andsubsequentfailure,ofmanyearly
schemes.Organisationsimportedschemesfromelsewherewithlittlethoughtgivento
supportingprocesses,suchasobjectiveandtargetsetting.Thebestpracticeapproach
risksorganisationsapplyinguniversalsolutionsthatareillsuitedtotheir
circumstances.InorderforanyPRPschemetobesuccessful,organisationsneedto
followarewardstrategypathway.Thisinvolvestakingintoaccounttheorganisations
overallperformancegoalsandhowtoreflecttheminthepaysystem.Otherquestions
thatneedaskinginclude:Howdostaffcontributetothesegoals?Whatisthe
organisationsculturethroughwhichemployeeattitudesandbehavioursaremediated?
12
HowcanHRpoliciesfurthertheirachievement?Itisonlybyansweringtheseanda
numberofotherquestionsabouttheorganisationsbusinessandperformancemodels
thatanorganisationcanbegintoconsiderthedetailofaPRPscheme,thelevelsatwhich
theyshouldoperate,appropriatemeasuresandoperatingarrangements.
Inshort,whatorganisationsshouldbeensuringisthatthereisaprocessofvertical
integration(aligningrewardstrategywithbusinessstrategypriorities),togetherwith
horizontalintegration(ensuringthatPRPissupportedbytheorganisationsotherpeople
managementpoliciesandpracticesreward,resourcing,employeerelations,etc).In
particular,theremustbecongruencebetweentheaimsofrewardandperformance
management.Youwouldnotwant,forexample,theperformanceappraisalsystemtobe
emphasisingdevelopmentwhentherewardsystemisperformancedetermined.
Unlesstheaimistochallengetheprevailingculture(andmanyPRPschemesdoindeed
havethatintention),thereshouldbeanattempttoalignrewardwithorganisational
culture.Performancepayworksbestwhenthereisaclosecongruencebetween
organisationalandemployeeinterests.Thiscanbeseeninhightrustenvironments
whereemployeesrespectthecompetenceandintegrityoftheirmanagersinmaking
performancejudgements.Foritspart,whererewardreflectsdegreeofacceptable
differenceinsocialdistance,betweenthebestandleastwellrewardedunderPRP,then
theschemeislikelytobeaccepted.Thusasalesteammaytoleratewiderdifferentials
thanaadministrative/clericalunit.Thisrelatestoanotherpoint:itisjustifiabletohave
largerincentivesforthosejobswherethereisthecapacityforgreatervariationsin
performance.Aclericalofficerdoesnothavethesamefreedomtoshapehis/herjoband
liftperformance,assomeonewithgreaterjobautonomyandthecapacitytoimpacton
performance.
Organisationsshouldalsotakeaccountoftheexternalandcorporatecontextswithin
whicharewardstrategyandpolicyneedstooperate.The2004WERSfoundthatthe
degreeofproductmarketcompetitionfacedbycompanieswasafactorinfluencingthe
existenceofincentivepayschemes,suchasIPRP.Halfofthoseorganisationsthat
assessedthedegreeofcompetitionintheirmarketasveryhighhadinplacePRP
schemes,suchasmeritpay.Thus,theexternalenvironmentandcompetitiveelementof
anorganisationsoperationsforexample,itsneedtoensuresalesorgrowthtargetsare
met,ordeliveriesmadeontimeshouldinfluenceitsdecisiontoadoptIPRP.
Thefavouredapproach,therefore,istofollowbestfitratherthanbestpractice.
Contingencytheory(asitisalsocalled)meansthat,tobeeffective,PRPshouldbe
appropriatetotheorganisationsuniquecharacteristicsandneeds.
13
Suitable conditions for PRP

Nonetheless,someauthorswouldsuggestthatthereareparticularconditionsfavourable
toPRP,orunfavourabletoit.AccordingtoArmstrong(1999),PRPandsuccessin
introducingandoperatingPRPismostlikelyif:
thecultureisentrepreneurialwithanemphasisongrowth,competitivenessandthe
achievementoffinancialobjectives
topmanagementisconvincedthatPRPcanbringaboutculturalchangesleadingto
significantperformanceimprovements
performancemanagementprocessesareinplacethatincludetheagreementof
objectivesintegratedwiththeoverallobjectivesoftheorganisation,thatinvolve
feedbackandreview,andthatprovideasoundbasisformakingfairandconsistent
paydecisions
linemanagersowntheschemeandbelievethatitwillhelpthemtoachievetheir
objectives
linemanagersareskilledintheprocessofobjectivesettingandgivingfeedbackon
assessingperformance
theexpectationofwhatemployeesneedtodotoachievearewardareclarified
theschemeistransparentsothateveryoneknowshowtoitworksasLawler(1998)
says:Ifyouaredoingsomethinggood,flauntit!Ifyoufeelyouhavetohideit,you
shouldntbedoingit
thereisatraditionofinvolvingemployeesindecisionsonmattersthataffectthem
theorganisationcanaffordtoawardworthwhilePRPincreases
PRPprocessesareintegratedwithotherpersonnelanddevelopmentpractices.
Someoftheseconditionsrelatetothebusinessstrategy,itsinteractionwiththeexternal
environment,andwhetherPRPwouldsupporttheorganisationscorporategoals.
Othersrelatetothedominantworkingcultureandwhetherthereisatraditionof
employeeinvolvement,whileothersstillrequirethatsupportingmechanismsbe
establishedalongsidetheschemesimplementation.Thelastconditionrefersto
horizontalintegrationpointmadeearlier.
Crucially,PRPmustbebuiltonaneffectiveperformancemanagementsystem,withclear
objectivesthatsupportbusinessgoals,andlinemanagersthatareconfidentand
competentinassessingperformanceagainstindividualobjectives.
14
Moving PRP on
BecausethePRPoriginalschemeswerenotseentobedeliveringtherightresultsfor
example,therehavebeenproblemsinobjectivesettingandassessment,particularlyfor
jobswhoseoutcomesarenotclearcutschemeshavebeenmodified.IRS(1998)reports
anarrayofchangestoenhancetheireffectiveness,including:
improvedperformancemanagementtechniques
movestomultirateror360degreeappraisal
theuseofawiderrangeofperformancecriteria,withdifferentaspectsofperformance
linkedtodifferentpaymechanisms
theincorporationofcompetencies
theblendingofteamandindividualmeasuresofperformance
higherlevelsofemployeecommunicationandinvolvement.
InresponsetoconcernsoverthecrudeorformulaicapplicationofPRP,manyemployers
havedevelopedamoresophisticatedunderstandingofperformance.Oneprominent
developmentisthebroadeningoutofperformancetoincludebothinputsandoutputs
contributionbasedpay(BrownandArmstrong,1999).Rewardingthewholeofan
individualscontributionreflectsamoreholisticapproachtopayprogression,where
successinachievingpredeterminedobjectivesiscomplementedbyanassessmentofhow
theindividualhasworkedtowardstheseobjectives,usuallybasedonthecompetencies
theyhavedemonstratedindoingso.Thisapproachcanhelptoovercomesomeofthe
maincriticismsofPRPschemes:forexample,thattheyencourageshortterm
compliance,thattheyinhibitteamwork,andthattheydemandablinkeredfocuson
quantifiableoutcomestotheexclusionofquality.Thisisincreasinglyimportantgiven
therealisationthatcustomerservicecanbethedifferentiatingfactorinbusinesssuccess
orfailure.
Customer service agents at the RAC site in Bristol have monthly off-the-job review meetings to assess
performance and determine bonus payments. Employees are assessed in terms of their productivity,
quality, reliability and the customer service index (essentially, the proportion of customers very
satisfied with the service) (Suff, 2000).
Table2summarisesthemaindifferencesbetweenIPRPandcontributionrelatedpay.
15
Table 2: A comparison of PRP and contribution-related pay

Pay for performance
Pay for contribution
Organising philosophy
Formulae, systems
Processes
HR approach
Instrumentalist, people as costs
Commitment, people as assets
Measurement
Pay for results (the whats),

achieving individual objectives
Multi-dimensional, pay for results

and how they are achieved
Measures
Financial goals; cost efficiency
Broad variety of strategic goals;

balanced scorecard; added value
Focus of measurement
Individual
Multi-level: business, team,

individual
Design
Uniform merit pay throughout

organisation
Diverse approaches, wide variety of

reward methods to meet different
needs
Timescales
Immediate past
Past performance and contribution

to achieving future strategic goals
Performance management
Past review and ratings focus; topdown; quantitative
Mix of past review an future

development; 360-degree feedback;
quantitative and qualitative
Pay linkage
Foxed formulae; matrix
Looser, more flexible linkage;

holistic approach to pay review;
pay pots
Administration
Controlled by HR
Owned/operated by line managers
Communication and
involvement
Top-down; written
Face-to-face; open; high

involvement
Evaluation of effectiveness
Act of faith
Regular monitoring against clearly

defined success criteria
Changes over time
All or nothing
Continuous improvement
Source: Armstrong M (1999), Employee reward, Institute of Personnel and Development
AccordingtoBrownandArmstrong(1999),payingforcontributionrepresentedthe
missingdimensioninreward.Theydescribecontributionrelatedpayasamixedmodel:
itattemptstoovercomesomeoftheproblemsassociatedwithIPRPandtakeittoanew
level.Contributionrelatedpayencapsulatesamuchmoreindepthviewofperformance;
inthisapproachinputs,suchascompetence,skillsknowledge,experience,behaviours,
andcommitmenttotheorganisationsvaluesallcomeintoplay.Forexample,becauseof
thisfocusoninputsaswellasoutputs,theremaybegreaterscopetoallocatehigher
rewardstothoseindividualsdevelopingtheirlevelofcompetenciesandskills,enabling
rewardstoreflectoverallcontributionbetter.Italsomeansthatbehaviournecessaryin
todaysworkplacesforexamplearoundimportantareassuchasinnovationand
creativitycanbeencouragedandrewarded(Suff,2001a).
16
Case study
Cisco Systems
A strong performance management system underpins all decisions concerning the financial reward
Cisco employees potentially receive. Individual appraisals are based on an assessment of the persons
overall performance in their role as well as measurement against competencies such as leadership.
When making a judgment on the level of increase, the individual will be assessed from the
perspective of current performance and market position. In this way, the appraisal process is both
retrospective and aims to develop the persons future contribution to the company (Suff 2001a).
Case study
Canon (UK)
Canon UKs performance management process uses competencies that are linked to pay and
reward. Employees receive an overall rating for the achievement of objectives and
competencies. Following this, line managers make a judgement based on the ratings as to where
employees lie on a one-to-five scale. In turn, this scale corresponds to Canon UKs pay scales
and enables an employee to have both an annual market-based pay review (determined by job
families and equivalent external job markets) and a PRP review. According to the HR manager,
the competencies help people to understand their role by ensuring that the company measures
not just what people do but how they do it. By having both dimensions, the company is able to
really differentiate between a competent and high performer (Competency and Emotional
Intelligence, 2006).
ThedevelopmentofIPRPisconfirmedbyIncomesDataServices(IDS2004).Itfindsthat
thecharacterofmanyorganisationsapproachtoPRPhaschanged,withamixtureof
performanceandmarketrelatedsystems.Forexample,inthefinancesectorthe
performanceelementofpayreviewshasshiftedfrombasicsalaryincreasestoannual
bonuses.
IDSalsoreportsthatinfinancialservices,wherethereisincreasingrelianceonmarket
ratesandbenchmarking,individualperformancehassometimesbeensqueezedoutof
annualpayreviews.Oneresulthasbeenthatmanyofthehighestperformersonsalaries
wellabovethemarketratearereceivingverysmallorevennorisesinconsolidatedpay.
Becausestaffhavebeenusedtoreceivinghigherperformanceawards,companiesare
experiencingdifficultiesinmeetingemployeesexpectations.Somecompanies,suchas
Nationwide(seecasestudybelow)havedecidedtoseparateperformanceand
progressionarrangementsinordertoeasethedifficultieswithtyingpaytomarketrates.
Thisdoesnotmeanthatprogressionisnolongerrelatedtoperformancebutstaffcan
differentiateclearlybetweenawardsthatareprogressionbasedandthosethatare
performancebased.
17
Case study
Nationwide Building Society
In previous years, PRP increases had been applied to the target or market rate rather than to actual
salaries. This meant that all staff with the same performance rating received the same increase, in
effect slowing progression for staff above the market rate. Following feedback from staff the
company decided to apply the performance-related increases to actual salaries with more than 50%
of staff above the target this was a big issue for staff. The increases for these staff were split into
consolidated and non-consolidated increases, with the increase derived from the target rate
consolidated into base pay and the remainder non-consolidated (IDS 2004).
Consolidated payments versus bonuses

PRPincreasesmaybeaddedcumulativelytobasicpaythatis,consolidateduntil
eitherthemaximumrateforthegradeoralimitwithinthegrade,definedintermsofa
levelofperformance,isreached.Alternatively,increasesmaybepaidasacashbonus,
knownasvariablepay,andnotconsolidatedwithinanindividualssalary.Insome
organisationsindividualsareonlyeligibleforsuchbonuseswhentheyreachthetopof
theirpaybracket,ortheremaybeinrangebonusesonoffereitherinsteadof,orin
additionto,performancebasedbasepayprogression.
Inanenvironmentoftightbudgetcontrols,variablepayenablestheorganisationto
avoidthecontinuing,fixedlabourcostsofconsolidatedperformanceincreases.Thereis
alsotheviewthatalargeroneoffpaymentcanrepresentamoremotivatingrewardthan
thesameamountofmoneypaidincrementally.Awardingpeopleimmediatelyafterthe
achievementalsoprovidesaclearlinkbetweentheawardandperformance.Non
consolidationisespeciallyimportantinalowinflationclimate,becausefairlylargerises
intotalpaycanbeawardedtohighperformerstocompensateforrelativelylow
increasesinsalarieswithoutincurringsubstantialadditionalfixedcosts(Suff,2001a).
Case study
Department of Trade and Industry (DTI)
At the DTI the 2006 pay award consisted of two elements:
Progression progression awards provide, for example, an increase of two steps on the pay range for
specific groups of employees who received an overall performance assessment of successful or highly
successful. For staff at or above the 2005 target rate, consolidation of the progression award depends
on performance: those with an overall assessment in 2005/06 of improvement needed received their
one-step increase on a non-consolidated basis; those with an overall assessment of successful received
their two-step increase on a non-consolidated basis; and those with an overall assessment of highly
successful received one step of their increase consolidated and one step non-consolidated.
Performance in addition, highly successful performers received an additional, non-consolidated
performance award equivalent in value to 2.6 steps based on the 2005 rate (IRS 2007).
18
Whilebonusschemescanfocusonameasureofperformanceatjusttheindividuallevel,
manyemployersoperatemultilevelormultifactorschemesthatenablethemtoalso
linktherewardatateam,departmentorcompanywidelevel.Thisapproachenablesthe
organisationtolinktheachievementofanindividualspersonalobjectivestoitswider
strategicandoperationalgoals.Anemployeesownperformancecanbeincludedasa
factorwiththemeasuregenerallyderivedfromindividualappraisals.Thisisthecasein
YorkshireBuildingSocietysAccordBonusScheme,where,attheendof2007,ratings
willbemadeagainstbehaviouralcompetenciesandannualperformancegoalsforevery
role.Similarly,atUnitedUtilitiesNorthWest,employeestypicallyhavefivetoeight
individualperformanceobjectivesagainstwhichtheyareassessedforpartoftheirbonus
(IDS2007).
Case study
Yorkshire Building Society
The Accord bonus scheme at Yorkshire Building Society is a multi-factor scheme and was updated in
2007 to place greater emphasis on individual contribution. All staff working for the Accord Mortgage
subsidiary except senior management and the intermediary sales team are covered by the bonus. The
scheme is designed to:
motivate people to achieve Accords 2007 growth objectives
enhance the relationship of the business with its customers and provide an improved basis for
long-term growth
be based on factors that people can influence positively
be easy to understand.
There are three key factors:

1.
mortgage asset growth
2.
broker surveys
3.
individual performance at the end of the year, ratings are made against both behavioural
competencies and annual performance goals for every role (IDS 2007).
Different groups require different treatment

IfthepracticalresearchandongoingdebateabouttheeffectivenessofPRPhastaught
payspecialistsandHRpractitionersanything,itisthatPRPcanwork,incertain
circumstancesandifitismanagedproperlybutitisnotsuitableforeveryorganisation
or,indeed,everyemployeegroup.Itisthisprovenprinciplethatpartlyexplainsthe
variationinitsincidencebetweensectorsandoccupationalgroups.
19
Public sector
Althoughpartsofthepublicsectordooperatemeritpayschemes,thisformofrewardis
farlesscommonthanintheprivatesector,despitesuccessivegovernmentshaving
promotedIPRPacrossthesector.WERS(2004)foundthatPRPsystems(thatinclude
bothmeritpayandpaymentbyresults)werepresentin44%ofprivatesector
workplacescomparedto19%ofpublicsectorworkplaces.IntheNHS,PRPhaslargely
beenrestrictedtotheexecutivelevel.Inlocalgovernment,aPRPschemeforteachers
waspilotedbutwasquicklyabandoned(Reilly,2003b).
MuchoftheevidenceagainstPRPemanatesfromthepublicsectorperhapsbecause
sectionsofthepeoplewhoworkinthissectormaynotbethemostopentotheethosof
PRP,placingmoreemphasisonothermotivators.Forexample,thePublicServices
ProductivityPanel(2002)reportedthatemployeeswerenotinitforthemoney,instead
emphasisingtheimportanceofmoreintrinsicfactors,suchasqualityrelationships,
delegationofresponsibilities,goodcommunication,andparticipationinworkdecisions.
MarsdenandFrench(1998)lookedatIPRPinthepublicsectorandfoundthatonlyfora
minority(betweenatenthandathirdofstaffdependingontheorganisation),hadPRP
servedasanincentivetoworkharder;fortheremainder,ithaddamagedworking
relationshipsandhinderedteamworking.Makinson(2000)studiedperformancepayin
thecivilserviceandconcludedthatsuchpaysystemscouldbediscriminatory,thatthe
lowlevelofawardsfailedtobemotivationalpartlybecausethedifferentialsin
performancepayweresonarrow.HealsoarguedthatIPRPmadelittlesensewhere
individualsallworkedtocommongoals.Heproposedteambasedpayforthesegroups.
Makinsonscritiquehadsomeinitialimpactonthepayreformprocessinthecivil
service.Teambasedpaywastrialledinanumberofdepartments,butatavery
aggregateleveland,asaconsequence,wasfoundwanting.Theuseofnonconsolidated
bonusestorewardindividualperformancehas,however,becomeafeatureofmany
departmentspayarrangements(IDS2004).
AsDavidMarsdensays,publicsectorstaffdonotalwayshavethesamecleargoalsas
thoseintheprivatesector,withtoomanyconflictingprioritiesthroughtryingtoserve
toomanymasters.AsReilly(2003b)says,itisnoteasyincentivisethepolicetocatch
morecriminals,CustomsandExciseofficerstoincreasetheirdetectionrateor
ambulancestogettoaccidentsmorequickly.Atargetcanbeset,butcareneedstobe
takenovertheprocessofreachingthegoal:thepublicmightcomplainaboutover
enthusiasticpolice,customsorotherpublicservants.
Althoughthereisevidencethatatleastsomeprofessionalgroupschoosetoworkinthe
publicsectorbecauseitisavocation,thisdoesnotmeanthatpublicsectorworkersare
uninterestedinthelinkbetweenperformanceandreward.ResearchfortheCIPDby
Guest(1999)suggeststhereisacomplexprocessatwork.Hisstudyfoundthat40%of
respondentsdidnotbelievethattheywerefairlyrewardedfortheefforttheyputinto
theirwork,whilehalfthoughtthatthepossibilityofmoremoneywouldmotivate.The
otherhalfsaiditwouldmakenodifferencetothem.TheseresultsbearoutinIESfocus
groupdiscussions:thereseemstobeasmallminorityopposedtoalinkbetweenpayand
20
performancebutalargeproportionsittinginthemiddlethinkthat,asaprinciple,those
whoworkharderorcontributemoreshouldbebetterrewarded.Theproblemtheyhave
iswiththeskillsofmanagerstoexercisetheirjudgementinafairandconsistentmanner;
theyfearfavouritismandignorance.
Private sector
Fromacertainperspective,whetherornotIPRPmotivatesisnotnecessarilythekey
questionformanyprivatesectoremployers.IPRPisviewedasanimportantvehiclefor
communicatingcorporategoalsanddeliveringresults.Furthermore,intimesofrapid
economicchangeandincreasedbudgetaryrestraints,theyneedtheflexibilityafforded
byIPRPandtheabilitytotailordifferentialpayincreasestoretainkeystaffthegolden
handcuff.
Butthisisageneralisation,andanassessmentofwhetherornotIPRPissuitablemust
takeaccountofarangeoforganisationalfactors,includingthetypeofworkbeingdone.
Forexample,Deathridge(2002)saysthatcallcentresareideallysuitedtoPRPschemes,
largelybecausetheindustryreliesonalmostcontinuousassessmentofharddata,such
asabandonedcalls,speedofanswer,talktimeandtotalwraptime,whichprovidea
regularandobjectivemeasureofindividualandteamperformance.However,the
introductionofPRPisnotascommonasonewouldsuppose.Noeticas2002survey
foundthatonly11%ofmanagersusedperformancerelatedpayasamotivationaltool.
IRS(2006e)found,initsannualsurveyofthesector,thattheuseofmeritawardsare
widespreadincallcentres,althoughjustoveroneinfive(22%)ofemployersawardeda
payrisetoemployeessolelyonthebasisoftheirperformance.Amorecommon
approachwastocombinethisapproachaspartofawiderrewardstrategy,forexample
bycomplementingIPRPincreaseswithanacrosstheboardrise.Ofcourse,the
availabilityofappropriatemeasuresshouldnotbetheonlyconsiderationwhen
introducingPRP.Jobdesign,andspecifically,theexistenceofsufficientdiscretionin
howjobsaredoneforemployeeefforttomakeasignificantdifferencetoperformance,is
critical.Therelativeroutinisationofsome,butnotall,callcentrework,maygive
employeeslittlechoiceinhowtodotheirjobs,thusreducingthepossibilityofPRPto
haveanimpactonperformance.
Segmentation
IfIPRPworksmoreeffectivelyforsomegroupsratherthanothersthenitwouldbe
worthconsideringvaryingitsintroductiontosuittherangeofemployeetypes.Theycan
begroupedbygradeanditiscommontotreatexecutivepay,atleast,differentlyfrom
lowerpaybandsorbyoccupation/function.Optionsforreflectingdifferentapproaches
include:
excludingsomeoccupationsorgradesfromIPRPaltogether
limitingthesizeoftheIPRPbudgetforcertainoccupationsorgrades
restrictingtherangeofawardsforspecifiedoccupationsorgrades
21
givingincentivesinbothbaseandvariablepayforthoseforwhomIPRPwillwork,
butforotheroccupationsorgradeslimitingperformancerewardto,say,justbasepay
WhereparticularoccupationsorgradesareexcludedfromIPRPorincludedina
restrictedmanner,considerationshouldbegiventosomeformofcompensatoryreward,
egparticipationinteambasedpayorinarecognitionscheme.
ManyHRpractitioners(especiallyinthepublicsector)mightrecoilfromsucha
variegatedapproachtopaybecausesomuchemphasisisputonfairness(thatisinfact
uniformity)andconsistencythatrequirescommonality.Butifthepointistomotivate
staff,ratherthantohavestandardisation,thenthemeansshouldbechosenthathasthis
effect.
Customer service roles

OneoftheearlycriticismsofIPRPwasthatablinkeredfocusontheachievementof
objectivesharmedthequalityofcustomerservice.Thisisbasedonthepremisethat
purelyusingoutputstodrivepayisriskyinthatitcanleadtoinappropriatebehaviours.
Butsomecustomerservicecentresareovercomingthisproblembyincorporatingboth
quantitativeandqualitativeaspectsofservicedeliveryintotheirPRPschemes,or
combiningmeritpaywithotherformsofrewardsuchasrecognitionschemes.Asurvey
bytheCIPD(2005)ofrewardincustomerserviceoccupationsfoundthatorganisations
withthehighestlevelsofcustomerserviceusedthefollowing:
individualperformancerelatedpay
performancejudgedagainstcustomersatisfaction,notjustproductivity
teambasedcommunication,rewardandrecognitionschemes.
Case study
The Carphone Warehouse
The companys corporate pay philosophy is to reward employees for superior performance. The core
individual performance award is awarded on the basis of both quality and productivity criteria:
SOLVE the quality of service the employee provides to the customer connecting with the
customer, exploring their needs, making a recommendation and delivering on the CPW Promise of
service. This quality score takes a weight of 50% of the core bonus.
Adherence adherence to the schedule which accounts for 25% of the bonus.
Not Ready the time employees are not ready to take calls due to administration or note-taking
tasks (25% of the bonus).
Those employees who achieve 100 per cent core bonus for six months also receive a continual
achiever bonus (IDS 2005a).
22
Sales roles
TurningtosalesstaffArmstrong(1999)notesthatthenatureofsalesmeansthat
rewardshavebeenmoreresultsdriventhanforotheremployees,withfinancial
incentivestypicallyformingacorepartoftheiroverallrewardpackage.Variablepay,or
payatriskhasalsobeenakeyfeature.However,thisdoesnotmeanthatPRPtypically
takesquitethesameformforsalesstaffasforotheremployeegroups,orthatthesame
motivationaltheoriesunderpinthisformofperformancebasedreward.Performance
targetsforsalesstaffareoftenvolumebased,andtheirpayreliant,todifferingdegrees,
onsalesvolume.However,RyalsandRogers(2005)pointoutthatsellingisonlyasmall
partofthejobforanincreasingproportionofemployeesinvolvedinthesellingprocess
andagrowingnumberofaccountmanagersneedtolookafterallofacustomersneeds
(SuffandReilly2006).Therefore,thesameissuesaffectingtherelationshipbetween
customerserviceandPRPforcallcentrestaffmustbetakenintoaccountwhendesigning
appropriatepayprogressionstrategiesforsalesstaff.
Knowledge workers
GiventhebroadlyacceptedviewthattheUKhasmovedtowardsaknowledgedriven
economy,thereareimplicationsforhowknowledgeworkersfirstusedbyDrucker
(1998)todescribeanemployeewhoaddsvaluebyprocessingexistinginformationto
createnewinformationthatcanbeusedtodefineandsolveproblemsarerewarded.Of
course,usingthisdefinitionmeansthatlargesectionsoftodaysworkforcecouldbe
describedasknowledgeworkersand,withinthisbroadcategorisation,itisimportantto
differentiatethedistinctgroupsofexpertworker.Thereisaconsensusthatknowledge
workershavearangeofspecificqualitiesandexpectationsoftheemployment
relationshipthatsetthemapartfromotherworkers.Forexample,researchpublishedby
theCIPD(2004)foundthattheyarenormallyambitious,upwardlymobileandtheirkey
focusiscareerprogression.Inlinewiththisfinding,theresearchersalsoreportedthat
knowledgeworkersarenotsomuchconcernedwithfinancialrewardaswithvarious
nonfinancialrewards.Forexample,theopportunitytoattendaconference,keepupto
datewithdevelopmentsintheirfield,orundertaketrainingwasoftenhighlyvaluedand
linkedtogettingfullsatisfactionfromthejobitself.
Asaresult,effectiveremunerationpackagesforknowledgeworkerstendtocombine
bothfinancialincentivesandnonfinancialrewardandrecognitionpracticesinatotal
rewardapproach.Financialrewardsshouldcompriseamixoflongandshortterm
incentives:PRPintheformofbonusesforachievingaspecificgoal,forexample,could
giveimmediateimpactanddeliverimmediatesatisfaction,althoughthereisacounter
viewthatoutputbasedincentiveschemesmayfailtoengageknowledgeworkers.
ThompsonandHeron(2006)analysedconnectionsbetweendifferentdimensionsof
HRMandinnovativeperformanceforR&Demployeesinscienceandtechnology
industries.TheyfoundthatperceptionsofPRPbeingdeliveredwerepositively
associatedwithorganisationalcommitmentbutnegativelyassociatedwithinnovative
performance.However,thiscouldbeinterpretedasinnovativeemployeesperceiving
theirperformancerelatedrewardstobeinsufficient.
23
OneofthebiggestchallengesinapplyingIPRPtoknowledgeworkersisthatthenature
oftheirworkcanmakeitdifficulttomeasureobjectively.Touseanextremeexample,
thismayinpartexplainhowPRPworksforthesalesforceandnotaswellforresearch
scientistssalesresultsareunambiguous,whereasresearchoutcomesmaybecomplex.
Someorganisationshaveincludedknowledgesharingorknowledgedevelopmentasa
specificobjectiveundertheperformanceappraisalprocesssothatschemesrefertoboth
inputsandoutputs(SuffandReilly2005).Forexample,CapGeminirevampedits
performancereviewprocesstosupportknowledgesharingandallstaffareassessedon
knowledgemanagementgoals.EnterpriseOilalsointroducedacompetencybased
performanceappraisalsystemandallstaffhadatleastoneobjectiverelatingtothisarea
(IRS2000).Aswithallstaff,butparticularlyknowledgeworkers,attentionhastobepaid
todevelopinggooddecisionmakingprocesses.Proceduraljustice(howdecisionsare
made)islikelytobemoreimportantthandistributivejustice(howrewardsare
allocated).Financialrewardsmaybeimportantintermsofhowtheyconveystatus,but
maynotbesufficienttomotivateorretain.
Continuing challenges
PRPdeliversinsufficientreward
Acriticismthatisoftenlevelledatmeritpay(andadvanced,aswehaveseen,byequity
theorists)isthat,intimesoflowinflationorpayrestraint,awardsaretoosmalltobe
motivational.NearlythreequartersofrespondentstotheCIPDsurveyfeltthat
performanceawardspitchedatamedianof4%fornonmanagerialstaffand5%for
seniormanagersweretoolowtobemeaningfulasamotivator.Richardsonsevidence
(1999)isthatwhilstthreequartersofmanagersinhissurveybelievedthatIPRP
improvedorganisationalperformance,theirbiggestproblemwasthesmallsizeofthe
award.USresearchershavecometothesameconclusion.EdLawler(1990)hasmadethe
pointthatmeritpayisoftentoosmalltomakeadifferenceand,morepositively,
Appelbaumetal(2000)haveclaimedthatwhereenoughmoneyisprovidedandreward
isproperlydifferentiated,meritpaysystemsaresuccessful.Theimplicationsfor
organisationsarenottorelytooheavilyonpayasaprimarylevertomotivate
employees,sincetherewillbetimeswhentheyarelikelytohaveinsufficientresourcesto
achievesatisfactoryimpactwithfinancialreward.
PRPcandamagecreativityandintrinsicmotivation
AccordingtoDeciandRyan(1985),financialincentivesdemotivatetheintrinsically
motivatedand,moreover,oncethebehaviourbecomeslinkedtothereward,itisnot
performedwithoutthatreward.Plansthatarecontingentonbehaviourwillencourage
theprescribedbehaviourandstifleinitiation,saysDeci.Amabile(1998),supportingthe
viewthatPRPreducescreativity.However,othershavesuggestedthattheseproblems
shouldnotbeoverexaggerated.ForJenkins(1998)thenegativeeffectsontaskinterest
andcreativitycanbedealtwith,whilstthepositiveeffectsonthequantityofoutputcan
beenjoyed.Moreboldly,GeorgeBakerhasarguedthatplansthatrewardresultsare
likelytostimulateinnovation.Amorenuancedpositionisthatfinancialrewards
24
decreaseintrinsicmotivationinhighcontrolcultures,butincreaseitinhigh
communicationculture(Ryan,MimsandKoestner).Thissuggeststhatpayisa
supportivebutnotprimarydriveroforganisationalcultureandthatsystemsmustbe
developedtakingintoaccountotherelementsoftheoverallHRsystem.
PRPworkswellwithtopperformersbutnotwiththebulkofstaff
Thisisthezerosumargumentmadeearlier:whilstaminoritybenefitsfromPRPitisat
theexpenseofthemajority.WorldatWorkresearchsuggestedthatintwothirdsof
organisationsPRPbroughtnochangeinemployeeengagementforaverageorlow
performers.Abetterresultwasachieved,asonemightexpect,withthetopperformers
(57percentweremoreengaged).Suchresultsleadsomemanagerstomitigatetheeffects
ofPRPbynarrowingthedifferentialbetweentopandbottom.Indeed,LynetteHarris
hassuggestedthatoneofmanagerskeyobjectivesistomaintaintrustandrelationships
withstaff,soIPRPisoperatedtomaintainequitynotrewardhighperformers(2001).Of
course,oneconsequenceistheproblemdescribedabovesmallincreasesforthebest
performers.
Lackofemployeesupport
Aswehavedescribed,PRPisnotsowellacceptedinthepublicsectorastheprivate
sector.Itcanbearguedthatemployeescanrecognisedifferencesinperformanceand
maywanttodifferentiallyrewardthosethatcontributemore.Theproblemisthateither
theydonotagreewithmanagementonwhatconstitutesgoodperformance(perhaps
emphasisinginputsoveroutputs)and/ortheydonottrusteitherthecompetenceor
integrityofmanagerstomaketherightdecisions.Itiscertainlysalutarytorecordthat
only35percentofemployeesinaHudsonSurveybelievedthatperformanceismore
importantthantenureindeterminingtheirpay(CompensationandBenefitsReview,
2005),andthathalfofmanagersinaMercersurveybelievedthatemployeesdidnotfind
theirIPRPschemeseitherfairorsensible.Thesameproportionfeltthattheseschemes
broughtlittlevaluetothecompany(CompensationandBenefitsReview,2003).Surveys
tendtofindthatemployeesoverwhelminglysupportPRPinprinciplebutthen
withdrawitrapidlywhentheyseeschemesoperateinwayswhichtheyperceiveare
unfairordeliversmallrewards.ManagingexpectationsaboutwhatPRPcanandcannot
deliveristhereforeacriticalroleformanagersinthedesignandimplementationprocess.
Isperformanceassessmentwithoutrewardsufficient?
Ifatleastsomeemployeeswillnotbemotivatedbyreward,thenisthereanargumentto
limitPRPtothoseoccupationalgroupswhereapositiveeffectcanbeexpected?Latham
andLockesresearchwithlumberjacksandWestsresearchwiththeNHSsuggestthat
simplysettingworkgoalsandgivingfeedbackonperformancemaybesufficientto
improvecontributionlevels.However,thereiscontraryevidencefromCanada.AYork
Universitystudyshowedthatthosewhoreceivedperformancefeedbackandhada
linkedrewardweremoresatisfiedwiththeirpaythanthosewhohadnoperformance
appraisalorPRPnotlinkedtoappraisal.
25
Overcoming the challenges

MostoftheavailableresearchincludingthatcarriedoutbyKesslerandPurcell(1992)
indicatesthat,wherePRPfails,itismoretodowiththeschemesimplementationand
managementthanPRPperse.Thisisassuming,ofcourse,thatPRPisnotregardedasa
universalsolution,isappropriatetotheneedsoftheemployeegroupandcorporate
strategy,ispartofanintegratedrewardstrategythatdoesnotrelyonPRPastheonly
motivator,andisnotdiscriminatory.Theseissuesshouldbetackledthroughthe
schemesdesign:rewardneedstobesegmentedtoensurethatthedesiredoutcomesare
encouragedtosuittheparticularneedsofdifferentemployeegroups,forexample.For
anyrewardscheme,thereshouldbeclosecongruencebetweenorganisationaland
employeeinterests,andahighleveloftrustinthecompetenceandintegrityofmanagers
whoarechargedwithmakingrewarddecisions.ForPRPschemes,itislogicalthat
biggerincentivesareavailableforthoseemployeeswherethelargestvariationsin
performancearepossible.
ButitishowPRPschemesareintroducedandmanagedwithinorganisationsthatwill
ultimatelydeterminetheirsuccessorfailure.Armstrong(1999)identifiesthefollowing
successfactorsnecessarytomakePRPwork:
definetheobjectivesofthescheme
ensurethatthemethodofoperationwill,sofarasthiscanbejudged,achievethose
objectives;accountshouldbetakenofthelessonsprovidedbyexpectancytheory
communicatethepurposeoftheschemeandhowitworkstransparencyisessential
involveasmanypeopleaspossibleindevelopingthescheme
developacomprehensiveperformancemanagementprocess,againinvolvingstaff
traineveryone(staffaswellasmanagers)intheskillsandprocessesnecessarytomake
performancemanagementeffectivethisshouldincludepracticeandtrainingin
objectivesetting
iftheschemeincludesratings,defineeachofthelevelsascarefullyaspossibleand
issueguidelinesontheirapplication
trainmanagersinratingperformancetoensurethattheyunderstandwhatisinvolved
andgainfamiliaritywithwhatthedifferentlevelsmeanbyreferencetorealexamples
issueguidelinesonhowjudgmentsonPRPincreasesshouldbemade,whetherornot
ratingsareused
provideonetoonetuitionformanagersonratingandpaydecisionprocedures
monitorratingsandpaydecisionsagainsttheguidelinesandprovideadviceon
dealingwithinconsistenciesordoubtfuljudgments.
26
Performance management
AsArmstrong(1999)says:Youcanpayforperformanceonlyifyoucanmeasure
performance,anditisoftendifficulttoapplyappropriatemeasuresthatcanbeused
fairlyandconsistently.Accordingtohim,theobjectivesettingandreviewprocesses
associatedwithperformancemanagementcanmakeatleastasmuchimpacton
performanceasPRP.Ofcourse,notallPRPschemesrelywhollyonperformanceagainst
objectives,butwhicheverthebasisforthereward,performanceisbeingassessedin
someformoranother.Aneffectiveperformancemanagementsystemthereforeliesatthe
heartofIPRP.
Overthepastdecade,adifferentconceptofperformancemanagementhasemerged,
withanemphasisonmultidirectionalandbottomupinvolvementandperformance
improvement,ratherthantopdownperformanceappraisalandcontrol(Brownand
Armstrong,1999).Centraltothisapproachistheideathatperformancemanagement
shouldinvolveacontinuousprocessoftwowaydiscussionanddevelopmentthatseeks
toincreaseskillacquisition,aswellasrewardtheachievementofagreedobjectivesand
contributiontobusinessgoals.ArmstrongandBaron(2005)refertoperformance
managementasacyclethatconsistsofaseriesofinterconnectedbutnotnecessarily
successiveprocesseswhichtakeplacethroughouttheyearandwhichoverlapsuchas
performanceplanning,definingexpectations,objectivesetting,reviewingperformance,
providingfeedback,assessingperformanceandratingperformance.
Case study
ScottishPower
A new pay structure based on job families and performance management was agreed for Scottish
Power employees within its Energy Retail Division, a key driver of which was to recognise high
performance. Annual increases and pay progressions are based on individual performance, and
integral to the new system is the introduction of a new performance management framework that
establishes an explicit link between performance and pay. Bedding down of the new performance
management scheme is regarded as a crucial element of the new integrated pay arrangements. The
performance management process is based on quarterly reviews, and a final annual performance
appraisal. Objectives and associated priorities are jointly determined and agreed at the beginning of
the performance management process. All objectives are set using the SMART (specific, measurable,
achievable, relevant and timebound) criteria. These objectives provide the framework of measurable
performance standards for individuals to work towards within the agreed timescale. Objectives
should be reviewed regularly to ensure they remain relevant and may need to be changed by
agreement to reflect changes in the working environment and business priorities. The aim of the
quarterly reviews is to ensure that individuals are provided with adequate feedback on their
performance, with a review of objectives. The annual performance appraisal incorporates: a review
of previously agreed objectives, taking into account any changes in circumstances during the review
period; a review of performance against agreed objectives; an agreed rating; the drawing up of a
development plan; and the setting of objectives for the following year (IDS 2006).
27
Transparency and communications

AccordingtoBrownandArmstrong(1999),theclarityandcommunicationofscheme
objectives,generallylinkedtobusinessstrategyandgoals,werefoundtobeakey
differentiatorbetweensuccessfulandunsuccessfulperformancepayschemes.
Transparencyandcommunicationaregoldenprinciplesforthesuccessful
implementationofanyrewardschemebutinPRPschemes,wheresomeindividuals
receivehigherawardsforsuperiorperformance,theimportanceofcommunicatingthe
rightmessagestoemployeescannotbeemphasisedenough.
Case study
Yorkshire Water
Yorkshire Water overhauled its PRP system and performance management process following
employee and trade union perceptions that it was unfair and, according to the Unison official, was
used, by managers as a big stick to punish employees who stepped out of line during the year. The
company also undertook research revealing that the distribution of awards was skewed in favour of
higher-paid staff. As well as aiming to increase motivation and be affordable, one of the main goals
of the new system was to be trusted by employees. The new scheme was developed and refined by a
number of working groups, including trade union and employee input. Yorkshire Water established a
separate team to manage the communications process prior to the new schemes introduction. It
concentrated on a number of key messages, initially explaining why a performance management
system was necessary. A number of media were used, including internal publications, team briefings
and roadshows and two-hour joint trade union and management presentations to all staff prior to the
roll-out. As a result of the joint communications effort, the Unison official says that employees now
fully understand the companys pay arrangements. To ensure fairness and transparency, the company
publishes the size of quarterly bonus payments in advance and objectives are agreed jointly with
employees in advance. The company is keen to ensure there is a clear line of sight between an
employees performance in any particular quarter and the receipt of the bonus (IRS 2005).
Case study
Airbus UK
In 2005, Airbus UK introduced a revised pay and grading structure for technical and professional staff
in its aircraft engineering and wing assembly plant. A major objective of the revised scheme was to
devise a new set of arrangements which would reward good performance and relate pay to the
market, at the same time as meeting union members concerns over fairness, consistency and
transparency. Under the previous, merit-based scheme, the unions had come to oppose the merit
budget on the grounds that the decision to award merit increases was subjective. As a result, no
performance increases had been allocated since 2001. Before drawing up its proposals, the project
team undertook a significant amount of research and visits to other companies to seek their views
all those visited emphasised the importance of communication and training to ensure that any new
28
pay structure is consistently applied. As part of the implementation of the new pay progression
system, Airbus UK put in place a grandfathering process whereby the managers manager reviews
the outcomes of the performance reviews to support as objective an approach as possible (IDS 2005b).
Role of line managers

AkeyelementoftheidealPRPmodelisthatresponsibilityandownershipofthe
paymentsystemshouldbedevolvedtolinemanagers.ButArmstrong(1999)saysthat
PRPputsmuchgreaterpressureonlinemanagerstopossessandexerciseskillsin
agreeingobjectives,providingfeedback,conductingperformancereviews,andratingor
assessingperformance.Ifthesetasksarecarriedoutbadly,PRPislikelytodemotivate
employeesbecausetheywillperceiveitasbeingoperatedunfairlyandinconsistentlyby
incompetentpeople.AccordingtotheCIPD(2007),oneissuethathasbeenaconstant
refrainforanumberofyearsisconcernoverfrontlinemanagers:Dotheyhavethe
attitudes,skillsandknowledgetomanageperformancebasedawards?No,ifyouask
manypayprofessionals,saystheCIPD.Accordingtoitsresearch,mostfrontline
managerssupportthepropositionofdifferentiatingrewardaccordingtoindividualor
collectiveperformancewhatthosefrontlinemanagershaveproblemswithisthatthe
performancemanagementandrewardprocessisoftendevelopedinsplendidisolation
bytheHRdepartment.Theprocessofrewardingperformanceissomethingthatis
thereforedoneto,ratherthandonewith,linemanagers.Theimplicationofthisisthatit
ismoreeffectivetodesignrewardprocessesaroundthecapabilityoflinemanagers,
involvingtheminthedesignandintheassociatededucationandcommunication
programme,ratherthanimposingthepolicyandrequiredtrainingonthem.
JustastheefficacyofaPRPschemetypicallydependsonthesupportingperformance
managementsystem,sotheperformancereviewframeworkisonlyaseffectiveasthe
linemanagerswhooperateitonadaytodaybasis.Theneedformutualtrustbetween
appraiserandappraiseeiscrucial:theindividualbeingreviewedisunlikelytoprovidea
candidassessmentoftheirownperformanceunlesstheytrusttheirlinemanagernotto
takeadvantageoftheirhonesty.Wheretheappraisaloutcomeinfluencesreward
decisions,asisoftenthecaseforIPRP,thereisalwaysthetemptationforindividualsto
overestimatetheirperformance,placingthelinemanagerintheuncomfortableposition
ofhavingtoscalebacktheappraiseesassessment(Suff2001b).
OrganisationsimplementingIPRPneedtopayparticularattentiontothecompetenceand
confidenceoflinemanagersindealingwithdifficultperformanceissues.Aswellas
havingthetrainingframeworkinplacetoensurethatlinemanagersunderstandandare
committedtotheperformancemanagementprocess,organisationsoperatingIPRPneedto
makesurethattheseguardiansofthesystemareabletodifferentiatebetweendifferent
levelsofperformanceandareabletoprovidefeedback.Linemanagersneedtohavethe
softermanagementskillsinordertoconvincepeoplethattheirpaydecisionsarefairand
unbiased.AccordingtoArmstrong(1999),byallmeansdevolveasmuchaccountabilityto
managersformakingperformancepaydecisionsaspossible,butprovidereasonablyclose
helpandguidance,andinvolvemanagersindevelopingPRPtoensureownership.
29
Case study
Rail Europe
Rail Europe has operated a PRP system for over five years. All employees go through performance
reviews to achieve a performance rating and this rating determines any pay increases for the coming
year. Line managers conduct reviews for their own teams, and to ensure consistency, all managers
then discuss all employee ratings with their own line manager. The key to the PRP process is, in the
HR advisers view, consistency. In her view, some employees will always think that they are
performing to a higher standard than they actually are. Alongside this, one manager will have a
different view to another on what constitutes good or great performance. Therefore, the HR manager
and call centre manager sit down and go through each individual award to ensure consistency (IRS,
2006e).
30
Conclusions
Performancerelatedpayisnowafirmfixtureofmanyorganisationsrewardstrategies
and,intherightcircumstances,itcanformaneffectivemotivationaltool.ButPRPisnot
aquickfixandwillnot,onitsown,actasalevertoimproveindividualperformance
andorganisationaleffectiveness.IfPRPistobeusedtobesteffect,organisationsneedto
reflectonthosesituationswhereitdoeshavethepotentialtoenhanceemployee
motivationandimproveproductivity.PRPtendstobemoreappropriateforrolessuch
assalesstaffthatlendthemselvestothemeasurementofoutputs.Itmaybedifficultto
applyobjectivebasedPRPtoknowledgeworkers,forexample,manyofwhomworkon
longtermprojectsthatdonotnecessarilyhaveobvious,quantifiableoutputs.Thismakes
thesettingofobjectivesandtheassessmentprocesschallenging,anddifferentialawards
maybedifficulttojustify.Withthequalityofcustomerservicenowfrequentlyforming
thekeydifferentiatorforcompetitiveedge,thereisgreateracknowledgementthathow
thejobisdoneisasimportantastheachievementofobjectives.Theassessmentof
competencies,aswellastheachievementofperformancetargets,providesamore
roundedviewofanindividualscontributiontobusinessgoals.Thus,many
organisationsnowassessperformanceonthebasisofbothinputsandoutputs,reflecting
themovetocontributionrelatedpay.
Anyrewardapproachneedstoacknowledgethatindividualstendtobemotivatedby
differentthings:remunerationarrangementsthereforeneedtobetailoredtomeet
individualdifferencesasfarasispossible.Thereisagreaterrecognitiontodaythat
moneyisnottheonlymotivatorand,formanyworkers,thejobitselfandelements,
suchasteamwork,careerprogression,goodcommunicationsandrecognitioncan
engenderlongerlastinglevelsofengagementandcommitment.Thisapplies,in
particular,topublicsectorworkerswhereitcanbeproblematictoapplyIPRP.Aside
fromthemoretheoreticalobjectionsforexample,thatpayingforperformancegoes
againstthegrainofthepublicsectorethositisnotstraightforwardtosetcleartargets
giventhepotentialpoliticalimplicationsforsomegroupsofpublicsectorworkers.
Wheremoneyisusedasakeymotivationaltool,thereshouldalwaysbeaclearlineof
sightbetweentheeffortexpendedbytheemployeeandthefinancialpayment.A
particularproblemwithIPRPisthat,attimesoflowinflation,theawardisnot
31
significantenoughtoeffectivelymotivatepeople,andwiththepublicsectorpay
restraints,thismakesanincentivebasedPRPschememoredifficulttoachieve.
IPRPputsconsiderablepressureonlinemanagerstomanageandassessperformance:
whereIPRPfails,itisusuallymoretodowiththeschemesimplementationand
operationthanitsdesign.Criticalsuccessfactorsincludetheneedforclearobjectives,
transparency,goodcommunications,aneffectiveperformancemanagementsystem,and
trainingforeveryonebutespeciallylinemanagers.TheCIPDhasexpressedconcernthat
mostfrontlinemanagerslacktheskillsandcompetencytomanageperformancebased
awards.Itisessentialthatlinemanagersarecompetenttodifferentiaterewardaccording
toindividualperformancelevels,andareabletofosteranemploymentrelationshipwith
theirstaffbasedonmutualtrust.Thisunderstandingwillsetthecontextwithinwhich
discussionsoverperformance,includingunderperformance,canbeconductedina
positiveway.Ifnotmanagedproperly,thereisarealriskthatIPRPwilldemotivate
peoplewhohaveoverestimatedtheirownlevelofperformance.Linemanagers
thereforeneedtobeinvolvedfromtheinceptionstageofanyPRPschemeiftheyareto
ownitandiftheschemeistobesuitedtotheircapabilitiesasmanagers.
32
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000new Trends in Performance-Related Pay

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Paying for Performance

New trends in performance-related pay

The Institute for Employment Studies

The IES Research Networks

Institute for Employment Studies

Paying for performance

Is PRP alive and well?

Institute for Employment Studies

Paying for performance

Motivation and reward

Institute for Employment Studies

Expectancy theory and pay satisfaction

PRP and fairness

Paying for performance

Does PRP work?

Institute for Employment Studies

Paying for performance

Kaufman,1992citedinTamkin P,Giles L,Campbell M,HillageJ(2004),SkillsPay:TheContributionof

Institute for Employment Studies

Provides a direct incentive

Reduces pay equity

Tangible means of recognising achievement

Contaminates development aspects of performance

Generates a performance culture

Improves goal setting

Demotivates if goals are too hard to achieve

Improves individual performance, productivity,

Relies on quality of line managers assessment

Focuses employees on improvement

Undermines cooperation and teamwork

Rewards best performers

Focuses attention on activities (often short-term

Can support organisational change

Raises expectation of continual payout

Identifies poor performance

Does not work well (in terms of motivation) in low

Flexibility may help retain valued staff

Awards may be seen as arbitrary

Paying for performance

Institute for Employment Studies

Paying for performance

Institute for Employment Studies

Suitable conditions for PRP

Paying for performance

Institute for Employment Studies

Table 2: A comparison of PRP and contribution-related pay

Pay for contribution

Instrumentalist, people as costs

Commitment, people as assets

Pay for results (the whats),

Multi-dimensional, pay for results

Financial goals; cost efficiency

Broad variety of strategic goals;

Multi-level: business, team,

Uniform merit pay throughout

Diverse approaches, wide variety of

Past performance and contribution

Past review and ratings focus; topdown; quantitative

Mix of past review an future

Foxed formulae; matrix

Looser, more flexible linkage;

Owned/operated by line managers

Face-to-face; open; high