Introduction (357 words)
Performance related pay (PRP) is a reward scheme that links employee performance with pay. It is a process of giving a monetary reward to an individual based on individual, group or organizational performance (Armstrong & Murlis, 2005). The main reasons for PRP are the performance improvement, competitive benefit and equity (Brown, Sturman, & Simmering, 2003). Companies proceed to plan their remuneration schemes around the perception of rewards for individuals who accomplish set targets (Perkins, White, & Jones, 2016). Moreover, researchers have mainly focused the success of the PRP scheme from motivational viewpoint and employees attitude towards PRP implementation.
The significance of this topic relies on understanding how employees attitude might vary depending on internal factors such as companys compensation and benefits. Therefore, investigating employees attitude towards PRP process in company x is crucial for the companies belief that workers are committed to their work and to rewarding them will enhance more value to the productivity (McNabb & Whitfield, 2007). Moreover, PRP scheme is influential in performance improvement, which can benefit the organization (McAdams and Hawk, 1994). Jobs with PRP interest employees of higher capability and encourage employees to deliver more effort (Booth and Frank, 1999).
Aim, Purpose, and Rationale
The study aims to examine employees' attitudes towards the implementation of PRP in a health insurance company. The purpose of the research is to use a case of a health insurance company to explore the views of employees to make appropriate recommendations. Whereas the subject of PRP impacts on organizational performance has been explored thoroughly, only sporadic studies have attempted to examine the attitude of employees toward performance related pay. Moreover, little research has been directed toward the employee perceptions in the insurance industry as much as they have explored other industries such as the retail industry. As employees in the insurance industry mostly thrive on commissions, their perceptions on performance related pay would be of great interest to the insurance companies.
The following research questions guided the case study;
Do employees perceive PRP implementation in the company as a positive aspect?
Do employees perceive PRP implementation in the company as a negative aspect?
Literature Review (2147 words)
Literature is replete with studies involving equity and satisfaction of pay albeit methodologically deficient (Scarpello & Carraher, 2008). Most studies often use salary comparisons as the only determinant of pay equity. Rewarding employees with financial payment based on their performance is known as performance-related pay (PRP). The motive of PRP policy is to enhance the employees behavior, and money is seen as a powerful incentive that controls the workers' commitment to the attainment of organizational goals. Contradicting theorists suggest that money enables employees to gain internal recognition while achieving external status, and others PRP often fails to meet the organizational goals. According to motivation crowding theory, for example, PRP might decrease instead of increasing employees' motivation depending on their perception of the reward. Motivation is likely to increase if the performance pay is seen as supportive. On the contrary, if the employees perceive the reward as controlling it will decrease the motivation. Theories of need such as McClelland's Need Theory, Herzberg's Two-Factor Theory, and Maslow's Hierarchy of Needs suggest that employees are more satisfied with higher-level psychological needs such as recognition, achievement, responsibilities, and advancement while other theories emphasize employees are exercising the right behavior (Hutchinson, 2013).
The focus of this review is to help understand the impact of performance-related pay on employees performance. Relevant articles will be examined to shed light on the background of PRP, the association between PRP and motivation, the various types of PRP, the employee perceptions about PRP, and the effect of related factors on performance pay.
Overview of PRP policy
Many organizations across the world have adopted policies that reward their employees with non-consolidated and consolidated financial benefits. Many managers have argued that offering employees with financial increments based on their performance increased their productivity. Individual performance-based pay has thus become an increasingly powerful motivator of employees.
Individual performance related pay can be defined as a system of rewarding employees based on their efforts to meet organizational goals and objectives. Therefore, the implementation of such a program in an organization would require the establishment of a performance evaluation criteria of the worker against which the individual performance is based (UNISON, 2013). Consequently, the company establishes the appropriate relationship between the level of the reward and performance level of the employee. Individual performance-related pay would also create managerial performance assessment based on the goals of the organization to find the relationship between individual performance and the reward. The fundamental assumption in this framework is that offering rewards provides the link between individual performance and overall organizational performance. If that were to be true, then the higher the rewards the organization gives to the performing members of staff, the higher the corporate performance is expected. Bach and Edwards (2013) argue that to execute an individual performance-related pay, the managers must have an efficient management system to optimize the link between employee performance and organizational performance.
The history of performance related pay had its antecedents in the 1980s when managers in the UK started implementing this system to encourage cultural exchange in their organizations and thus support higher organizational performance (UNISON, 2013). Ever since its inception, individual performance related pay has had its fair share of criticism. However, it has been applied widely since when it was introduced in private companies, and later in public organizations. Atkinson (2011) highlighted the advantages and disadvantages of the PRP system. The greatest advantage is that it offers direct incentives to employees, which can help the worker to gain recognition and a range of beneficial achievements. Studies have provided evidence that PRP indeed increases the rate of staff retention (Carraher, 2011). On the other hand, Atkinson suggests that performance related pay undermines the perceptions of equity and can be discriminatory leading to demotivation of the other employees begging the question whether the demotivation of some employees is well compensated with the motivation of the recipients of the reward.
The Relationship between Performance Pay and Motivation toward Occupational Commitment
Managers are finding motivating their employees one of their greatest challenges. The motivation of workers is considered an integral component of meeting the goals and objectives of organizations. Since motivation is the driving force behind the employees behavior in the organization, it could also be a measure of the level of persistence and effort to the employer. While persistence refers to the degree of commitment of the worker to the company regardless of the challenges the organization might be going through, effort relates to the level of input of the employee into meeting the goals and objectives of the organization (Suff, Reilly and Cox, 2007).
Existing theories of motivation point out that extrinsic reward appeals to the workers to increase the effort in their roles to increase their performance, which would lead to meeting the organizational goals and objectives. This individual PRP is based on expectancy theory and the reinforcement theory. The proponents of the reinforcement theory argue that there is a direct relationship between employee pay and performance. The reinforcement theory explains that PRP fosters the desired employee behaviors such as high performance (Suff, Reilly and Cox, 2007).
The expectancy theory posits that the workers are likely to increase their effort based on the outcomes they value. In other words, an individual would make an effort into something if he/ she expects a reward from the organization based on the level contribution to achieving the set goals. However, the theory suggests that employee compensation should be based on the needs as well as the effort they put into meeting the organizational goals. It can be deduced that a small reward may not encourage the employees to put in more effort, which suggests both qualitative and quantitative dimensions to valence. Therefore, the employees who expect and value monetary rewards are likely to work harder and increase the effort that meets the organization to obtain the PRP (Kobussen, Kalagnanam, & Vaidyanathan, 2014).
Taylor theory used the framework of psychological thinking to deduce that reward encourages the employees to develop the right behavior, while punishment does the exact opposite. He determined that money is the most important motivator to encourage workers to increase their performance at work. Besides, he observed that money plays an integral role in shaping the employee behavior who expect to receive a reward from the organization for meeting the goals (Perry, Engbers, & Jun 2009).
However, Herzberg and Maslow contradicted the need theories above by stating that monetary rewards can create dissatisfaction among the workers. Instead, they pointed out that intrinsic aspects of the employment such as individual recognition, responsibilities, and achievement can create the required employee satisfaction for the long-term. While Maslow acknowledges that Pay is the physiological need employees require fulfilling their basic needs such as clothing and food, other requirements need to be satisfied by the organization to increase their performance level such as self-esteem and advancement (Boachie-Mensah & Delali Dogbe, 2011; Young, Beckman & Baker, 2012). The argument of the need theories is that employees can be motivated primarily by pay. However, this practice is likely to bring about inequality in pay leading to discontentment among the employees. Belle (2015) also suggests that the PRP might affect the achievement of the organizations objectives because the employees will focus only on receiving better or increased rewards. Unless the employee compensation is competitive and equitable externally and internally respectively, the organization is likely to lose some of its talented workers.
The crowding theory of motivation casts aspersions on the role of PRP in motivation (Belle, 2015). According to this theory, rather than increasing employee motivation (crowding in), it may indeed reduce it (crowding out). This effect depends on the individual worker's attitude toward the reward. If the employee feels that the PRP is supportive, then the required motivational force will be generated. On the other hand, if the perception is that the reward is controlling, workers motivation will diminish (OToole & Meier, 2014; Stazyk, 2013).
It can be hypothesized that PRP is a controversial issue even though there seems to be a relationship between performance-related pay and motivation.
Advantages and Disadvantages of PRP Implementation for Employees
Armstrong and Taylor (2014) suggested that the implementation of PRP must be based on critical evaluation of pros and cons of performance related pay. Despite the challenges of PRP implementation,...
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