Performance-Related Pay

Performance-Related Pay (PRP) has become a growing trend in the last two decades in many organisations (Cadsby, Song & Tapon, 2007). The concept of performance-related pay was designed as a way to motivate employees and encourage desired behaviour due to individuals being different in terms of their own levels of motivation, drive and initiative. Organisations need to take this into account and set overall targets clear to individuals which are also in line with organisational goals to make sure incentive plans work effectively. Numerous researches have been conducted regarding the issue of the effectiveness of incentive plans. Some management experts suggested that incentives can be a powerful tool to motivate employees (Bennett, 1993) and Vroom’s (1964) expectancy theory indicated that pay for performance provides a direct and explicit link between performance and outcome, which fixed salary compensation does not. However, Author Kohn (1998) contends that money does not motivate employees and is not a substitute for good management. The aim of this essay is to examine the benefits and the costs in implementing performance incentives.

The benefits of implementing incentive plans

Managers have to be familiar with how to use the power of incentives to drive for individual motivation and organisational effectiveness. It can be a highly efficient motivational tool and should be employed under the appropriate circumstances (Bennett, 1993). Most notably, performance-related pay plays an important role in economy downturn. Since companies generally have a smaller amount of capital to allocate for compensation during an economy slowdown, offering salary increases or bonuses in varying amounts to the best performers or the most essential employees would be better than giving everyone an equal but minimal increase to their base pay. By rewarding good workers, it can increase productivity and secure dominance in potentially lucrative markets (Bates, Mirza & Fox, 2003). Although these bonuses may be very small, it represents a promise to the employees that better performance results in better compensation. In addition to this, forward-thinking companies believe that this is the time to capture market share, by doing things that are uncommon in a down economy to gain competitive advantage (Bates, Mirza & Fox, 2003).

Team incentives do motivate

The current trend in organisations is toward less hierarchal and more teamwork based with an increasing emphasis on cooperation among employees themselves. According to Cumming’s (1994) article, it proved that team incentives are really motivational. Given the facts of the manufacturer case, team incentive programs encourage employees to work together to generate ideas for improving operations and to implement changes that they agreed would assist in meeting the incentive goals. Additionally, it helps to reinforce a new attitude among employees in achieving the goals. In an environment where individual contributions are clearly measurable, targets are clear and realistic, and employees can be aligned to focus on a common goal where team incentives are most effective. It is clear that team incentives can work well when there is a group of like-minded people with clear organisation goals working together. This helps to build cooperation and collaboration, as it acts like a glue to make people work together to share their knowledge and get along better.

Drawbacks of team incentives

Despite the fact that teamwork is becoming more widely used in all types of organisation, firms are shifting from individual incentives to collective incentives. Team reward systems are difficult to implement because it can be hard to accurately measure the performance of a team and if the incentive plans are not well designed, it can be demotivating. Employers can recognise special effort by awarding prizes to top performance, but this can also alienate the rest of the team. For instance, if the top salespeople of a team received a really good prize as a reward, there is a potential that the person who comes second and might only be perform a little bit worse, becomes demotivated. However, team incentives can take many forms such as non-cash recognition; it is cost effective, flexible and can gain instant reinforcement. It may cost nothing, but it is powerful tool in motivating employees who see valued in it. For instance, it can be one-off giveaways such as shopping vouchers, team days out of the office, a spa treatment or even a pen. However, unless the rewards trigger the employee’s interests, it may backfire if they do not see value and may possibly damage an organisation’s image.

The structure of an organisation also influences the effectiveness of incentive plans. As per Cumming (1994),