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There has been substantial growth in the use of performance pay systems over the
past 15 years. While the original performance related pay systems were
concentrated in the private sector, an increasing number of public sector employers
have introduced schemes recently, or are considering doing so.
What is it?
There are many different forms of performance related pay, which may be used on
their own or side by side. Employers may move from one to another. Most common
are:
· Piecework: a price is paid for each unit of output; this is the oldest form of
performance pay.
· Plant or organisation wide incentives: bonus earnings or pay levels are based on
measured quantities or values for the whole establishment.
· Merit pay: bonus earnings or pay levels are usually based on a general assessment
of an employee’s contributions to performance; this is an earlier, less structured
form of the next system.
· Profit related pay: bonus or share options are based on the organisation’s profit
performance; this is widespread in the private sector, where share options are
often important for senior managers. Profit related pay has become less common
since the government phased out tax relief on PRP schemes.
The key to all performance pay systems is the measurement required to determine
the output on which to base payments. The main steps are:
· Setting objectives
· Appraisal results
· Linking achievements to pay (and deciding where the money comes from).
· to introduce more flexible pay systems or deal with recruitment and retention
problems
· in the case of some employers, to give greater power to managers and weaken
trade union influence in bargaining and representation of staff.
Does it work?
The effectiveness of any pay system depends many factors. However, there are some
problems inherent in all performance related pay schemes:
· Staff motivation and moral – A wide range of research has found schemes less
effective than expected. In the public sector this is frequently due to cash limits
making rewards for high performance ratings too small to motivate staff.
Problems of poor training for managers and inadequate communication with staff
have had a negative impact on staff morale. Studies of NHS managers in 1997 and
1998 showed that performance-related pay did not contribute to improve
performance but did cause jealousies between staff and undermine moral.
(Dowling and Richardson, 1997, Marsden and French, 1998).
· Transparency -- The basis for appraisal and how rewards are arrived at should be
transparent at both the individual and collective level.
· Fairness in operation -- There should be a fair and equitable approach to the way
the scheme is carried out for all staff. In competence pay schemes, all staff should
have equal access to training.
· Piloting -- The scheme should be piloted to ensure that it achieves its objectives
and does not operate unfairly.