Does Performance Related Pay Increase Productivity?

Introduction

The Performance Related Pay (PRP) method is widely applied in modern business as companies try to increase the employees’ motivation and thus, the general productivity as well. The interconnection between this payment system and productivity has been widely studied by the management community. In the meantime, there is currently no consensus regarding the impact that this method has on the employees’ performance.

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Hence, some experts believe that performance-related rewards serve to be powerful motivation tools that encourage employees to targeted new aims and achieve them successfully (Lucifora 2015). The critics of this method insist on the contrary. Thus, they assume that the monetary-based motivation cannot ensure increased productivity, so the implementation of the PRP is irrational from the long-term perspective (Sundheim 2013). Nevertheless, despite the criticism, more and more companies rely on this payment method to a greater or smaller extent.

The paper at hand is aimed at examining the advantages and disadvantages of the PRP approach from the standpoint of its influence on productivity. It is assumed that despite some natural weakness, the relevant method is generally an effective motivation trigger.

Background

Boeri, Lucifora, and Murphy (2013, p. 213) point out that active implementation of the PRP schemes in Europe began at the end of the twentieth century. This type of pay was initially associated with increased productivity, elevated job satisfaction, and lower turnover. The number of European and American companies that rely on the PRP system has increased significantly throughout the past decade which is explained by the growing popularity of the so-called “high-involvement” management (Lucifora 2015). The ultimate objective of the PRP implementation resides in increasing the employees’ productivity.

The problems of PRP and its impact on productivity have been widely discussed in the scientific community within the past decades. Numerous studies have been carried out to find out whether the targeted positive effect coincides with the real outcomes. A significant contribution to the problem’s examination has been made by an Italian researcher, Claudia Lucifora. In her articles, Lucifora (2015, p. 1) considers the PRP approach from different perspectives putting a particular emphasis on the positive aspects, such as increased motivation, productivity, and improved micro-economic performance. Paauwe (2004, p. 73) likewise focuses on the favorable impact that the PRP has on productivity.

Thus, upon having summarized all the empirical evidence, the author points out the following advantages: better social climate, lower turnover, improved perceived organizational performance and productivity, increased motivation, and others.

In the meantime, it is essential to note that despite the generally positive evaluation of the PRP approach, some criticism might likewise be found. Hence, for instance, Hindle (2009) mentions that an effective PRP scheme is very hard to design as it requires considering the right balance between short and long-term objectives (para. 4). He also points out that the reward-related approach creates an unreliable motivation that is poorly associated with a job commitment.

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The quality of the money related performance is likewise doubted (Sundheim, 2013). Otherwise stated, there are some doubts regarding the rationality of the PRP method. In the meantime, despite all the criticism, the PRP approach is widely implemented in companies all over the world.

PRP Increases Motivation

First and foremost, it should be pointed out that the PRP method is a powerful motivation trigger. The interconnection between motivation and productivity seems to be evident – the more motivated an employee is, the higher his or her productivity is. Hence, every company is interested in designing effective motivation strategies to improve productivity. A reward is commonly regarded as an integral part of such strategies as it is the simplest way to motivate an employee.

Thus, Lucifora (2015, p. 2) notes that companies employ different types of pay incentives to stimulate productivity: individual or team performance pays, and financial participation. In any case, employees receive extra money for showing good performance, working longer hours, etc. On the face of it, the motivating power of financial rewards is determined by the fact that an employee can account for a fixed amount of money instead of vague acknowledgment. Therefore, it is natural that the financial aspect plays a critical role in the motivation process.

From this perspective, the main advantage of the PRP system is that it creates an impression of receiving extra pay. Even though a reward is initially incorporated in the size of the wage, employees believe that their effort and skills allow them to gain more than they are supposed to. Therefore, it is the psychological implication that makes the PRP system so attractive.

PRP Ensures Effective Monitoring

Another argument in favor of the PRP’s positive impact on the productivity resides in the fact that this system allows carrying out effective monitoring. A consistent track of the employees’ progress is vital for the management as it allows pointing out the most critical problems that impede development. Generally speaking, a PRP approach prompts the management to improve their measurement systems as it needs to ensure that a reward is assigned to the right group or person. In other words, managers feel more responsible for consistent evaluation as their mistakes might lead to additional expenses.

Numerous measurement approaches exist that help managers evaluate the progress. However, to monitor the employees’ performance, it is also important that the latter report their actions in the most detailed manner. Hence, with the implementation of the PRP system, employees become more stimulated to fix and report all their achievements as they account for a reward. Therefore, it is easier for the management to point out the most ambitious employees as well as those who are ready to take up extra tasks and work longer hours. Thence, for instance, Lucifora (2015, p. 4) refers to the recent research that revealed an 18% increase in productivity caused by improved co-monitoring associated with the implementation of the PRP model.

Financial Participation Increases Involvement

Employees’ involvement and productivity are closely interconnected. An involved employee is essentially more responsible and focused on the outcomes. Fix-pay systems naturally weaken the feeling of involvement as an employee does not have a chance to realize the cost of every particular action. As long as they are guaranteed to receive fixed payments, they are less interested in increasing sales or enlarging the clientele. They are likewise indifferent to the scope of work they manage to do within a month, as long as the number of completed tasks satisfies the management.

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The PRP approach offers an opposite pattern. Employees receive a chance to monitor the nominal cost of every action or decision. Thus, they feel more responsible for their performance, realizing that its quality determines the size of the reward. For this reason, the PRP approach is most commonly applied to managers (Hindle 2009). The point is that their decisions are particularly important, and managers must evaluate their accountability.

In this case, it is also rational to assume that the PRP system prevents managers from taking risky and thoughtless steps. In the framework of the fix-based system, they are free to take risks as the consequences will not have a direct impact on the income. Within the PRP system, managers have to be more careful unless they want to bear losses.

PRP Decreases Intrinsic Motivation

The criticism of the PRP model is mainly based on the negative character of the motivation that is created in the framework of this approach. Whereas the fact that the PRP approach helps to increase employees’ motivation seems to be evident, the quality of this motivation can be seriously doubted. Hence, it is commonly believed that the motivation that is favorable for productivity should be based on job satisfaction and commitment rather than on financially related motives.

In his article, Sundheim (2013) describes recent research that illustrates that a project involvement and inspiration are the main motivation drivers, whereas “pure monetary gain takes the “interesting factor” out of a job” (para. 7). In other words, it turns out that monetary rewards are insufficient to compose the basis of the employees’ sincere inspiration.

Also, it would be rational to assume that monetary-based motivation is unfavorable from the standpoint of turnover. In case an employee is focused on the money aspect and, at the same time, does not show high job commitment, he or she is hardly concerned about the company’s interests. Otherwise stated, an employee that is mainly stimulated by the money factor is more likely to cross over to a competitor in case the latter makes a more attractive offer.

PRP Increases Burnout and Job-Related Stress

Another argument that contradicts the favorable impact of the PRP on productivity is the associated stress and tension. It is natural to suggest that the management that introduces the PRP system has paid due attention to formulating the rewards conditions in advance. Otherwise stated, a reward is, in a sense, an additional expense; hence, the company will not assign it for anything but will require an employee to show some outstanding results.

Striving to receive the incentives, an employee is likely to work longer hours overestimating his or her health limits. Thus, Lucifora (2015, p. 7) notes that PRP systems often tend to “generate excessive work intensification and psychological stress.” Under that logic, it can be assumed that even if the PRP can assist in improving short-term productivity, the received effect cannot be long-lasting.

Critical Analysis

It is essential to note that the discussed counterarguments appear to be reasonable and grounded. Hence, it is true that the monetary-based motivation cannot ensure strong commitment and sincere inspiration. In the meantime, the implementation of the PRP system does not imply rejecting other motivation tools and methods. Hence, rewards can serve to be additional engagement triggers, while the management should continue working on critical aspects such as job satisfaction, commitment, and other elements that compose sustainable motivation. Therefore, the criticism that relies upon the disadvantages of the monetary-based motivation is irrelevant to the PRP approach as the latter does not suggest that the motivation should base on the incentives exclusively.

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It likewise appears to be reasonable that the employees’ desire to receive more rewards can increase the risks of job-related stress and burnouts. Nevertheless, this problem can be resolved through skillful management. Hence, managers are obliged to set reasonable conditions for achieving a particular reward. In other words, there should be no unlimited incentives prospects, targeting at which employees are likely to overwork considerably. Also, work-related burnout is not essentially associated with the PRP system – in fact, it can appear under any other payment system, in case the management does not make the necessary efforts to take care of its subordinates.

Conclusion

The analysis of the PRP has shown that this payment method has both advantages and disadvantages. In the meantime, it should be pointed out that all the weaknesses of this pay system discussed in the paper can be easily corrected through effective management and reasonable decision making. From the standpoint of productivity increase, this method appears to be highly favorable. Thus, the implementation of the PRP system leads to an increase in motivation; it makes employees more focused on the outcomes and more responsible for the decisions they make.

As a result, it might be concluded that even though the discussed criticism is grounded, it does not imply rejecting the PRP model. The only insight that it implies is that the PRP system is not capable of resolving all the productivity-related problems; however, it can help to improve the situation considerably.

Reference List

Boeri, T, Lucifora, C & Murphy, KJ 2013, Executive Remuneration and Employee Performance-Related Pay: A Transatlantic Perspective, OUP Oxford, Oxford.

Hindle, T 2009, ‘Performance-Related Pay, The Economist. Web.

Lucifora, C 2015, Performance-Related Pay and Labor Productivity. Web.

Paauwe, J 2004, HRM and Performance: Achieving Long-term Viability, Oxford University Press, New York, New York.

Sundheim, K 2013, ‘ What Really Motivates Employees? Forbes. Web.

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