Performance-related pay, sometimes addressed as merit pay, comparatively is very different from all the earlier incentive methods mentioned above, for the scheme connects itself to the evolution of Management by Objectives to a larger extent. The main goal for PRP is similar to profit-related bonuses, which is to achieve targets, but the particular aims are distinct-the former generally applies to targets relating to individuals whereas the latter tends to focus on groups or even a whole organization ( Cannell and Wood in IPM, 1992).
It is also called merit pay, for in the implementation of such scheme part or all of an employee' basic payment raise is decided principally by the individual's performance which is measured by a number of specific objectives (for instance, sales targets or customer satisfaction) (Marchington and Wilkinson, 2002). PRP thrived well in the last decade and has been demonstrated repeatedly by piles of survey findings to receive support among employees engaged in various jobs in a wide range of organizations (Fletcher in IPM, 1993: 41). Nowadays, near two-thirds of organizations adopt this scheme as one of their main reward strategies. Even in the public sector, such as local government, the Civil service, and more recently, teachers (Marchington and Wilkinson, 2002).
Although based on Armstrong's article in People Management (2000), the teachers' case seems to be an example of failure for applying PRP, yet he also suggested the potential benefits of implementing it, such as acting as a lever of change, improving individual and organizational performance and helping the organization to attract and retain people through financial rewards and competitive pay-the latter may accordingly largely reduce the so-called 'golden handcuff' effect which refers to poor performers staying with employers (1999).
In the book Incentive Pay Impact & Evolution (Cannell and Wood, 1992), PRP is argued to have all the strengths and none of the weaknesses of the other systems in theory. Then is it also invincible in practice?
As Kessler's (1994) review pointed out, there is an important gap between assumptions and reality in those organizations which have introduced IPRP. This fact strikingly contrasts with the claims presented in books about the efficacy of PRP. In the following paragraphs an effort is made hopefully to discover those problematic issues concerning PRP's effect on performance as well as the fairness of operating PRP scheme.
It is widely recognized that PRP is by far the most popular reward scheme which directly links the performance review with the reward review. The influence of PRP on performance, theoretically speaking, must be strong and straightforward. However, certain research into individual performance-related pay in the UK over the past decade has failed to show that such systems have an effect on performance (John Purcell, 2000). Thus, examining the causes of potential problems brought by PRP is necessary and unavoidable.
Firstly, pay fails to motivate. Though no one will deny the fact that money can buy things and services that human being need, there is no evidence for the assumption that people will be encouraged to work better by being paid more. As Frederick Herzberg indicated, too little pay can demotivate people, but it does not mean that more and more money is capable to generate their better performance. In his principle: the real motivation comes from the job, not things like money and the conditions under which they work. People works for satisfaction, for recognition, for pride and for more meaningful things in life, which is in particular applicable to those senior employees. When the salary is high enough, the excess money cannot make people do better.
Secondly, PRP could contradict to team-work performance. It is not difficult to understand that when people are exposed in a competitive surrounding with their colleagues and evaluated individually, great emphasis is more likely to be attached to their own performance goals, and their attention are more easily to be focused on individual targets rather than the team's objective as a whole. Obviously, the possibility for employees to cooperate with and help each other is rather slim. As a result, less commitment and contribution will be involved in the teamwork as well as the organization.
Thirdly, PRP can undermine intrinsic interest in a task. It has long been realized that excessive stress on extrinsic motivation in the form of pay can be detrimental to intrinsic motivation(Deci, 1975). Studies have shown that intrinsic interest which results in optimal performance typically decreases when external reasons are presented for doing it. In fact, a series of studies, published in 1992 by psychology professor Jonathan L. Freedman and his colleagues at the University of Toronto, confirmed that the more incentive we are offered, the more negatively we will view the activity for which the bonus was received (Kohn, 1993: 62).
In short, PRP is inclined to reduce people's enthusiasm about their work, the outcome of which is undesirable performance. Besides, PRP can lead to short-termism. In order to achieve quick profit, it is easy for people to have strong intention on short-term benefits instead of pursuing the accomplishment of long-term strategic goals. It seems that focusing on the former is more practical than striving for the latter.