Advantages and Disadvantages of Performance Related Pay

Report Abstract

Purpose

This report will look into the key advantages and disadvantages of introducing performance related pay into Next retailing and the effects it may have on the motivation and performance of the workforce. Recommendations and a planned method of execution based on the findings will then be formed, followed by guide to effectively implement a PRP scheme into the rewards system.

Methods

Secondary research gathered from various sources such as, books, websites, journals and government data provide the information used to compile this report. A survey conducted by the management in a single branch at Next has also been used (with permission) as a secondary source of data.

Results

The results show that although employer's implement performance related pay with the intention to improve motivation and performance, very often it has a negative effect on the workforce. Throughout the report arguments will be provided highlighting the case for a more diverse reward strategy, with the key motivational factors not just encompassing monetary remuneration but also consisting of intrinsic factors tailored to the individual.

Conclusion

Although experts claim many benefits to the introduction of performance related pay, data conducted argues that these positive claims may not always be correct. Individual motivational factors differ from one person to another and an organisation cannot simply rely on money to improve the performance of their workforce.

Contents

Introduction 3

What is performance related pay? 3

Performance related pay at Next 4

Advantages of introducing PRP 4

Disadvantages of introducing PRP 5

The Labour market theory 7

Expectancy Theory 8

Expectancy 8

Instrumentality 9

Valence 9

Conclusions 9

Recommendations 10

Appendix 1 12

Appendix 2 13

Appendix 3 13

References 15

Bibliography 17

Employee Reward

1.0 Introduction

The report analyses the implications of introducing performance related pay into Next PLC. Key arguments for and against the systems are to be analysed and evaluated with relevant recommendations provided. Established in 1982 and trading in more than 500 stores, Next employs over 58,000 people (Next Plc, 2011). Employee performance plays a big part in achieving key operational milestones and targets.

2.0 What is performance related pay (PRP)

PRP is a method of reward that links pay to an assessment of individual performance, measured against a goal or objective. Employers strive to increase performance levels within their staff, to increase sales and performance by linking employee reward to the business objectives (CIPD, 2011).

PRP normally takes form of bonuses over an agreed rate and may be related to the performance of the firm as a whole, a sub-sector, team or individual results. Theorists such as Taylor argue that performance related pay provides motivation for better performance in order to maximise the results for the organisation and it is good for morale as staff are rewarded when profits are higher (Mullins, p. 119 2007).

2.1 Performance related pay model

The main features of PRP are shown in the model below, the fundaments of the scheme is that pay increases are related directly to achieving specific goals or targets. Pay brackets are linked to specific levels or grades, with rewards awarded depending on the achieved category.

Illustration by author, adapted from (Armstrong, p. 171. 2010)

3.0 The current reward strategy

Next utilises a strategy that primarily focuses on the non-financial aspect of reward.

Financial Rewards Non-Financial Rewards

'Competitive' salary Career development

Bonus Schemes Money for staff outings

4 week holiday pay

Twice yearly 75% uniform discount

Healthcare schemes

Pension schemes

Share save scheme

Staff Discount

All non-financial rewards are paid out to employees regardless of individual performance. Their financial bonus scheme relates to how the organisation or store performs as a whole and is awarded based on how many hours an employee has worked during this period.

4.0 Performance related pay in Next

Performance related pay schemes are not widely utilised within Next, with many of the financial reward packages tailored towards higher level management and their ability to meet the individual store targets. Ground level employees receive basic pay levels relevant to their contractual terms, which are non-variable within the organisation.

4.1 The advantages of introducing PRP

By introducing PRP Next can improve workforce motivation. Williams explains that 'with an effective individual PRP system it is possible to create a highly motivated workforce when employees see a close relationship between how they perform and how much they are paid' (PersonnelToday 2001). Increased motivation lowers staff turnover so that high performers are kept within Next, increases morale and benefits the working environment.

While performance related pay is a good system for rewarding the highest achievers, it also functions as