perceptions of their performance. In addition, people generally are prone to compare their pay to others who are perceived as comparable in performance, but who earn more. Given these tendencies, the odds are good that a significant number of workers will be dissatisfied with their rewards and perceive themselves as unjustly under compensated.
Coping with dysfunctional effects of incentives How can a manager cope with the seemingly inevitable dissatisfac tion that performance contingent rewards will thus produce One ap proach is to reduce the intensity of the pay plan – that is, to reduce the proportion of a worker’s pay that is contingent on performance. This approach also reduces the positive impact of incentives on motivation and performance. Research suggests the most effective way to cope with a worker’s sense of “distributive injustice” – the relative size of re wards – is by establishing “procedural justice” – the process by which the size of the rewards is determined.
Research on the simultaneous impact of distributive and procedural justice, has discovered a fascinating interaction. Workers perceive a high pay level as fair regardless of the process by which the pay level was determined. Workers perceive a low pay level as fair only when the process by which the pay level was determined was fair. In other words, workers tolerated a distribution of rewards that they felt was unfair so long as the process of determining the distribution seemed fair. A proc ess is more likely to be perceived as fair when it is open and transpar ent, and when workers can contribute to the process by providing rele vant information, for example, through upward feedback.
How should incentives be structured What key contingencies have been identified Given the level of interest in contingent pay in both the public and private sectors, there is surprisingly little research into how best to structure an incentive system. This may be due to the difficulty of con ducting comparative research that is both costly and time consuming.
Researchers have found that schemes with greater incentive intensity (percentage of pay that is contingent on performance and thus at risk) have a larger positive impact on motivation and performance than schemes with lesser incentive intensity. It is also known that when de signing group based incentives, the smaller the group the greater the impact of the incentives on motivation.
Should incentives be based on individual or on group/organizational performance Research shows that both approaches have benefits and both have costs. Basing rewards on individual performance is generally associated with increased pressure on individuals to perform and to accept responsibility for their own actions, and increased risk taking behaviour. When individualistic schemes successfully distinguish be tween high and low performers, such systems provide a valuable source of performance feedback, and foster the sense of a meritoc racy.
When incentives are based on group performance (which typically means every group member receives an equal reward) group members report greater liking and respect for one another, enhanced self esteem and perceptions of control, lower anxiety, and more task en joyment. Research has found greater communication among team members when rewards were group rather than individual based, even when the task did not require any interaction. Some researchers have found higher levels of learning and information sharing among group members when rewards were based on group performance. Several investigators have found that group based rewards foster cooperation and helping.
Both the individualistic and the egalitarian, group based approaches have serious shortcomings. Under the individualistic approach, re sources and information are more likely to be hoarded than shared. In dividualistic systems can exacerbate the sense of a two tiered society of organizational winners and losers. Outstanding performance ap praisals are, at least in theory, reserved for a select minority. This can alienate the very people who most need to improve. Instead of trying harder, low performers may rationalize their poor performance evalua tions as merely a sign of incompetence or bias on the part of those conducting the performance appraisals. The organization can produce a residue of disgruntled people who feel they owe it nothing; indeed, they may wish it ill. High performers also can suffer under individualistic pay schemes. Several classic case studies of incentive plans have documented the ostracism and other negative social sanctions that high performers must sometimes endure.
Group based rewards can have dysfunctional effects as well. Group based incentives can promote regression to the mean rather than out standing contribution. Low performers may have little incentive to ob tain training and raise their contribution. So as not to be taken advan tage of, high performers may hold back from exerting themselves or leave the organization altogether. Alternatively, high performers may become vigilant police officers, pressuring the low performers to try harder. As a result, low performers may feel tremendous pressure and scrutiny from other group members, which may further inhibit im provements in low performers’ output. Furthermore, the group product can suffer if low performers feel their low status gives them little right to exert influence or express their individual perspective.
Given this data both pro and con, what do experts infer from this body of research In general, they conclude that incentives should be team based when cooperation and knowledge sharing are critical to task success, such as in cross functional and cross agency develop ment projects. The task complexity is likely to shape the need for coop eration and the extent of interdependence among workers. When task success hinges on individual excellence, individual incentives are ap propriate. This is likely for tasks that are simpler and less interdepend ent. In short, the nature of the work should drive the design of the in centive system.
On question that may be relevant to research undertaken by re searchers is, how should the design of an incentive system vary based on the type of worker Several decades ago, sharp distinctions were drawn between the types of pay plans appropriate for senior managers, middle managers, and line workers. In most instances those distinc tions have now largely fallen by the wayside. Only a small amount of re search speaks to this question. Some researchers found that perform ance contingent pay is less appropriate for workers who have a low will ingness to take risks. Placed under a variable compensation regime, such workers are likely to withdraw, either cognitively or behaviourally.
Other research has found that incentive intensity (the percentage of pay at risk) is greater at higher levels in an organizational hierarchy than at lower levels. It is argued that this is deemed appropriate, since people at higher levels have greater influence over the organization’s success.
This brief survey of the extensive research on individual and organ izational performance provides some important clues into the parame ters that are likely to contribute to success and failure in the design, de velopment, and implementation of such systems. It does not however, provide much guidance on which specific systems have worked under which organizational and cultural contexts. This takes us to a brief ex amination of the leading studies that have been undertaken of specific performance related systems that have been put in place by various public sector organizations in varying organizational and political con texts.
Specific studies A recent and comprehensive empirical study on the use of perform ance related pay in the British Public Service – the first large scale study of it kind – reports some significant conclusions80. This study included a sample of 5,000 employees in Inland Revenue and Employment Ser vices, two National Health Service trust hospitals, and primary and sec ondary school head teachers and covered a variety of occupations. The introduction of performance related pay in the late 1980s and the com plete replacement of pure time based pay by the late 1990s provided an opportunity to assess the impact of these new pay schemes81.
This empirical study is generally consistent with several of the results noted above. The study concludes that the introduction of performance related pay has been associated with increased levels of effort by work ers as judged both by ordinary employees and line managers who ap praise their performance. However, the financial incentive has played a rather small part compared with the much more important role of goal setting and appraisal. The study emphasizes that improving goal setting may raise performance in two important ways, and herein lies a funda mental ambiguity: in part it can clarify work goals, and in part, it can en able management to negotiate higher levels of performance which may David Marsden, Stephen French, and Katsuyuki Kubo, Does Performance Pay De Motivate, and Does it Matter (London: Centre for Economic Performance and Political Science, London School of Economics and Political Science, 2001).
http://cep.lse.ac.uk/pubs/download/dp0503.pdf See also Marsden, French and Kubo, Does Performance Pay De Motivate Financial Incentives vs. Performance Appraisal, (London: Centre for Economic Performance and Political Science, London School of Economics and Political Science, 2000).
Performance related pay in the British Public Service is mostly consolidated into base salary so that the accumulation of above average awards can lead to quite large and last ing benefits for individual workers.
not always be voluntarily given. The researchers conclude that for ordi nary workers, more systematic attention should be given to the way employee goals are set, and the interplay of interests involved, and how they are handled.
A recent study of the proposal by the UK government to adopt per formance related pay for schoolteachers raises some important con clusions and sets out some key issues82. In short, the researchers con clude that incentive schemes do work, but they need to be designed with great care to avoid undesirable and unintended consequences.
Typical undesired consequences include employees aiming to hit quan tity targets regardless of quality, or rewarding good teaching by promoting teachers to become administrators who then must give up teaching.
Additional factors effecting performance The success or failure of performance pay is affected by a variety of circumstances that vary from country to country. That is why the trans planting of such systems to Russia without necessary modifications is unlikely to meet the objectives. According to a study by the International Labour Organization (ILO)83, success or failure will generally be influ enced by circumstances such as the following:
- Tradition of collective bargaining.
- Attitudes of unions. For example, the negative attitude of unions in Malaysia has hindered the introduction of performance pay in that country, while the opposite attitude of the union in Singapore con siderably facilitated it.
- Cultural factors. For instance, group incentives may be more ap propriate in some cultures.
- Human resource management strategy that uses pay to reinforce larger business strategies. Thus organizations that are in low cost manufacturing, promote innovation, skills and higher performance, or which are in service industries need to consider different forms Simon Burgess and Paul Metcalfe, Incentive Pay for Teachers, Centre for Market and Public Organization, University of Bristol, June 1999, Issue 1.
See Sriyan de Silva, An Introduction to Performance and Skill Based Pay Systems, (In ternational Labour Organization, 1998). See http://www.ilo.org/public/english/dialogue/actemp/papers/1998/srspaysy.htm.
of performance pay. Their human resource management strategies will differ, and pay objectives should be consistent with them.
- Whether the overall climate in the enterprise is favourable to per formance and productivity. For instance, enterprises that encour age employee involvement in workplace policies and practices have experienced better results with performance pay.
Performance is affected by a variety of factors such as:
- Knowledge or skills which determine the potential to perform, and which need to be developed through training.
- Work attitudes which determine willingness to perform, and which therefore have to be matched by appropriate motivational systems with intrinsic rewards.
- The ability to match the above factors is what secures performance, and is consequently a central task of human resource manage ment.
On the issue of whether reward systems do motivate, it is essential to pay attention to aspects which are equally – perhaps even more important than the rewards themselves, such as:
- Reorganization of work processes.
- Employee training.
- Employee involvement and participation in decision making.
- Opportunities to contribute ideas and knowledge.
- Non monetary recognition.
- Career development.
- Employee and organizational goal setting.
The ILO paper suggests the following “tentative guidelines” for de veloping performance pay systems:
1. A performance pay system should be designed to promote the kind of performance an organization needs. In order to do so - An analysis should first be made of the objectives and results sought;
- The principles/policies and practices needed to obtain the results (e.g., team work) should be established; and - These policies and practices should form part of an overall human resource management strategy.
2. Employees should be consulted in the formulation of the plan (to ascertain the type of rewards most likely to have motivational effect), in regard to its operation and distribution of rewards, and in monitoring the scheme.
3. The criteria for the determination of performance pay should be:
- Measurable and measure only what is important;
- Operated along with an appraisal system which measures perform ance appropriately;
- Designed to feed back information to employees, and not only to management;
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