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.
As a matter of fact, nowadays a growing number of staff and managers have appeared to lose faith in applying PRP in practice. Apart from its adverse influence mentioned above, the major reason could be due to the difficulty in implementing performance appraisal, which, however, lies at the heart of PRP. According to the survey conducted by the Institute of Personnel and Development(IPD), one third of employees believes that their bosses merely regard appraisals as “a bureaucratic chore”, and one in eight managers would prefer to have a dental appointment instead of doing an appraisal (Hilpern, 2000).
Why does performance appraisal sometimes not work? In general, it is perceived as arbitrary, subjective and therefore lack of justice. The study of Inland Revenue staff found that 87 percent of the interviewees felt that “PRP has made staff question the fairness of appraisal system”; 63 percent believe that “a good appraisal is too often overruled by someone higher up”; 35 percent felt that “people get a good box marking not because of their performance but because managers want to reward their favorites” (Cannel and Wood, 1992: 90).
As it is shown in the above study, the outcome of assessment is mainly based on the subjective view of the appraisal, which can be easy to be changed in accordance with individual’s arbitrary will. And what makes the process much worse is that managers who are responsible to measure people’s performance are not well-trained and qualified enough to conduct such performance appraisals. Thus their judgments on subordinates are usually unconvincing.
Certain figures generated from similar study indicate that manager’s ratings are often manipulated to suit different motives (Redman and Wilkinson, 2001). Longnecker et al. ‘s study of 60 senior managers also found that a variety of factors, other than the subordinate’s actual performance, influenced the ratings managers allocated their subordinates (Bach and Sisson et al. , 2001: 252). For example, supervisors are reluctant to give unfavorable ratings to their subordinates since this will reflect their own poor performance as well.
Another difficulty which causes problems with performance appraisal is setting the objectives or criteria. Firstly unrealistic targets may be set by inexperienced managers. Some targets may be too easy while others are too difficult. Secondly, it is especially challenging for individuals to reach the organization’s objectives. That is to say some variability of macro environment is not controllable. Even if great endeavors have been made in work, there is still little likelihood for individuals to reach the organization’s objectives.
For instance, in financial services the economic climate produces far more influence than individual effort, which can easily demotivate employees’ performance when it is in close relation with reward (Redman and Wilkinson, 2001). Thirdly, since jobs of each employee are not identical, and people vary considerably in their ability and motivation, it is impossible to find single universal criterion or target for managers to assess every one’s performance. Some managers tend to give everyone a similarly intermediate-high score of performance to make every one happy.
The case in Finbank ( See Table 1) shows that around 90% of employees are assessed as “Fully Effective” and “Excellent” which are intermediate-high grades (Lewis, 1998). But in such cases, when every one has the same score of performance, there is no reward in fact. At the same time, since the employees cannot find a universal standard to compare their own work with other employees, they might think the appraisal is unfair to them even though it is fair.