Effectiveness of Individual Performance Related Pay System in Improving Employee Performance

Explore the critical evaluation of Individual Performance Related Pay (IPRP) system in enhancing employee performance. Understand the circumstances where IPRP system works effectively and where it falls short.

STRATEGIC HRM

Introduction
In the field of Human Resource Management (HRM) Individual Performance Related Pay or
IPRP is comparatively a new addition. In this system, human resource department of the
organizations manages the payment scale of the employees by linking the progression of salary
of the employees with their performance standard (Gärling et al. 2017). The system is also
known as merit pay system. This essay is focused on the critical evaluation of the effectiveness
of IPRP system in the context of improving employees’ performance standard. Along with that,
the essay will also identify and analyze the circumstances in which the IPRP system does not
work properly. The essay will use some published articles to get reliable information about IPRP.
Critically evaluating the extent to which the individual performance related pay or IPRP
can stimulate higher levels of performance from employees
In an article, Dr. Mark Bussin has mentioned that Individual Performance Related Pay is the
payment system that can vary based on the performance of the individual employee, team or the
company. Dr. Mark Bussin has also clarified that high performance is the standard that everyone
tries to achieve in all the activities in their life (Humancapitalreview.org 2018). In the same
article, it has also been indicated that IPRP system is applied on the people, who are associated
with the competence rating, grades or salary structures. It is not like the incentive system of the
company. In the other words, IPRP system can be defined as the rating system that has direct
impact on the payment size of the employees (Humancapitalreview.org 2018).
Nuckols (2017) has mentioned that IPRP system creates a strong relationship between the reward
system and performance level of the employees. At the same time, the IPRP system also helps to
meet the strategic objectives of the business. In this context, Bryson et al. (2017) argued that
IPRP system influences the individuals towards superior performance level at their workplace
and it sends clear message to the individuals, who are non-performer within the organization.
Therefore, the argument made by Anselmi et al. (2017) is clearly indicating that IPRP system
can stimulate the performance levels of the employees to the higher extent. On the contrary,
Shields et al. (2015) commented that the effectiveness of the IPRP system is limited to certain
organizational position of the employees. Hence, it is an argumentative matter whether or not the
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IPRP system has any positive impact on the performance standards of the employees at every
organizational level.
According to Tayeh et al. (2015), the IPRP system is very effective in the sectors like,
manufacturing sector and financial sector because in these two sectors, the payment and
promotion of the employees depends mostly on their individual performance standards. On the
other hand, Bellé (2015) commented that use of IPRP system is more in the developed countries
than the developing countries because in the developed countries the employees are highly
motivated by their payment scale than the employees in the developing countries.
In a study done by Paul Suff, Peter Reilly and Annette Cox, it has been mentioned that the IPRP
system was first introduced in UK during 1980s and the primary aim of this system was to bring
some cultural change within the organizations and encourage the employees towards the
achievement of high performance level (Employment-studies.co.uk 2018). In the current
scenario, IPRP system is one of the key rewarding strategies in many organizations. Critically
analyzing the IPRP systems in the organizations, it can be mentioned that the system is
nowadays a strategy of motivating the employees. In support of this, the argument of Meker and
Barlas (2015) can be mentioned, in which it has been claimed that IPRP system brings better job
satisfaction to the employees.
However, Ogundeji et al. (2016) stated that the effectiveness of IPRP system depends on the
infrastructure of the company. The infrastructure must be supportive enough for achieving better
level of effectiveness. Moreover, the IPRP is also organization specific. The IPRP system of an
organization may not work in other organization. Therefore, it is difficult to identify the right
design for the effective IPRP system (Anselmi et al. 2017). At the same time, it has also been
identified in some organizations that IPRP system stimulates the performance of the employees
on temporary basis, but it cannot develop a performance-based culture within the organizations.
For example, Starbucks has implemented the IPRP system; however, the management of the
company still faces many complaints due to the negligence of the employees (Gärling et al.
2017). It clearly indicates that the employees of the company are not accustomed with
performance-based culture or it can also be stated that IPRP system failed to motivate the
employees towards performance improvements.
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In this context, Halpern et al. (2017) added that IPRP system sometimes creates work burden on
the employees. It is because under the IPRP system, the managers expect higher level of
performance from the employees and if the employees fail to meet the expectation, managers use
to force the employees for more achievements, so that the performance of the team can be
improved. This sometimes creates negative impacts on the performance standards of the
employees. However, Japinga et al. (2017) claimed that the IPRP system was developed for
base-level employees not for the managers or personnel at the higher level of organizational
hierarchy.
While analyzing the effectiveness of the IPRP system, it is important to analyze the theory based
on which the IPRP system has been developed. Closely reviewing the IPRP system, it has been
understood that the system is based on the Maslow’s motivational theory, which is also known as
need hierarchy theory of motivation (Kahn et al. 2015). As per this particular theory, the
motivation of employees depends on their needs at different level. Maslow has divided the
human needs in five different levels, which are shown in the below diagram:
Figure 1: Maslow’s need hierarchy
(Source: Meker and Barlas 2015)
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The above diagram is showing that the basic need of the employees is physiological need. This
need of the employees is for food, shelter and cloth. In the context of an organization, it can be
stated that the ground level employees are at this level of need and as the employees get
promoted in the organizational hierarchy their needs go up in the Maslow’s need hierarchy. The
system IPRP is based on this theory of motivation (Bellé 2015). Critically analyzing this theory,
it can be identified that the physiological needs of the employees can be met properly if the
employees earn enough amount of money. Hence, in this case, it can be stated that IPRP system
is influenced by the physiological needs of the human beings. On the other hand, every employee
within an organization always tries to involve in a group and as the employee get promoted at the
organization due to better performance, people tends to involve that employee within their group
(Ogundeji et al. 2016). Hence, from this point of view again the IPRP system is motivated by
belonging need. The esteem and self-actualization needs of the employees have also influenced
IPRP system because without having enough level of income or money, it is very difficult to
reach to the esteem or self-actualization needs in the Maslow hierarchy (Tayeh et al. 2015).
Therefore, the above discussion is indicating that from the very beginning the IPRP system aims
to motivate the people towards better performance, so that they can earn more money. Hence, it
can be stated that the IPRP system is effective for motivating the employees towards higher level
of performance (Anselmi et al. 2017). Another important matter that must be considered while
analyzing the IPRP system is that IPRP system is individual specific or team specific
(Ir.polytechnic.edu.na 2018). Hence, when an organization implements the IPRP system, the
employees know that if they perform better they will earn more and at the same time, they will
get recognized by their colleagues also. In the case of team performance, every team member
gets motivated by the IPRP system because if the performance standard of any team member
declines, the chances of increasing the payment scale of the other team members are decreased
(Nuckols 2017). Due to this, every team member cooperates with each other so that the
performance standard of the team become improved. It is indicating that the IPRP system also
creates a sense of cooperation among the employees within the organization.
Therefore, the findings in the above discussion are clearly indicating that the benefits of IPRP
system are more than the loopholes in the system. Moreover, the discussion has also proved that
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the IPRP system is effective enough to stimulate the higher levels of performance within the
organizational framework.
However, in this context, it must be noted that the effectiveness of IPRP system is not equal at
every circumstances in the organization. In some circumstances, the IPRP system becomes
highly effective, but in some other circumstances the system becomes inactive or inefficient.
These different circumstances are discussed below:
The IPRP system is highly effective or efficient in the circumstance in which the organizational
activities largely depend on the efficiency of the base level employees or workers. For example,
in the car manufacturing organizations like, Toyota or Ford where the efficiency or quality of the
car depends on the skills and knowledge of the base level workers, the IPRP system works
properly. It is because if the base-level workers can develop a car as per the exact expectation of
the engineer without any mistake, overall efficiency of the company enhances (Ogundeji et al.
2016).
There is another situation in which the IPRP system becomes very effective to motivate the
employees and that is in the target based working environment. For example, in the financial
sector, the IPRP system becomes very effective because in the financial service providing
organizations the primary target of the employees is selling the financial products, which is very
difficult (Kahn et al. 2015). Due to this, in the financial service sector, more or less every
employee has certain targets, which they can achieve easily under the IPRP system because this
system motivates them improving the performance standard, so that they can achieve targets
easily.
Meker and Barlas (2015) stated that the IPRP system is very effective in the organizational
circumstances, where the performance criteria of the individuals is established on the actual
performance of the employees. At the same time, Shields et al. (2015) noted that the IPRP
system is also effective in the organizations where the individual performance of the employees
is linked with the reward system of the organization. In the other words, Bellé (2015) mentioned
that the IPRP system is effective where the payment scale of the employees depends on the
managerial assessment. It is because the employees try to satisfy the managers and due to that
they get easily motivated towards the performance improvement. There is another situation,
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where the IPRP system becomes very effective and that is when the formal system of
performance management of the company directly depends on the performance level of the
employees as well as the company. It is because in this type of situation it is very easy to
motivate the employees towards better performance standard as they know if they do not perform
well, they will never achieve any promotion (Anselmi et al. 2017).
Another circumstance is in the organizations that deal with social welfare activities. In this type
of organizations, the income depends highly on the donation and government grants, so if they
do not perform well, they do not get donation or grant from the government (Ogundeji et al.
2016). Hence, if in this type of organization IPRP system is implemented, the effectiveness
becomes higher.
Every situation that has been mentioned above is very suitable for implementing the IPRP
system because in each of this circumstance the promotion or income level of the employees
depends on their performance to large extent. Due to this, the employees become more conscious
about their performance standards. However, there are also some circumstances, where the IPRP
system does not work properly to motivate the employees. These circumstances are stated below:
In the government owned organizations the IPRP system does not work properly or effectively to
motivate the employees. It is because in most of the government owned organizations the
promotion of the employees is not directly based on their performance standards. There are many
other factors that decide the promotion of the employees. Moreover, the level of competition in
case of the government owned company is low (Tayeh et al. 2015). Due to this the IPRP system
does not work properly in the government owned organizations. On the other hand, the IPRP
system is also not effective in the circumstance where the salary level of the employees is fixed
and there are some fixed policies for the salary increment of the employees. In this type of
situation the IPRP system does not work to motivate the employees because from the very
beginning the employees know that their promotion or salary increment will not take place
before a certain time (Anselmi et al. 2017).
Another situation where the IPRP system cannot motivate the employees is in the initial time of
the organization. It means in the case of new organizations, the IPRP system does not work
because in a new organization the financial strength is very low and due to that the organization
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cannot increase the payment scale of the employees based on their performance standard. If the
company does so, it cannot control its cost level and it cannot reserve enough amount of money
for future purposes (Kahn et al. 2015). Hence, implementation of IPRP system cannot work in
this type of organization.
The situation where the business of the company depends on the creativity of the employees, the
IPRP system cannot motivate the employees. It is because the employees cannot enhance or
stimulate their creativity to get better payment from the organization. Due to this, if the
management implements this system within the organization, the IPRP becomes ineffective.
Therefore, from the above discussion, it can be clearly understood that there are many
circumstances where the Individual Performance Based Payment system does not work properly.
Hence, it can be stated that if the organizations plan to implement the IPRP system at the
workplace, the management at first needs to analyze the type of the business and at the same
time, they also needs to understand the actual needs of the employees because the effectiveness
of IPRP system highly depends on the need hierarchy of human beings.
Conclusion
In this study, it has been identified that Individual Performance Related Pay system is widely
used system in the current scenario. The study has also mentioned that the use of this system has
been started in 1980s and from that time, the system became much popular in the business world.
As per the findings in the study, the IPRP system is much effective in motivating the employees
because it is based on the Maslow’s need hierarchy theory of motivation. However, at the same
time, the study has also clarified that the system does not work properly in every circumstances
because it is organization specific.
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