Evaluating Individual Performance Pay: Impact on Employee Motivation

This essay critically evaluates the extent to which individual performance-related pay (IPRP) stimulates higher levels of performance from employees, considering contextual factors such as occupation type, income standards, and individual differences. It explores how motivation, both intrinsic and extrinsic, is influenced by IPRP, and examines the circumstances under which IPRP effectively motivates employees, such as when equity and efficiency are observed, financial rewards are visible, compensation decisions are reversible, and the workforce is young. Conversely, it discusses scenarios where IPRP is less effective, including companies with small salary increase pools or discriminatory reward systems. The essay also highlights the importance of fair reward systems, improved performance measurement, and the potential drawbacks of overrating employees, ultimately arguing that the benefits of performance-based pay often stem from improved standards rather than the pay itself. Desklib provides a platform to explore more solved assignments and resources for students.

IPRP and International HRM
IPRP and International HRM
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IPRP and International HRM
Individual performance related pay and its link to motivation
Introduction
Individual performance-related pay has grown significantly in the recent years more so in the
manufacturing sector in a bid to improve the performance of employees. It is a monetary reward
of employees whose performance has reached or surpassed a required standard. According to
Kvaløy & Olsen (2012) it is generally used in circumstances where employee performance
cannot be reliably measured using other standards such as sales achieved. Employees are
regularly reviewed against set standards and grouped into various performance categories which
determine their level of compensation. IPRP is different from other incentive methods that are
company or team based as it is performance and formula driven and payments are once off. This
essay analyses the extent to which Individual performance related pay stimulates higher job
performance among employees, the circumstances under which it works well and the ones in
which it does not. In doing so, it takes into account various the contextual issues such as the
standard income, individual differences, type of occupation among others.
The extent to which performance related pay motivates employees for higher performance.
Motivation involves activating or inducing job performance that is goal-oriented among
employees. According to Rathore & Chadha (2013) the management Is often faced with the
challenge of satisfying employees as it has a significant impact on efficiency and productivity, it
impacts on employees attitudes, behaviors and their willingness to perform tasks and attend to
their responsibility, the extra effort they apply, and their efficiency in performing duties.
Motivation towards work can be classified into intrinsic and extrinsic motivation. Intrinsic

IPRP and International HRM
motivation revolves around the value obtained from the work itself while extrinsic motivation, is
about the additional value not derived from the work. Intrinsic values are such as increased
responsibility, recognition, advancement, excellent interpersonal relationship while bonuses and
salaries are good examples of extrinsic values. If employees are satisfied with the reward system
then the extrinsic variables may be different and independent of intrinsic variables. Motivating
employees is significant in achieving the overall objectives of the organization. Motivation may
be viewed as psychological factors that determine an individual’s behavior in his/her
organization, the amount of effort applied and the persistence level of an employee (Bruce and
Pepitone 2012, pp67-72). The effort is a clear reflection of the amount of hard work put in by an
employee. According to Trout (2017) persistence is achieved where employees work in tough
conditions continuously without giving up. Employees view their salary as compensation for
services rendered to the employer. They consider it as the value placed on them in their
workplaces and in terms of their expertise and the level of training or education they have
achieved. Managers, on the other hand, view salaries and wages from two angles: being
significant expenses and as a way to impact on employees' performance through reward-based
motivational schemes. This ability to influence employees' behavior and attitudes as well as the
efficiency and productivity of the organization, is the main reason leading many people to
appreciate the motivational effect of performance-related pay on employees.
Designing and Implementation of a reward strategy is among the significant investments
made by an organization. Although an appropriate salary is the basis of the implied and
contractual agreement between the employer and the employees, the general assumption is that
money has the ability to influence attitudes and behavior. Lauby (2009) believes that majority of
employers and company directors believe an increase in the employee's salary increases their

IPRP and International HRM
motivation, productivity, and loyalty. The impact of compensation strategy is a significant factor
in every organization and that job performance is a vital issue for many organizations because
they need to attract, motivate and retain the most appropriate talent pool for the organization to
achieve its objectives. According to Anon (2016) Individual performance-related pay that is
well-designed can pull employees together and motivate them to move in the direction
management wants them to perform. It has the ability to improve the decisions and choices made
by individuals and hence enhances employee performance. A research of 84 subjects by Stone
showed that performance-related pay resulted in changes in attitudes, behavior and improved as
well as informed decision making.
Individual performance related pay may work but only for some time and to some extent.
In the early stages, employees are tempted to work towards the set standards so as to improve
their pay but then once they realize that their performance and application of skills is being
completely controlled by the management, their enthusiasm drops .The reason behind this is that
people hate being controlled thus performance-related pay is only successful in ensuring
temporary compliance. Moreover, offering rewards to individuals who are already intrinsically
motivated undermines their intrinsic motivation. According to East (2008) employees are
basically interested in their jobs and employ a certain level of expertise thus recognizing this
expertise through including them in the decision making process is a better motivation tool.
Performance related pay also reminds workers of the power gap in the organization. They are
reminded that the management takes home a huge amount of salaries compared to them hence a
demotivating factor.

IPRP and International HRM
In addition, employees are well aware of the basis of their merit pay hence forget about
all the other non-measurable aspects of the job such as innovation and creativity and focus all
their energy on the measurable aspects on which their pay is based on. They work with a reward
set mind and shift their focus from the task to the reward. They also may conceal any challenges
they encounter in their work so as to prove their expertise to the supervisor. They also become
averse to risk and resist from exploring new possibilities as they prefer simplicity and
predictability hence creativity is significantly hindered. Mcnabb (2018) indicates that if
employees are paid more than they deserve in terms of salaries, they will not have contributed to
the attainment of objectives and competitive advantage will be negatively impacted. According
to Kragl (2015) there are often minimal variances in the set standards and actual performances.
This trend of overrating employees is rampant in parts of Africa where it has negative impacts on
motivation and efficiency. People will often be unwilling to assess others negatively in their
workplaces more so in relation to compensation matters because they do not want to be accused
as the reason behind low levels of wages in their divisions as opposed to other divisions where
fellow employees might be earning huge salaries. The situation may lead to rivalry among
divisions and conflicts among supervisors and employees.
Individual performance pay may not also impact motivation if it is not directed to the
appropriate people. This kind of reward system may not motivate managers as such as it may
motivate junior employees. This is in accordance to Milkovich and Wigdor’s research, which
found out that, among other factors, that performance-related pay schemes work best under jobs
in which the responsibilities can be reliably measured and are concrete. Differentials in
efficiency, however, should not be overstated. These findings are in contrary to existing beliefs
that performance-related pay strategies are more motivational and effective at higher levels of

IPRP and International HRM
the organization. Nevertheless, employees ultimately consider the unfairness of the reward
systems. The reason why employees have this perception is not clear but may include low trust
levels among departments and individuals, lack of transparency in the reward system, lack of
trust in the integrity of management and lack of trust in the appraisal systems.
Finally, irrespective of management or work level, improving measurement of job
performance and other appropriate actions that are not related to pay incentives may lead to
improved performance through improvement in the setting of goals. According to the Economist
(2009) the benefits accrued from performance-based pay seem not to originate from the pay itself
but from the improvement in set standards. Performance standards are the most significant
benefit accrued from performance related pay as shown by various studies. In most cases
introducing pay into performance measurement leads to adverse changes in the performance of
employees.
Circumstances under which IPRP tends to motivate employees
Where equity and efficiency are highly observed. The firm may purchase employee motivation
and energy to pursue organization objectives by distributing financial rewards in an equitable
and efficient manner. When equity is enhanced the employees feel that they are all valued at the
same level by the organization hence they strive to achieve the set standards of performance. The
gap between employees which is often a demotivation factor is also eliminated. The reward
system must, therefore, be implemented and managed in an efficient manner taking into
consideration the employee's needs.

IPRP and International HRM
Where the financial rewards are visible. Many companies do not disclose the amount of
compensation to employees but those that do have a greater potential in motivating employees
through performance-related pay. Disclosing the compensation will actually make the employees
see the fairness of the system hence be motivated towards achieving certain standards because
they are aware that a certain reward awaits them. Research shows that employees in companies
where the rewards are not visible feel to be in a worse situation than the actual one hence
demotivation. The non-monetary rewards should also be publicized so that they can be visible to
all employees and increase on the fairness of the reward system.
Where compensation decisions are reversible. Reward systems should be structured in such a
way that a reward decision can be reversed so as it does not have to be that the same person is
rewarded in a specific way severally. For example, bonuses that are offered to a specific
employee in a particular year could be offered to another employee the following year,
performance being the basis. These changes will surely strike motivation in employees and
encourage them to put in extra effort as it is not obvious that they receive a certain amount of
salary.
Where the workforce is mainly made up of the young generation. The young people have a lot
of needs hence they are sensitive to monetary issues and minimal increases in salary are easily
noticeable. They are likely to work extra hard so as they can receive better compensation
packages and thus reaching and surpassing the set standards. They are also energetic and any
effort in motivation will surely have a great impact on productivity. Therefore individual
performance-related pay is likely to have a significant impact on motivation and overall
productivity.

IPRP and International HRM
Circumstances under which IPRP does not work so well.
Where companies or organizations have small salary increase pools. Such organizations
may consume a lot of time and resources in rating and ranking of employees which often leads to
high expectations by employees hence disappointments eventually. In such a case performance
related pay may be important but then it becomes insufficient such that it is inefficient
(performance related pay 2018). The reward size to be effected on employees is a major factor to
consider before introducing a performance-related pay system. Employees who put in a lot of
effort but receive very minimal increases in pay may become demotivated and even quit in
extreme circumstances.
Where the reward system is discriminatory based on the level of staff. Companies often have
reward systems that are different for managers and other staff. They may also vary according to
the level of management where senior managers are evaluated and compensated differently from
junior managers. This is done by organizations, and the reasons behind it may seem credible for
instance to motivate new and junior employees to aspire to achieve greater heights in the
organization so as to gain the attractive reward packages (Honeywell, Dickinson, & Poling 2012,
pp 261-271). However, restriction of eligibility may be inefficient and unproductive although it
was seen as a good idea in the past years when there were many tiers in companies and

IPRP and International HRM
individuals could aspire to achieve more, but in the modern world work environments the
organizations are flatter in structure and employees are eager to unveil the reward system (PRP,
2018). As described by Kerr it similar to a lottery situation, where the winning chances are
minimal yet the tickets are bought by thousands of people.
Where the economic situation is adverse and pay differentials seem huge. During seasons
of minimal inflation as pay differences seem smaller, employees are not able to notice the gap in
their salaries hence there is no much of an impact. In periods of high inflation however when pay
differences seem huge they are able to notice the change in the value of their money and that
they have received a significant rise in their salary. It is, however, challenging to create the
differentials due to the low budgets on wages hence effective management is substituted for
performance related pay. This issue arises when managers assume that the concept of effective
management and performance related pay is the same.
Where the reward system is inefficient and does not reward the right people. In most
reward systems, the high performers are burdened with more workload while the poor
performers may easily get vacations and time off. This may discourage high performance and
demotivation and the poor performance will be in a comfort zone as they have no reason or basis
for improvement.
Where the duties of several employees are interrelated or tied to one another. The
challenge in this situation is the inability to distinguish the specific contributions made by each
particular individual. Even if separation is possible, it may not be necessary and may consume a
lot of time and resources as found out by some investigators. The reason for this is that

IPRP and International HRM
employees are not in control of their outcome per se, because what they achieve in terms of
output will depend on colleagues. From the aspect of employees, measuring their performance is
a major factor for dissatisfaction and thus leading to demotivation. Employees will often
perceive favoritism in the appraisal and assessment system. If the dissatisfaction is on a large
number of employees it may negatively affect the total motivation of employees and thus
inefficiency in the organization.
Conclusion
It is difficult to clearly state whether performance-related pay ultimately affects employee
motivation and their performance at large as motivation is only affected to some extent and the
overall impact on organization success is not visible. There isn’t a particular reward system that
guarantees success. There are several variables that determine the extent of motivation and thus
it is hard to state that individual performance-related pay is effective or not. Such factors include
the industry type, cultural values, values in the workplace, core competencies, design type of
employees, and implementation of the strategy, communications among others. There are
drawbacks associated with each reward system and hence finding the most appropriate system
that best suits your organization is almost impossible. Individual performance is significant and it
should ultimately reflect in the pay cheque.it may not have the ability to fully motivate
employees but it surely focuses their energy on the organization's goals and keeps them from
being dissatisfied. Appraisal systems used by management are subject to errors which may be a
barrier to the motivational effect of individual performance-related pay.

IPRP and International HRM
References
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