Performance-Related Pay Essay Example

Performance-Related Pay (PRP) has become a growing trend in the last two decades in many organisations (Cadsby, Song & Tapon, 2007). The concept of performance-related pay was designed as a way to motivate employees and encourage desired behaviour due to individuals being different in terms of their own levels of motivation, drive and initiative. Organisations need to take this into account and set overall targets clear to individuals which are also in line with organisational goals to make sure incentive plans work effectively. Numerous researches have been conducted regarding the issue of the effectiveness of incentive plans. Some management experts suggested that incentives can be a powerful tool to motivate employees (Bennett, 1993) and Vroom’s (1964) expectancy theory indicated that pay for performance provides a direct and explicit link between performance and outcome, which fixed salary compensation does not. However, Author Kohn (1998) contends that money does not motivate employees and is not a substitute for good management. The aim of this essay is to examine the benefits and the costs in implementing performance incentives.

The benefits of implementing incentive plans
Managers have to be familiar with how to use the power of incentives to drive for individual motivation and organisational effectiveness. It can be a highly efficient motivational tool and should be employed under the appropriate circumstances (Bennett, 1993). Most notably, performance-related pay plays an important role in economy downturn. Since companies generally have a smaller amount of capital to allocate for compensation during an economy slowdown, offering salary increases or bonuses in varying amounts to the best performers or the most essential employees would be better than giving everyone an equal but minimal increase to their base pay. By rewarding good workers, it can increase productivity and secure dominance in potentially lucrative markets (Bates, Mirza & Fox, 2003).