Views on Incentive Payments

1. Views on Incentive Payments • Fascinate managers as they search for magic formula • Linking payment to performance • Incentives source of much debate • Some incentive payments subject of significant government initiatives

2. Extent of Incentive Payments in the UK • Common in UK • Still millions who do not receive this kind of reward • Some employers use in limited way

3. Should Incentive Payment Systems by Used? • Ideological reasons – poor reasons, generally little long term success • Used where they are appropriate to the needs of the business and can contribute to organisational objectives

4. What Academic Literature Suggests • Herzberg – pay a hygiene factor not a motivator • Thompson – incentives tools of management control • Others – reward effort and behaviours which the organisation wants to encourage • Not universally applicable

5. Expectancy Theory Individual employees will alter their behaviour if they believe that in so doing they will be rewarded with something they value

6. Ways Incentive Payment Schemes Can Operate • Bonus payments and incremental progression • Incremental progression dependent on individual’s contribution

7. Extent of the Incentive Minimum level – ‘that necessary to elicit positive perceptual and attitudinal responses’ (Bartol & Durham, 2000) Lesser payments will only have a peripheral impact

8. Level at Which Incentives Are Paid • Reward individuals for individual performance • Reward a group of employers for collective performance • Share incentives payments amongst all employees

9. Extent to Which Incentives Are Paid • Conflicting evidence • ONS Survey 2003 – 14% receiving incentives • Workplace Employment Relations Survey 1998 – 60% of their survey operative an incentives scheme • Larger employers tend to operate schemes

10. Payment by Result Schemes • Individual time saving • Measured day work • Group and plant wide incentives • Commission

11. Disadvantages of Payment by Result Schemes (1 of 2) • Originally set up to cope with stable and predictable situations – level of change growing • Steady decline of these schemes since 1983 (New Earnings Survey) • Operational inefficiencies

12. Disadvantages of Payment by Result Schemes (2 of 2) • Emphasis on quality of work can impact on quantity • De-motivate work force – impact on the quality of working life • Selective nature of the incentive • Obscurity of payment arrangements

13. Performance Related Pay (PRP) • Merit based systems • Goal based systems

14. Theoretical Attractions of PRP (1 of 2) • Attracting and retaining good performers • Improving individual and corporate performance • Clarifying job roles and duties • Improving communication • Improving motivation

15. Theoretical Attractions of PRP (2 of 2) • Reinforcing management control • Identifying developmental objectives • Reinforcing the individual employment relationship at the expense of the collective • Rewarding individuals without needing to promote them

16. Critiques of PRP • Ability of PRP to motivate positively • Means of reinforcing management control at expense of worker autonomy • Means of perpetuating gender inequality in payment terms • Against principles of TQM • Fundamental flaws that cannot be overcome

17. Possible Outcomes of PRP (1 of 2) • Employees can develop a narrow focus to their work • Tends to undermine teamwork • Can de-motivate staff when rating received • Factors outside employees’ control affect their rating • Difficult for managers to undertake fair and objective appraisals

18. Possible Outcomes of PRP (2 of 2) • Objectives set can become obsolete after a few months • Can discourage creative thinking • Budgets can lead to reduced ratings • Difficult to ensure a uniform approach taken by all • Employees can downplay their weaknesses • PRP systems increase the paybill (Pfeffer & Purcell)

19. Favourable Conditions For Using PRP • Where individual performance can be objectively and meaningfully measured • Where individuals are in a position to control the outcomes of their work • Where close team working or co-operation with others is not central • Where there is an individualistic organisational culture (Gomez-Mejia & Balkin, 1992)

20. Skills Based Pay • Established in USA • Becoming more common in UK • Encourages multi skilling and flexibility • Can attract and retain staff more effectively • Reward employees with additional increments once they have completed relevant skills modules • Will only be cost effective if productivity increases as a result

21. Profit Sharing • Promoted by government for many years • Cash based schemes • Share based schemes

22. Disadvantages of Profit Sharing • Pay levels may decline if company fails to meet expected profit levels • Share values can go down as well as up • Incentive effort may be slight

23. Summary (1 of 2) • Incentive schemes should only be used where they are appropriate to the business • Involve payment of a bonus or form the basis of incremental progression systems • Extent to which schemes are used in UK varies • Various types of payment by result methods

24. Summary (2 of 2) • Performance related pay systems are either merit or goal based • Performance related pay systems have been subject of much debate • Skills based pay involves linking incentives to achievement of defined competencies or qualifications • Profit sharing has been promoted by government