Performance related pay (PRP) works on the theory that if you offer monetary bonuses to employees for a job well done, they will perform better. You can issue individual goals and objectives (Management By Objectives - MBO) based on the company's goals and objectives, ensuring that everyone is on the same track in terms of corporate philosophy and priorities. Money is a strong motivator, so people will do whatever necessary to bring home a bigger pay packet at the end of the day. And the company is happy because its business is handled through high quality work and contented employees. Sounds great, right?

Except for one problem. Performance related pay doesn't work very often. It sounds intuitive in theory and looks good on paper, but when it comes down the nuts and bolts, money is not the be all, end all to top notch job performance. Research has found that money is not as powerful of a motivator as employers once hoped, at least not when offered within the guidelines of a basic performance related pay system. But to understand why performance related pay doesn't work effectively, it is important to first understand what it is and how it is set up.

Defining PRP

Performance related pay programs will offer bonuses to employees who perform especially well through meeting particular criteria or receiving a high performance evaluation from supervisors. In most cases, these bonuses will be a percentage of the annual salary to be paid out on top of regular salary the following year. Employee and supervisor will generally meet at the beginning of the year to set the goals and objectives that must be achieved. They will sit down again at the end of the year to determine whether objectives have been met and if the bonus will be paid out.

Performance related pay became a popular tool across industries in the 1980's for motivating employees, previously it had been restricted to production work and ‘piece rates’ or payment for the number of items produced. In the decade when Michael Douglas was telling us, "Greed is good," in the movie Wall Street, companies determined that offering additional money to staff would be just the ticket to getting better performance and productivity out of them. It stood to reason that more money would be equivalent with harder workers, since money is the primary motivator in the workplace, right?

Problems with Performance Related Pay

Wrong. According to studies conducted by Frederick Herzberg, there are two types of factors that contribute to motivation: one type contributes to job satisfaction and the other only to job dissatisfaction, and neither the two shall meet. Factors contributing to a higher level of satisfaction on the job included achievement and recognition, opportunities for advancement and growth, level of responsibility and the work itself. Reasons for dissatisfaction were relationship with boss, supervision, company policies and work conditions, relationships with peers and – salary. If a low salary results in dissatisfaction with workers, a high salary was not shown to have the same type of positive effect.

The bottom line? Employees are not as motivated by monetary incentives as employers once thought. There are other factors that go into job satisfaction and a willingness to go the extra mile for the company and a salary bonus just ain't it. In an article two years ago, Human Resources Magazine provides an illustration of a UK based company in Italy that tried using performance related pay with its young employees. The problem was that many of these workers were in their 20's, still living at home, and more interested in a fulfilling social life than they were in more money. It was nearly impossible to get these young Italian people to work past regular quitting time, no matter how much money was thrown at them.

And it's not just young Italian workers who don't place much emphasis on such things. Many employees are simply not willing to sacrifice quality of life for more pay, particularly in light of the fact that many performance related pay bonuses do not pay out a significant enough increase in salary for workers to sit up and take notice. An extra ten or even twenty dollars a week is not going to be enough to become a KITA factor, otherwise known as "Kick in the ….."

Another problem with performance related pay is that it can be hard to measure. In some industries like sales, job performance is easy to quantify through quotas and sales revenue. But how do you measure the performance of a teacher or a doctor? How do you know if a customer service representative is making her objectives unless you are there to observe her all day long? By customer complaints? What about the number of customers who were dissatisfied with her service but never said so? The fact that performance is hard to objectively evaluate at times makes performance related pay difficult to fairly assess and can cause dissatisfaction and feelings of inequity in the workplace as a result.

Of course, the intuitive thought is that people who perform better should be rewarded more, and – most crucially that people who are performing worse than me should be rewarded less. However, this rests upon the assumption that it is possible to objectively measure performance, but of course it’s not.

Performance related pay tends to work best in industries where job performance is easy to evaluate objectively and when the bonus is a major part of the salary amount. This is the case in the financial industry, recruitment jobs and sales positions. In these types of jobs, it is understood that the performance related pay is a part of the salary and that performance must be maintained for the pay to be received. In these situations, performance related pay is traditionally accepted as it appears much more objective in these industries. However, even in these cases, it’s not possible to objectively measure (e.g. what relative contribution to a sale comes from marketing, good product design and the sale person?), so artificially objective measures are placed on people, e.g. sales territories.

PRP can also distort performance and company results. If you measure me on a particular metric and tell me that my pay depends on hitting it, then I am going to make sure that I hit that target. I don’t mind if I sell something to a customer that maybe doesn’t strictly require it to hit my sales target, or even if I have to fiddle the figures to my advantage. So although the organisation wants to increase productivity and motivation, what they often get is less satisfied customers and employees using their ingenuity to work out how to play the system rather than working out how to increase customer value.

In other industries, it does not appear that performance related pay is an effective tool, due to all of the reasons listed above. Money is not the primary motivator for many employees, as shown by Herzberg's Motivation-Hygiene theory dealing with job satisfaction and dissatisfaction. Job performance can be a difficult thing to measure in objective terms to make performance related pay sufficiently just and fair. PRP can actually lead to job dissatisfaction for some workers who see an inequality in the system. While this system may work for some, it is certainly not an effective tool for most.





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