The advantages and disadvantages of Performance Related Pay
Performance Related Pay (PRP) provides individual employees with financial rewards linked to an assessment of their work performance, such as: sales commission, bonuses for reaching targets, piecework payments or financial profit sharing.
A performance related pay system can have its advantages and disadvantages. Some SFA members will praise its ability to focus employees on their goals and believe that the financial incentive encourages their teams to reach targets. Other members will feel that performance related pay is often poorly managed and can be a de-motivator which causes a pressurised and money driven culture. A recent SFA survey outlined some advantages and disadvantages:
- Managers can use a defined framework for setting goals. It should improve individual productivity and performance
- Employees are more likely to focus on what they need to do to improve if this is directly linked to pay
- A good PRP system will reward the best performers
- It is an effective way of dealing with poor performance
- Rewarding high performance can assist in retaining staff
- It provides a direct incentive for employees to achieve defined work targets
- The contribution an employee makes is recognised with a tangible reward
- A healthy performance based culture can be developed with its introduction
- Employees can be de-motivated if the goals set are too hard to achieve
- Too much of the process relies on the quality of judgement made by a manager
- It reduces pay equity and can make a company liable to costly equal pay challenges if not operated fairly
- The performance appraisal process can be affected detrimentally because of the focus on financial reward rather than developmental needs
- Team spirit and co-operation can be hindered
- As reward is made for a short-term quantifiable goal, it can be too narrowly focused
- There is a danger that employees can expect an additional payout year on year. In a low inflation climate the rewards might not appear to be that great
The SFA have published a guideline on performance related pay and its implementation. This guideline outlines the concept of performance related pay and further examines advantages and disadvantages of this type of scheme. It also considers the steps necessary for the introduction of a performance related pay scheme and explores other issues arising from the introduction of such a scheme.
For advice on the topic, or if you are thinking of implementing performance related pay, contact Jonathan Callan, SFA Executive on 01 605 1668 or firstname.lastname@example.org.