How Does Performance Related Pay Motivate Employees

Performance-related pay, when used correctly, is supposed to motivate employees to try harder, hit targets faster, and become more productive. And sometimes that works—but sometimes, it can have the opposite effect. In this piece, we’ll explore some of the issues around performance-related pay and motivation, and show some ways in which you can use PRP to make your business thrive.

Does performance-related pay motivate employees?

Yes—and no. It depends on several factors:

• The type of business you’re in
• The type of reward given
• Your KPI’s, and the way you measure them
• The performance of the individual
• The performance of the business
• Team cohesion
• Overall morale

If your business is heavily sales focused, it stands to reason that performance-related pay can be a very positive thing. Sales tends to attract outgoing, ambitious employees who are driven by targets, and get a thrill from achieving them—rewarding them financially for achieving these targets is another prime motivation.

But the same cannot be said for many other lines of work. Sales is something fairly easy to measure—when someone makes a sale, they’re rewarded for that performance. Manufacturing is another relatively easy line of work—quality and quantity of items produced is fairly easy to measure, and set targets for.

But measuring the relative performance of someone who works in admin, or in a creative role, isn’t quite so easy. And shoehorning a KPI into their job role can lead to frustration and resentment—making pay for performance in HRM a difficult task to do well. The best HR managers understand this, and will finely balance performance-based rewards with other reward schemes, to ensure everyone feels fairly treated.

What are the potential shortcomings of PRP?

According to the Work Foundation, there are some challenges to implementing performance-related pay across almost all sectors:

• Gaming behaviour—sometimes, people learn how to ‘play the system,’ maximising the reward without proportional increase in performance
• Loss of teamwork—when the focus is on performance of the individual, teamwork often suffers
• A lack of objectivity in assessment
• Poor cost-effectiveness
• Detrimental effects to morale
• Pressure, stress and anxiety resulting from unrealistic demands

These all have huge potential negative effects. Each of them can lead to greatly increased absenteeism and presenteeism, and the stress/pressure performance-related reward can bring is linked to increased burnout in several sectors.

But the importance of performance-related pay in motivating employees in the sort of businesses who take that kind of pressure and turn it into spectacular results cannot be overstated. In the right place, PRP is the perfect way to grow your organisation. So, with that in mind, here are some ways to ensure your HR department is putting a PRP system in place in the right way:

• Work out what you need—sit down and formulate an attack plan. Talk to a select few staff about whether they would be open to PRP, and involve your key stakeholders
• Define the metrics—this is arguably the most important part. Start off by figuring out the performance metrics you intend to reward, and how you plan to track them. Add or take away these metrics as necessary, fine-tuning as you go
• Talk, listen, and communicate—it's not just about financial reward. Communicating company-wide about great achievements and major boosts to performance is a great way to let people know that you’re looking for—and proud of—the things your employees are doing. Similarly, make it completely clear that you’re open to feedback, comments and suggestions on the systems you put into place
• Evaluate, evolve, and educate—this won’t be a ‘one and done’ process. Your HR department will need to monitor, refine and iterate the system at a low level, constantly improving and changing as the needs of the business dictate. This won’t be a simple process—rewarding your HR for their own good performance here should be a priority...

If you have questions about this, or any of the topics covered in our blog, don’t hesitate to get in touch on 0844 891 0355