Meaning of Performance Related Pay and Incentive System

Performance related pay (PRP) links any progression to a performance and/or competence rating. The rating could be carried out during a performance review, or it could be conducted at a different time exclusively for PRP purpose. PRP is sometimes called merit pay i.e. based on merit rating but this term is less used nowadays.
It normally provides for an increase in base pay, which is governed by a rating against such criteria as performance and contribution outputs, and skill and competence inputs. There may, however, be provision in some schemes for achievement bonuses to be paid in certain circumstances, which are also determined on the basis of rating carried out be managers on the individual’s performance etc. The overall objective of PRP is to provide incentives and rewards which will improve the performance by improving individual performance. To achieve this objective, the aims of the PRP are to,
  • Motivate all employees to perform better not only the high performance but also the core on which the organization depends.
  • Deliver a positive message about the performance expectations of the organization.
  • Focus attention and endeavour on the key performance issues.
  • Differentiate rewards to people consistently and equitably according to their contribution and competence.
  • Help to change cultures where they need to become more performance issues.
  • Reinforce existing cultures and values, which foster high levels of performance innovation, quality and teamwork.
  • Emphasize the importance of teamwork as well as individual contributions.
  • Improve the recruitment and retention of high quality employees who will expect PRP as part of a well-managed working environment.
  • Flex pay costs in line with organizational performance.
The most typical PRP system uses variable progression with in a pay range. The main features of such a system are following:
  1. Basic Characteristics: A PRP scheme provides for variable performance related payments in a pay range. This type of scheme, also known as a pay range scheme. Provides for progression within the range to be determined by performance rating.
  2. Rating: The size of performance-related increases in typically governed by rating. Scales need to be defined with great care and managers should be given explicit guidance on how they should decide on ratings.
  3. Size of Performance Related Increases: The size of performance-related increases are determined by ratings within the framework of policies on pay progression and limits and the limits of pay review budgets.

Performance Related Pay Guidelines

The guidelines for managers on conducting PRP reviews may simply consist of a statement of progression policy and the way in which it should be implemented. This might be accompanied by illustrations on how employees can progress through a range, advice on how to rate performance, the bud get for increase and the range of increases within that budget appropriate for different rating (i.e. A=10 – 20%, B = 6 – 9%, C = 3 – 5%). A more comprehensive approach to providing guidance is to use a performance matrix.

Establishing Pay Plans

The process of establishing pay plans consists of the following steps:
  1. Analyze present arrangements: The type of organization and its employees, the organization’s reward strategies and policies, the existing pay structure and how effectively it operates, and any specific objectives which the new or revised structure is expected to achieve.
  2. Set objectives and a time table for the review.
  3. Consider who are going to conduct the review, including the possibility of seeking gap from management consultants.
  4. Estimate the likely costs of conducting and implementing the review and agree a budget.
  5. Decide on the extent to which employees should be involved in the view. This is highly desirable, especially for job evaluation. And there are eves thing to be said for getting them involved as far as practicable with other aspects of the design. If there are trade unions processes of consultation and negotiation will have to be followed.
  6. Brief employee on the objectives of the review. How it is going to be conducted and how they will be involved call must be taken in this briefing to avoid creating expectations of a pay bonanza for all concerned.
  7. In the light of the analysis of present arrangement make preliminary decisions on what type of structures as required.
  8. Analyze and evaluate benchmark and related jobs.
  9. Obtain market rate information.
  10. Make a final decision on the type of structure or structures required and the main design and operational/features.
  11. Prepare a detailed design for the structure and how it will be managed and maintained.
Note: PRP = Performance Related Pay

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