Academic journal article SA Journal of Human Resource Management

A Formative Evaluation of a Pay-for-Performance System

Academic journal article SA Journal of Human Resource Management

A Formative Evaluation of a Pay-for-Performance System

Article excerpt


Key focus of the evaluation

The main aim of this evaluation was to assess whether the pay-for-performance (PFP) that at a South African university system introduced for administrative employees improved their performance. A secondary aim was to examine whether the university implemented the system as it intended to.

Background to the evaluation

Pay-for-performance systems emerged during the 1980s as the way to motivate employees and improve organisational performance (Cannell & Wood, 1992; Dowling & Richardson, 1997). However, research shows contradictory evidence as to whether PFP systems are effective motivational and performance improvement tools (Armstrong, 2006; Dowling & Richardson, 1997).

It seems that organisational contexts influence the effectiveness of these systems (Armstrong, 2003; Belcher, 1996; Gomez-Mejia, Wiseman & Dykes, 2005). According to Bruns (1996), PFP systems are most effective when implemented in organisations which foster trust between management and employees, do not have strong trade unions which oppose PFP systems and have an entrepreneurial or performance culture. Research also shows that PFP systems are less effective in improving team performance because PFP measurement tends to be individualised (Armstrong, 2003; Belcher, 1996; Bruns, 1996; Reilly, 2003; Wright, 2004).

Trends from the research literature

Elements of pay-for-performance systems

According to Ulrich and Brockbank (2005), two elements are the basis of PFP systems: measurement and pay.

Measurement consists of formal assessment and the ratings of managers. The main functional requirements for the measurement element of a PFP system are to distinguish good from bad performance and to separate past from future performance.

Records of past appraisals determine past performance whereas employees' development plans define future performance (Armstrong, 2003). Furthermore, the people the system affects need to perceive the measurement element of PFP systems as fair if it is to fulfil its motivational function (Armstrong, 2003; Edwards, Scott & Raju, 2003). Doran (2008) reinforced this idea and suggested that the employee ratings managers give should undergo independent moderation so that employees will see rating decisions as less subjective and discriminatory.

The pay element of PFP systems shows what and who organisations value (Holbeche, 2004). In addition, this element should reinforce positive employee behaviour so that employees can achieve their goals and improve their performance (Henderson, 2006).

This element of PFP systems is most effective when it links visibly to performance, when it gives employees feedback soon after they achieve outstanding performance and when it deducts pay if the recipients do not continue to perform (Eichinger, Lombardo & Ulrich, 2004; Rosenthal, Landon, Howitt, Song & Epstein, 2007).

The pay element of PFP systems should provide an adequate pay incentive (Doran, 2008; Rosenthal et al., 2007). According to Henderson, reward-related pay made in lump sums is more effective than percentage increases because lump sums have a more positive effect on employees' motivation and, therefore, on improved performance. In addition, Armstrong (2003) states that percentage increases do have a positive effect on employees' motivation and performance as long as the increase is between 10% and 15%.

Human resources (HR) publications rarely explore the pay element of PFP systems. One may attribute this to the fact that HR does not exclusively control the pay function of PFP systems. Quite often, finance departments are responsible for the pay element. In these cases, HR has focused on the measurement element. This could be problematic because it could separate the pay and measurement elements in PFP systems. Organisations need to align both of these elements to produce effective PFP programmes.

Standard requirements for implementing pay-forperformance systems

The essential requirements for implementing PFP systems successfully are:

* the commitment of managers to the system

* a focus on the implementation process rather than on designing the systems

* support from key stakeholders

* clear communication about the systems (Armstrong, 2003; Rosenthal et al. …

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