The value of HRM to business organisations
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Section 1: Literature Review
The approach to the employment of people experienced a major shift from traditional personnel management towards human resource management (HRM) in 1980s, when the deflation and recession crashed into the infrastructure of employment. After that shift, the employees were more likely assumed as valuable assets and a key source of competitive advantage (Marchington and Wilkinson, 2002), and the effective management of ‘resourceful humans’ tended to be seen as a crucial approach to improve organizational performance through ‘the strategic deployment of a highly committed and capable workforce using an array of cultural, structural and personnel techniques’ (Storey, 2007, p.7).
As an integral and prominent part of HRM, the pay and reward management also has undergone many considerable changes over the past two decades driven by the shift of organizational management as mentioned above. More recently, the notion that equilibrium pay level results from Adam Smith’s “invisible hand” – market forces – can hardly explain the pay and reward system of HRM, which involves far-researching aims (Gilman, 2009). Lawler’s ‘new pay’ began to attach much importance to the understanding of the organization’s goals, values and culture and the challenges of a global economy when formulating pay strategy (Armstrong, 2002).
And its model suggested that the reward strategy should consist of three key elements: the organization’s core value, structural issues and process, whose consistency would be the key factor of effectiveness of the reward system (Lawler, 1995). More frequently, the reward system is now linked to business strategy through motiving people to behave in expected ways. As Gomez-Mejia (1993, cited in Kessler, 2007) stated that the new approach to pay is more about achieving business objectives, rather than the issues of internal equity and external equity.
However, the reward system as a strategic tool in practice is quite doubtful. Many studies showed the indeterminate results from such system like PRP in terms of performance (Gilman, 2009). And Lewis (2006) also pointed out the limitations of assumptions in Lawler’s model. What’s more, the pay design is fraught with difficulties in changing people’s behavior for organizational goals. For example, the business objectives may contradict on each other in pay policy (Marchington and Wilkinson, 1998). Additionally, it was argued that the business strategy should not be primacy over internal and external equity. As Kessler (2007) suggested that the employees are more likely to feel good and act in ways to progress business objectives if they are paid fairly. And he also pointed out that business strategy and equity may be well related, rather than being alternatives.
In the light of these statements, various types of payment scheme are developed such as Payment by Results, Performance Related Pay, Total Reward and Skills-based Pay. And each of them involves a range of principles like internal and external equity, working time, outcome, skills and competencies, effectiveness, experience. The combinations of different principles vary from organizational objectives, cultures and features. Thus there is unlikely to be an all-fit system for every organization. This paper will then focus on the Performance Related Pay (PRP) and the organizations with PRP system.
Performance-related Pay (PRP) appears in organizations during 1980s as a result of motivating people to improve their work performance and developing a culture which performance plays a determinant role. First-generation system implemented in the 1980s did not acquire desirable results. Some organizations are carrying out second-generation system to avoid previous mistakes. Others are trying the pay relevant to competence or contribution (Armstrong, 2002). Nowadays, PRP is introduced continuously in two-thirds of organizations (Marchington and Wilkinson, 2002). ‘Performance-related Pay (PRP) provides individuals with financial rewards in the form of increases to basic pay or cash bonuses which are linked to an assessment of performance, usually in relation to agreed objectives’ (Armstrong, 2002, p. 286).
According to Armstrong (2002), Performance-related Pay provides the following potential advantages: Firstly, it incents individuals and thereby enhances personal and organizational performance. Secondly, it can be used as a lever for change. Thirdly, it conveys an idea that performance plays a significant role in general or specific fields. Also, it connects incentive programmes with the fulfillment of certain results which contribute to realize organizational goals. Additionally, it is beneficial for organization to recruit and retain people with monetary incentives. Finally, it satisfies a fundamental human need – to acquire rewards for fulfillment.
However, there are some problems about PRP. If employees agree about the principle and practice of PRP, then they will do better jobs and organization will acquire beneficial outcomes. Inversely, if they do not agree about either the principle or practice of PRP, they will not be motivated effectively for better work performance and organization will get bad outcomes (Lewis, 1998, cited in Marchington and Wilkinson, 2002).
According to a research made by Marsden and Richardson (1994, cited in Marchington and Wilkinson, 2002), PRP may cause jealousy among employees. Unfairness exists in distribution of performance payments which is the major reason for the non-efficiency of motivation. The amount of money is also a significant element for successful introducing PRP. If it is not large enough, then it is hard to trigger a change in work performance. As Lawler (1990, cited in Marchington and Wilkinson, 2002, p. 501) suggested that variable pay less than 10 per cent of base salary would be not attractive in PRP scheme.
An organization introduces and develops a PRP programme generally involving these main stages: setting objectives for rewarding employees according to their performance; analyzing the circumstances of organization, including its culture and the type of employees; determining who should be participated in – line managers, team leaders, employees and trade unions; considering methods of performance appraisal; carrying out the plan and assessing its effects. PRP should be schemed and conducted with great care and organizations have to be flexible to adjust the plan timely for constantly changing environment and the feedback from staff (Armstrong, 2002). The following part will describe two organizations conducting PRP scheme.
Section 2: Case Study Description
In this section, two pieces of empirical researches are introduced for the further analysis in next section. The first case of Finbank is regarded as an unsuccessful case of PRP system. And the second case of NHS has been chosen for two reasons: Firstly, though NHS is not exactly a business organization, the PRP of NHS was set by commercial-oriented objectives (Bach, 1994, cited in Dowling and Richardson). Therefore NHS still bears mush resemblance of business organizations in respect of PRP. Secondly, few empirical researches showed the positive result of PRP in the four journals. Thus the case of PRP in NHS is introduced here for its commercial-oriented objectives and relatively successful results.
2.1 The case of Finbank’s reward strategy for managers (Summarized from Lewis, P. (2000) Exploring Lawler’s new pay theory through the case of Finbank’s reward strategy for managers. Personnel Review, 29(1), pp. 10-32.)
The article explains consequences and effectiveness of introducing PRP in Finbank, by using Lawler’s model, where Lawler argues that three principal elements of reward system – core vale, process and structure – need to be consistent for the effectiveness of the system. The interviews of managers and personnel staff were conducted to explore their views on the reasons why the bank adopted PRP, and the extent to which it was successful.
Finbank introduced the new reward system with the business objectives of ‘driving up income and driving down costs’, where the incremental system never worked and any increase in salary depended on performance. This shift was expected to create a “performance culture”, while the process of implementation was more likely to result in a reduction of trust between Finbank and its managers. Consequently, PRP in Finbank was regarded as the main measure of cost control, not incentive mechanism for better performance.
The research showed that the low level of communication was the one of main features in Finbank’s PRP and reduced the effectiveness of the whole system. A lack of participation and involvement in objectives setting and performance appraisal resulted in low acceptance of the new system, and low levels of openness in performance feedback and reward criteria also declined the credibility of PRP process.
In conclusion, a fundamental inconsistency between the process and the values in Lawler’s model was argued for the deficiencies of PRP system. While, more limitations of a simple top-down process assumption, an assumption of causal link between reward strategy and employees’ behavior, deterministic assumption in Lawler’s model were tested by the Finbank case.
2.2 The case of PRP system for managers in the NHS (Summarized from Dowling, B. and Richardson, R. (1997) Evaluating performance-related pay for managers in the National Health Service. The International Journal of Human Resource Management, 8(3), pp. 348-366.)
This paper assesses the use of PRP (performance-related pay) for NHS (National Health Service) managers and explains the limited success drawbacks in the scheme’s design and administration. In addition, some refinements and implications of the scheme are also concluded.
In the first section, the author gives a brief introduction of NHS scheme. The three key elements of the scheme include the setting of objectives, the appraisal of the degree that these objectives being achieved and the increased payment linked to the assessment.
As for the evaluation criterion of the scheme, the author took various factors into consideration, such as its impact on manager’s motivation. However, evaluating a single policy innovation can be rather difficult as long as the circumstances maintain uncertain. To make subjective judgments of the extent the scheme succeeds, some explanatory theoretical framework based on scheme’s three key elements is also launched, including structured interviews and questionnaires for gathering data from managers.
According to the respondents, the scheme exerts limited positive effects on managers’ motivation and colleagues’ co-operation, and no evident corresponding negative consequences are indicated. The difference in the results may be explained in the following two reasons: the better implement and the mature design. The author tries to figure out why the scheme motivates only a certain group of people by examining the raw data and using formal multivariate analysis on further study of the scheme’s three elements.
Considering both the qualitative and quantitative material involved, the initial examination of the raw data suggests that the three elements of the scheme have different degrees of success. Respondents were most satisfied with many of the objective-setting process elements which may result from improved motivation levels; however, respondents expressed more insistent reservations on the of the performance-judging process elements; in terms of the rewarding element, even few respondents believed the scheme’s financial provisions themselves act as an incentive. So this could be another problem of implementation which hinders the success that the scheme supposed to have. Section 3: Analysis and Conclusions
3.1 Analysis of the case of Finbank
As mentioned in the section 2, the research of Finbank’s reward strategy followed the analytical structure of Lawer’s model, where the effectiveness of the reward strategy depended on the consistencies between three crucial elements: the organization’s core values, process of implementation and the structure of pay. In this section, the element of process will be focused and used as analytical framework.
3.1.1 Setting objectives
In the major background of recession and deflation of the 1980s, it seems reasonable to set the business objectives as ‘driving up income and driving down costs’ in the condition where PRP was introduced to Finbank with the closure of branches and the consequent loss of jobs. According to author’s research, most managers interviewed regarded cost reduction as a major motive for the introduction of PRP, which led to reduction of trust between the Finbank and its managers.
This negative effect of PRP results from the fact that the business objectives may be contradictive on each other in pay policy (Marchington and Wilkinson, 1998). For ‘driving up income’, the bank want to create the managers behaviors and attitudes meeting with customers’ needs. Whereas for ‘driving down cost’, salary cost – the major cost in the financial industry – would be cut producing negative attitudes. For sure, the motivational effects of PRP were seriously restricted by the objective of cost reduction.
3.1.2 Measuring performance
As Beer and Walton (1984) suggested, the acceptance could be improved by the involvement and participation in decision making and administration of reward system, but such participation was rare for the time-consuming. The research also showed the low acceptance and credibility of performance appraisal with the lack of such participation in Finbank. And the author argued that the criteria of appraisal encouraged managers to focus on “hard” financial and short-term targets rather than “soft” and long-term ones like developmental relationships with staff and customers, which managers thought were more important. It sounds reasonable, but more cautious consideration should be taken in this issue. For the “soft” performance cannot be reliably tested and easier for managers to argue. And such is human nature, that the “hard” criteria of PRP can hardly meet pleasantness of “risk-averse” employees, who were used to enjoy the security and predictability of the automatic annual increase in the incremental system.
3.1.3 Performance feedback and translating performance into reward The research showed that there was little feedback on performance received by managers. Furthermore, there were no clear criteria about how to translate a certain performance into reward. These two processes have key functions in changing employees’ behaviors, where Finbank seemed to be a failure. Furthermore, a lack of openness in performance feedback process and reward criteria led to the low trust and credibility in the whole PRP process, which seriously had negative impact on the effectiveness of the system. Personally, the lack of money available to drive the PRP and the cost-control objective appeared to be the main reasons for these results.
3.1.4 Major value of PRP in Finbank
PRP was a powerful symbol of “performance culture” at Finbank, which emphasized individual performance rather than the length of the service. This major shift of culture would definitely change employees’ attitudes and behaviors. Though it seems that the change was not positive and the motivational effects of PRP was a failure in this case, the PRP was still an integral and crucial part of business strategy of Finbank, which drove Finbank from poor commercial performance in 1980s to a recovery in profits in 1900s. On the credit side, PRP of Finbank indeed achieved one of the most importance objectives – driving down the cost, which practically is the obvious and vital value of PRP in Finbank, though it is theoretically not the major function of PRP.
3.2 Analysis of the case of NHS
The analysis from the research suggests the PRP scheme in NHS is comparatively successful. Although Marsden and Richardson (1994, cited by Dowling and Richardson, 1997) state PRP not only has positive influence, it also has many serious drawbacks; Thompson(1993, cited by Dowling and Richardson, 1997) argues PRP may demotivate employees rather than incenting them; Cannell and Wood(1992, cited by Dowling and Richardson, 1997) question the role of monetary incentives in motivation, because they believe people who work for Health Service are not for money; according to the questionnaire, 29 per cent managers motivated by the scheme and the majority of them thought they work harder than before. From this point, in my opinion, the PRP in NHS is working, but with limited effectiveness.
The PRP scheme in NHS has three elements: setting objectives, judging performance and the according rewards. Goal setting plays an essential role in PRP scheme. The best objectives are challenging but reasonable with agreed deadlines, otherwise, it may challenge managers instead of motivating them. Besides, making objectives clearly and acquiring feedback and support from immediate superior also exert an impact on the effectiveness of objectiveness. While the process of goal-setting in NHS is relatively success, because the majority of mangers thought objectives fit above
characteristics and enhance their motivation and work behavior.
For judging performance, to a certain extent, it reduces the effectiveness of PRP in NHS. As mentioned in the material, 67 per cent managers thought it is subjective to evaluate work performance to determine the awards. It is hard to keep fairness in judgment which is from the ideas of assessors. To conduct PRP scheme, it is necessary to remain objectives in performance appraisal with agreed criteria.
As mentioned in section 1, the amount of money is also an important element for successful introducing PRP. If it is not large enough, then it is hard to trigger a change in work performance. NHS managers appear to do not pay attention to this point. From the research, it can be found the monetary incentives were thought to be sardonic which was too little to act as a motivator. Probably, the limited cash environment may be a reason for it. The feeling of not reflecting personal fulfillments and subjective judgments make the rewards highly critical.
After analyzing main elements of the scheme, some aspects of it should be improved by policy makers. Firstly, people challenged by their objectives may be motivated to work harder. Therefore, objectives set should make people feel reasonable. This demands managers acquire appropriate feedback and support from their immediate superiors timely. Additionally, the process of performance appraisal should be operated with fairness. Otherwise, it may destroy the sense of challenge and cut down PRP’s effectiveness of motivation. Secondly, the scheme’s financial aspects are the other important part. The scheme should make the clarity to managers of the relation between effort and rewards, which is beneficial for strengthening the reliability and predictability of PRP scheme. Thereby, it heightens the motivational and behavioral effects of PRP scheme. (2922)