Accountancy: Faulty PR in PRP schemes: Performance-related pay needs better training and communication, argue Vicky Wright and Helen Murlis

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READERS of most big newspapers over the past few months could be forgiven for thinking that performance-related pay (PRP) is rapidly becoming discredited. Reports have cast doubt on its motivational value for the majority of employees and implied that it does not 'work'. What are we to believe? What should be the response of organisations that use, or plan to introduce, performance rewards? Is there a case for pulling out? And if so, what are the alternatives?

Reports of the death of performance-related pay seem somewhat exaggerated. Neither the private nor the public sector is retreating en masse. The few withdrawals have, in general, been for reasons that make sound managerial sense in specific and normally exceptional circumstances. These have been seized on and reported to an extent way beyond their significance in the UK economic scene.

What populist criticisms neglect is a fundamental consideration of how companies need to manage reward in a competitive and challenging business environment. UK industry has been at the forefront in Europe in creating organisational structures and working cultures that give scope to individuals and small teams to improve their performance. Old bureaucracies that constrained performance have disappeared fast.

It is difficult to justify rewards based only on service and seniority in those businesses where individual accountability is a key value of the organisation.

Similarly, delayering has meant that high performers are likely to stay in jobs longer. The old performance reward of promotion is not available to the same extent in such organisations. But there is no doubt that the value created by the high performers is superior to that of their fully satisfactory but less innovative or competent colleagues. Not recognising this in reward is seldom seen as fair and courts loss of good people to competitors prepared to pay the performance premium.

But the researchers and critics of performance-related pay are not entirely wrong. Contained within the fine print of research reports are some salutary lessons. From our reading of these reports and from our own research over many years in evaluating the progress and operation of PRP (of which the most recent study is our 1993 'Evaluation' of the performance-related pay scheme for top civil servants), there is widespread acceptance of the principle of rewarding performance, but a common litany of problems:

Lack of clarity about what performance-related pay is for; implementing it because it is the 'right thing to do' rather than being clear about what organisational success should look like and the contribution of pay in helping achieve this.

Poor definition of performance; the criticism that PRP has encouraged inappropriate and short-term performance is more to do with poor targeting than the pay system.

Poorly thought-out links with performance management and the delivery of business strategies and plans.

Implementation at a time when the prevalent organisational climate and management styles were characterised by low levels of trust and co-operation.

Insufficient training and communication in the working of both performance management and the pay processes, including the roles of coaching, objective setting and positive forward-looking reviews.

Largely as a result of the above, inconsistent performance rating and pay distribution with too much attention paid to individual (as against team) performance and 'hard' objectives rather than a broader view of performance (including skills and competences).

Performance-rating systems that hark back to school reports in the language they use, rather than documentation that encourages open and honest discussions about performance.

From these hard lessons a very clear agenda has emerged. The first point to recognise is that effective processes for setting performance objectives or standards coaching and performance review is the foundation on which everything else is built. In effect, implementing performance management means using it as a core business and people process. This also means taking a view on how to define, encourage, monitor and measure total performance.

From the work we are doing with clients across many sectors of the UK economy, we know that total performance entails not just the boss looking at results and competences but also performance 'in the round'.

A growing number of organisations are developing a '360 degree' view, which means that the perceptions of self, peers, staff in more junior roles and both internal and external customers may also be taken into account. It involves managing performance on a continuous basis as the 'way things are done around here', rather than an annual appraisal system linked to a performance progression or bonus scheme.

Second, pay needs to be removed from the uncomfortable position of being the primary driver for performance improvement - a role that sits uneasily with most respectable motivation theory. Crude 'carrot and stick' philosophies can work in some circumstances, but seldom have enduring positive effects where individuals have more complex motives and values about work. In most situations, performance-related pay is only part of a consistent message about recognising and rewarding success.

Third, performance-related pay must be seen as part of a broad approach to reward management - not a separate or discrete item. At a time when low inflation and earnings movement means that pay increases are well below the levels of previous years for the vast majority of employees, a holistic view of pay and performance is needed.

High on the list must be the recognition that pay levels, after a number of years of good performance, are more of a reward and source of real pay differentiation than the size of pay increase in any given year.

This outlook also provides opportunities for more creative approaches to both team and individual rewards - cash and non-cash within the work cultures needed to meet the competitive demands of the mid 1990s.

Evaluation of the performance related pay scheme for Grade 2 and 3 Civil Servants by Hay Management Consultants. Annexe to the Sixteenth report of the Senior Salaries Review Body Cmnd 2465 - HMSO 1994.

(Photograph omitted)