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Annie Hayes

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The final curtain-call: Paying for performance

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Is it 'curtains down' for PRP?
Performance-related pay (PRP) is the bedrock of motivation at many organisations – or so they’d like to think. Annie Hayes finds out whether these schemes continue to push the right buttons or if it’s time for the curtain to come down on them.


What is PRP?

PRP, in reality, is a reward strategy based either on short-term, cash-based bonus and incentive schemes, to longer-term PRP plans payable on delivery of key projects or annually, either as lump sums or, popularly, as share options.

According to the latest Chartered Institute of Personnel and Development (CIPD) reward survey (February 2007) the most common type of PRP scheme is an individual-based plan, followed by one driven by business results.

Most organisations, says the professional body, have more than one scheme. A sizeable proportion of private sector service employers and larger organisations take that one step further operating four or more plans. And it gets more complex; PRP plans are popularly tailored to departments, seniority and type of worker. One-size rarely fits all.

Does it work?

This is the million dollar question. Stephen Walker, founder of Motivation Matters, fears that PRP schemes become an end in themselves. He says that the only way they work is to make them directly related to organisational performance and timely.

“An annual profit share scheme does not relate easily to the time domain of the work, for example. Do you make the effort to make that last sales call at 5.45pm for a possible bonus in a year’s time?”

“An annual profit share scheme does not relate easily to the time domain of the work, for example. Do you make the effort to make that last sales call at 5.45pm for a possible bonus in a year’s time?”

Stephen Walker, Motivation Matters

The answer is most certainly not, but if you are a trader it’s all about the PRP, and staying on the trading floor for a 60-hour week is probably worth it taking into account that city workers can take home many multiples of salaries in their bonus alone.

Charles Cotton, CIPD reward and employment conditions adviser, says that whilst there is evidence that pay can motivate people, there are problems associated with what happens when pay drives workers in ways that aren’t intended: “Take, for example, call centre operatives that are paid on the number of calls not the quality – workers putting calls down after two minutes to fulfil the objective. It’s the customer that loses out. There are also the cases of pension and endowment scandals – the results of commission-based sales.”

Another sticky area is assessing the level of performance. For jobs in which PRP forms a key part of the reward package, including sales, performance tends to be quantifiable, for instance, how many sales calls that are made. But for more senior jobs and for other less tangible disciplines, measuring performance is far from black and white.

There are a number of Wall Street titans who have come under fire recently; in these cases it is harder to assess whether poor performance is the result of a lack of management or external influences.

PRP – getting the implementation right

Walker says that PRP is not just the preserve of senior management either.

“If the organisation has employees who are not essential to its health then one should ask why.” When everyone is eligible, what often results is tiered schemes. But, warns Walker, a plethora of schemes is likely to have conflicting priorities.

“A small company I visited recently had moved from an individual to a team-based PRP scheme. The individual scheme had caused arguments about favoured people getting the easy jobs. The team scheme was said to be working very well. But if it was working well, why was there a backlog of work of a week and a half?”

Cotton says that organisations are continuously refining the processes and advises businesses not to get too hung up on the money element. “Spend more time on assessing performance and make sure you communicate what you are doing. The problem with PRP is that you are dealing with ambiguity and compromise.”

“Spend more time on assessing performance and make sure you communicate what you are doing. The problem with PRP is that you are dealing with ambiguity and compromise.”

Charles Cotton, CIPD reward and employment conditions adviser

CIPD president Vicky Wright, who has specialised in reward for the last 20 years and who previously headed up Ernst & Young’s performance and reward team, likened the challenge of implementing reward strategies to composing music.

Speaking at a past CIPD rewards event and referring to Michael Porter’s 1980 Competitive Strategy, she said: “The A implementation of a B strategy is better than the A strategy with a B implementation.”

Of course, deciding how much is enough is part and parcel of the whole PRP debate. Walker suggests that you must firstly look at what the competition is doing, but analyse it in context; and the PRP scheme needs to directly support the behaviour you want for your organisation.

He adds: “I am reminded of the PRP schemes discussed between two salesmen. One sold computers; the other bridges. The computer salesman made a lot of commission every month – business was good. The bridge salesman sold a bridge every year or two – but wow, his commission was good when he did!”

Is PRP enough?

When we take PRP schemes as a whole, we are rarely talking about life-changing sums – these are sadly just the realms of city traders and that is a huge problem; PRP for the masses isn’t an earth mover.

Even where money does talk – bosses make the mistake that it is the only motivator. Charles Handy, HR commentator and author recognises this. In his book The New Alchemists, Handy talks of portfolio people. Employers, he says, must remember that people are multi-faceted – a banker may be a magnificent number-cruncher, but he or she may also be a mother, a father, a musician, a gardener, a volunteer – you get the point. There are numerous studies to show that work-life balance is as strong a contender for motivation as is money.

The answer for many organisations is offering PRP as part of a well-balanced rewards package.

So it would seem that PRP schemes are far from being a precise art. Whether PRP delivers performance-based results is a debate that will continue apace and, whatever you think, their popularity is increasing. According to the CIPD, of those employers that don’t have a bonus scheme (30 per cent), 16 per cent plan to introduce one this year.

And on the upside, one report says that PRP actually boosts levels of employee happiness. According to the Lancaster University Management School, people who were given profit share and bonuses had higher job satisfaction, were happier about their working hours and felt they had more job security.

What reward specialists have taken on board is that it simply isn’t enough to dangle the carrot and wait for the bite, employees are savvier and they want more than just pay to attract and retain them in the long-term – meeting those aspirations is the real challenge.

One Response

  1. Paying for performance
    A great article from Annie, as always!

    Having worked in the USA, where pay for some sales people in particular may exclusively be performance-based (no sales, no pay – but key performers get paid far more than their senior managers), this is clearly counter-cultural to many European companies. Even though this approach seems to work very well in their ‘hire and fire’, entrepreneurial-driven economy (another subject?) – it clearly does not sit well with many employee-expectations on our side of the pond.

    This doesn’t stop the insurance and finance sectors in particular offering very high ratios of base-pay to actual pay I know, nor many other sectors involved in B2C trading in direct contact with the end consumer.

    Nevertheless, there is a clear trade-off between highly-rewarded performance and both customer and employee satisfaction. Whether selling insurance, bonds, time-share, cars, double-glazing, kitchens or whatever; employers clarly get what they are prepared to pay for, and so do their customers.

    The fundamental problem with such highly leveraged reward schemes in our culture is, in my view, that they break several ‘golden rules’.

    First, such employers rarely pay for higher-level skills-training and further career development. So unless the employee is entirely short-term oriented, the churn rate of better recruits is likely to be very high – and so is customer disatisafction.

    Secondly, highly leveraged reward schemes can distort business values, so that bad deals may readily be done, for both the supplier and the consumer, to neither parties’ advantage. They can also set up vastly unproductive team-rivalry when team-playing may be all.

    Thirdly, you only get what you pay for. Targets that trigger significant extra pay need to be specific, measurable, open to personal (or at least team) influence, easily understood, rapidly paid, transparently ‘fair’ – however that is perceived, not value-distorting and directly related to corporate objectives. That is a tough call. But otherwise, they are meaningless.

    In my own experience, any financial reward that offers more than say 20-30% bonus on top of a base salary to an employee in our culture is open to challenge for its real-time effectiveness – and I specifically exclude serial entrepreneurs in this judgement who may have quite different motivations, such as Owner-Managers, who are not employees of someone else.

    So what then?

    Reward professional development and offer a career structure that can enhance this; reward shorter-term performance with short-term (minor) rewards by all means; reward longer-term coporate success with share-options and security (most longer-term employees’ prime concern?); but be very of wary of all their consequences?

    Never forget, what you give today, others will expect tomorrow – and forever?

    Best wishes

    Jeremy

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