Human Resources Management

Question: Critically explore the different strategies of performance-related pay adopted by

organisations as a reward policy. (这个地方有什么会改变的吗？而且它说是 policy？）Answer
with reference to theory and evidence. (因为 performance management 和 PRP 不同，难道说我
要尽量少提到 performance management 吗？）theory：不用写违背了，写影响

1. Introduction

Performance Related Pay (PRP) is an approach for financially rewarding employees according to
their job performance (Chamberlin et al., 2002).

Organizations increasingly use PRP as their main reward policy today to align employee goals with
the companies’. Employees are also given financial incentives through PRP to encourage them to
fulfil performance goals (Beckmann and Kräkel, 2022). As an effective method of motivation, PRP
has been crucial to the development of businesses.

This essay aims to provide an in-depth discussion of the main three PRP strategies, their advantages
and disadvantages, and the key factors that influence their efficacy to determine the optimal PRP
strategy under different circumstances.

The rest of the essay will explore the theoretical foundations of the two primary theories, including
Expectancy theory and Equity theory. It will then evaluate the specifics of individual-based PRP,
group-based PRP, and organization-based PRP, followed by a brief conclusion and implications to
the management practices.

2. Theoretical basis
Performance-Related Pay (PRP) is a payment measure that ties employees’ financial benefits
(payments or bonuses) to the evaluation of their job performances (Perry et al., 2009).

Expectancy theory and Equity theory offer basic assumptions for PRP to generate value. First,
Vroom (1964) ’s expectancy theory states that an individual's motivation is based on their assertion
that higher contributions will lead to greater performance (expectancy), good performance will lead
to viable rewards (instrumentality), and their desirableness towards the expected rewards (valence).
Expectancy theory provides the fundamental rule for PRP to establish (Lee, 2019). Employees are
motivated by explicitly linking monetary incentives to great job performance. However, this also
suggests that PRP may be inefficient if the employees do not perceive that their efforts will result in
excellent performance or if the monetary incentives are insufficiently attractive.

Assumption 1 (Expectancy theory - PRP): Employees will exert more effort to attain greater
financial rewards.

Figure 1: The model of Expectancy theory (Adapted from Vroom, 1964)

Although PRP can be a useful tool for enhancing workers’ performance, variable factors exist.
According to Equity theory, workers feel motivated when they believe that their rewards are
proportional to their efforts, which gives them a sense of fairness (Adams, 1963). Also, the
employees will compare their input/reward ratio to those of their colleagues (Adams, 1963).
Adams's Equity theory demonstrates PRP has to operate with fairness and transparency for high
efficacy.
Assumption 2 (Equity theory - PRP): PRP is a fair system of rewarding employees.

Figure 2: The model of PRP in relation to Expectancy theory and Equity theory (Resulted from
Adam,1963; Vroom, 1964)

3. Individual-based PRP (IPRP)

3.1 Definition and Aim

This section discusses the first PRP strategy, individual-based PRP (IPRP). IPRP refers to an
employee's financial incentive being directly tied to his or her job performance, independent of
coworkers’ performances (Beckmann and Kräkel, 2022). The kinds of IPRP include performance
rewards granted in the form of base pay raises (merit pay) or one-time bonuses (bonus pay) (Brown,
2020). IPRP frequently seeks to stimulate individual potential by rewarding high performers and
fostering high-performance work cultures within the organisation. 承上启下

3.2 Evaluation
Directness and individual emphasis enable IPRP to be an effective method for generating
immediate stimulation for each employee. Firstly, base upon Expectancy theory (Vroom, 1964), an
employee is more motivated since IPRP creates a clear connection between an employee's
performance and monetary rewards. Secondly, with an organization recognizing individual
contributions, each worker is more encouraged to develop personally in order to complete tasks
(Brown, 2020), which is associated highly with effective human resources management measures.
Taking Lincoln Electric as an example (Lincoln Electric Company, 2013), it bonuses employees
based on their sales, with great performers receiving significantly higher than others. In interviews,
managers stated IPRP approach has been beneficial for building a competitive environment for
them to stimulate and identify the most capable workers (Lincoln Electric Company, 2013).
Therefore, IPRP could further result in higher organisational success.

The limitations of IPRP will be explained in two folds. First, based on Equity theory (Adams,
1963), IPRP should compensate employees with equal input/rewards to retain their motivation.
However, in the recent business-world (Gardner and Matviak, 2022), work outputs conclude non-
physical categories and place an emphasis on group-outcomes, which are harder to allocate fairly to
each individual. Therefore, in these scenarios, IPRP approach could not function appropriately.

Second, if the corporation only compensated upon easily measurable components among job
responsibilities, shortism could result. Due to the equal compensation principle (Hu et al., 2022),
employees would allocate their time and concentration to those tasks that are compensated rather
than other essential but uncompensated tasks. Consequently, it leads to a deviation from the
company's intended objective. For instance, Sear Auto-Repair encountered profit reduction issues
due to employees caring only about sales and not customer satisfaction (Gerhart and Rynes, 2003).
Therefore, IPRP may result in the fulfillment of short-term results as opposed to long-term goals,
which place a greater emphasis on difficult-to-measure tasks.

3.3 Role of Performance Measurement in IPRP Effectiveness

Consequently, the most essential factor influencing the effectiveness of IPRP is performance
measurement, which refers to evaluating the performance of individuals based on different specifics
of the organization (Brown, 2020).

The above findings indicate that IPRP requires fair and trustworthy performance measurement
systems. The primary categories of performance measures are behaviour-based and result-based
(Gerhart and Rynes, 2003). First, behaviour-based measures are primarily subjective evaluations of
an employee by his or her supervisor and include merit-based pay (Ershadi et al., 2019). It provides
a full view of the employee's performance that correlate with the organization's long-term
objectives. However, the behaviours-based outcomes are difficult to quantify and may incorporate
supervisor biases, resulting in less accurate reward choices. Second, the result-based measures place
a greater emphasis on observable results of an employee's effort, such as sales quotas (Dahlan et al.,
2019). These metrics are both more accurate and directly related to the company's survival and
prosperity. However, as stated previously, it may deviate from the company's long-term objectives.
This study concludes that in the context of IPRP, a combination of behaviour-based and result-
based measures is more effective. By incorporating both subjective and objective assessments of an
employee's performance, IPRP thereby boosts motivation and fosters both equity and long-term
success.

4. Group-based PRP

4.1 Definition and Aim

This section evaluates group-based PRP (GPRP), the second PRP strategy. GPRP refers to
employees working towards a mutual objective and being rewarded based on collective
performance, including profit-sharing and team-bonuses (Spiegelaere et al., 2016). Instead of
nurturing a competitive workplace like IPRP, GPRP encourages a collaborative culture.

4.2 Advantages and disadvantages

GPRP could be beneficial for achieving synergy value (1+1 >2) among employees. First, GPRP
fosters mutual support among group-members by correlating monetary rewards with the group's
joint achievements (Gardner and Matviak, 2022). So, employees are more likely to overcome
hurdles to reaching goals. An empirical study of 426 workers from 35 Taiwanese electronics
enterprises found a positive association between employees' collective behaviour patterns and
performance targets (Chiu and Tsai, 2007).

Second, GPRP is beneficial for achieving the company's long-term goals by nurturing a sense of
shared responsibility among employees. Since group-members are rewarded for collective
accomplishments, employees are motivated to share responsibility for the group's initiatives and
foster mutual trust. (Paais and Pattiruhu, 2020). In the business context, it may also refer to less
individualistic actions that pose a threat to achieving long-term objectives. Team bonuses are the
best example of a GPRP, which refers to the distribution of equal monetary rewards within a group
for achieving specific performance goals (Guay et al., 2019). A study of a US retail business with
200 outlets (Friebel et al., 2015), found that increasing team bonuses as a reward strategy earned
$3.80 in revenue per dollar and raised employee advocacy and customer satisfaction by 3%. Hence,
GPRP can motivate employees and develop a healthy group work culture to achieve long-term
success.
While GPRP has these significant advantages, it still has a potential disadvantage - the problem of
free-riders. The free riders dilemma occurs when employees are rewarded for group achievement,
even if some contribute nothing (Gerhart and Rynes, 2003). Based on Expectancy theory (Vroom,
1964), it may contribute to lower instrumentality if group-members perceive that their individual
efforts have less bearing on the group's performance and the rewards they receive. According to
Equity theory (Adams, 1963), GPRP's disproportionate input-to-reward ratio may make employees
question the fairness of scheme. Both would result in employee demotivation, particularly among
the most diligent workers, which would have a greater negative influence on the company. The
results of a quantitative survey of 927 workers in Belgian (Spiegelaere et al., 2016), for instance,
indicate a relative stagnation of employee motivation in actual organisational contexts applying
GPRP schemes.

4.3 Factors Influencing GPRP’s Effectiveness: Role of Employees’ Perceptions in GPRP

Hence, in the context of GPRP, the perception of employees will have the greatest influence on its
effectiveness (Wang et al., 2019), which refers to employees' views regarding their work,
colleagues, and the establishment.

The aforementioned findings indicate that GPRP requires employees' perceptions of companies as
supportive and fair in the evaluation and that the group free riders issue would not significantly
contribute to employees' dissatisfaction with reward schemes.

Despite the potential difficulties of lower employees' perceptions that may arise as a result of the
problem of free riders. GPRP is still of great significance, as the majority of nations, such as the
EU, today place a premium on partnerships and external collaborations for outputs and brand
portfolios (Manyika et al., 2021).

This study offers suggestions for enhancing employee perception by emphasising clear
communication and managerial monitoring. First, according to Carr and Walton (2014), the issue is
not one of individual perception but of environmental atmosphere and management. Therefore,
support should be provided by the managerial teams to recognise GPRP's fair operation, which
would increase employee motivation. This is supported by the above-mentioned study (Spiegelaere
et al., 2016), as the results were more stagnant in the past. Nevertheless, when explicit
communication of the collective objectives and supervision from the upper management teams are
implemented, the results of employee motivation improve. Then, the benefits of GPRP could
significantly outweigh its disadvantages.
5. Organizational-based PRP

5.1 Definition and Aim

This section evaluates the third PRP strategy, organization-based PRP (OPRP). OPRP connects the
monetary compensation of employees to the achievement of organisational performance goals, such
as profitability growth (Shields, 2015). OPRP, similar to GPRP, is a collective PRP strategy that
encourages employees to collaborate to achieve goals. However, OPRP is more concerned with
direct organisational success, instead of specific team performances (Ogbonnaya et al., 2017). In
addition, OPRP generally compensates the key contributors to the achievement of organisational
goals, as opposed to compensating everyone on the team equally.

5.2 Evaluation (OPRP is collective, but focuses on individual pay?)

OPRP is beneficial for aligning each employee's objectives with the company's objectives for
effective human resource management. First, by its nature (Ogbonnaya et al., 2017), OPRP
communicates the organization's perception of success to employees, providing them with a view of
the organization's short-term and long-term objectives, such as profit and market-share growth.
Second, the direct connection between employee compensation and organisational accomplishments
also supports (Ogbonnaya et al., 2017). For instance, OPRP's stock options (Billings et al., 2020), in
which employees are offered to purchase the company's stock, at a price below its market price, or
even received for free (non-qualified stock options). Then, as the profitability increase, so would the
employee's stock becomes more valuable. As employees achieve a higher return on investment,
they are more likely to contribute further to the company's success. For example, a quantitative
analysis of a US public-corporation (Cappelli et al., 2019) demonstrated that employees with higher
stock options value perform 1.3% better, resulting in a $126,000/store profit boost. Showing how
OPRP scheme aligns firm performance improvements with employee goals.

Then, OPRP serves as a powerful motivator for improved employee performance by increasing
employees' company belongings. Specifically, profit sharing and stock options are both excellent
examples, and both involve offering a portion of the company's earnings (profit) or a direct
financial interest (stock) to employees based on the success of their companies (Green and
Heywood, 2010). When employees are awarded direct equity in the company, they may experience
a greater sense of ownership over the organization's success. According to Expectancy theory, the
valence would be greater (Vroom, 1964). Together, higher-performing employees will have higher
expectations, driving them to do even better, while lower-performing employees will be encouraged
to train to become key contributors. Additionally, if the organisation continues to be prosperous,
employee retention may also increase. In a quantitative review of Pakistani companies in the
financial, healthcare, and telecommunication industries (Ahmad and Allen, 2015), employees who
participate in profit-sharing measures (schemes might be better? 区别？) have a lower quit-rate and
higher productivity. Also, profit sharing is one of the most advocated reward policies for motivating
employees, with a statistical significance level of approximately 5%. (95 per cent confidence of
accuracy).

Nonetheless, OPRP has disadvantages. First, as for employees, legal requirements vary by country.
In the UK, for instance, both income tax and NICs apply to stock option gains (Atwood et al.,
2012). As a result, the monetary value of the stock options will decrease, possibly resulting in a
lower valence of Expectancy theory (Vroom, 1964), and a consequent decrease in employees'
motivation to achieve performance objectives.

Secondly, in OPRP plan, mediocre managers may receive generous compensation. Similar to the
free riders in GPRP. Since OPRP often compensates for collaborative performances but towards the
organization's main contributors, which are usually upper-level administrative teams. So, some
administrators may receive stock or firm profits without appropriate contributions (Haan and Vlahu,
2015). This may cause demotivation among junior workers. Since they may believe that their
contribution has been disregarded, violating Equity theory (Adams, 1963). According to research
(Haan and Vlahu, 2015), the correlation found between the level of executive-team performance
and compensation level is not often consistent. And other investment teams have reported problems
and concerns regarding the executive team's possible unethical behaviour, such as using their
managerial authority to influence their compensation.

4.3 Factors Influencing OPRP’s Effectiveness: Role of Organizational Culture in OPRP

Consequently, in the context of OPRP, the organisational culture will have the greatest impact on its
effectiveness, which refers to the physical elements, company norms, shared assumptions, and
company norms that develop internally in an organisation and govern the behaviour of its
employees (Paais and Pattiruhu, 2020).

A strong organisational culture could be beneficial to mitigate the negative effects of the
prospective threat posed by OPRP. The study (Rizal et al., 2021) performed moderate regression
analysis on 20 Indonesian stock exchange-listed firms and found that to achieve positive
relationships between stock options and abnormal returns, organizational culture, including
regulations, and guidelines, is essential. In this section, it could be stated that, with a positive
organisational culture, the benefits of OPRP would outweigh its drawbacks.

5. Suggestion and conclusion

This essay evaluates IPRP, GPRP, and OPRP to help firms build effective PRPs to reward staff and
reach objectives. This study initially acknowledges Expectancy theory and Equity theory and makes
basic assumptions to support the rest analysis. The study then analyses the IPRP and finds that it
provides direct and instant stimulation but is best for organisations with simple and fairly
measurable performance standards. Then, the study examines collective tactics, GPRP and OPRP,
which, while distinct, are both vital because they match today's collaborative economy and help
businesses achieve long-term goals.

This essay concludes that organisations should mix the three tactics to maximise reward
performance and employee motivation. Since then, IPRP could deliver instant benefits to
individuals, GPRP forms collective responsibility and trust, and OPRP motivates employees to
contribute to corporate success. However this combination may be difficulties, therefore
organisations should decide based on specific situations.

1）单数复数🙆‍♂️
2）专有名词！definition！
3）reference，记住 doi

OPRP methods may be expensive for the organization's operations and its employees. Profit-sharing
and stock options result in the organisation distributing a portion of its financial equity to
employees for accumulation; this may be costly for the organisation. In addition, measuring the
performance of an organisation and identifying its main contributors require expensive and time-
consuming systems (Lazonick, 2014)
.A