Critical Analysis of Performances-

Related Pay Strategies and Their

business implications

Z0177655
BUSI

1. Introduction

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Performances Related Pay (PRP) is an approach for financially rewarding employees ac-
cording to their job performances (Chamberlin et al., 2002). As an effective method to
align employee goals with the companies (Beckmann and Kräkel, 2022), PRP analysis is
crucial to the development of businesses.

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 indi-
vidual-based PRP, group-based PRP, and organization-based PRP, followed by a brief
conclusion and business implications to assist HR managers to determine the optimal PRP
strategy under different circumstances.

2. Theoretical basis

2.1 PRP Influences and Theory Context

PRP is a payment measure that ties employees’ financial benefits (payments or bonuses)
to the evaluation of their job performances (Perry et al., 2009). According to studies, PRP
can serve as an effective motivator to increase employees' productivity, enhance retention,
and foster a cohesive corporate culture (Beckmann and Kräkel, 2022), resulting in finan-
cial and non-financial organizational success (Gardner and Matviak, 2022).

Hence, motivation theories: Expectancy theory and Equity theory provide two hypotheses
that explain why companies utilise PRPs rather than other non-performances related meth-
ods, such as seniority-based pay, as reward policies:

Assumption 1 (Expectancy theory - PRP): Employees will be motivated to achieve high

performances if they believe increased financial rewards will follow.

Assumption 2 (Equity theory - PRP): PRP is a fair approach to rewarding employees,

and it helps organisations address issues of equity.

2.1 Expectancy Theory

First, Vroom (1964) ’s expectancy theory states that an individual's motivation is based on
their assertion that higher contributions will lead to greater performances (expectancy),

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good performances will lead to viable rewards (instrumentality), and their desirableness
towards the expected rewards (valence). Lee (2019) found out that the efficacy of PRP de-
pends on the level of employees perceive that their efforts will result in excellent perfor-
mances and the attractiveness of the monetary incentives. Expectancy theory establishes

the fundamental assumption for PRP working as a motivator. Nonetheless, it also raises a
potential concern: whether the monetary incentive would provide a high valence relative
to other rewards, and if yes, to what extent?

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

2.2 Equity Theory

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

Although PRP can be a useful tool for enhancing workers’ performances, variable factors
exist. According to Equity theory (Adams, 1963), workers will compare their input/reward
ratio with their colleagues’. If employees perceive that the ratio is equitable, they will feel
motivated. But if their ratio is lower or higher than that of others, they may experience
feelings of unfairness or self-reproach, demotivating them (Keller, 2020). Hence, Equity
theory demonstrates that organizations have to operate PRP with fairness and trans-
parency for high efficacy. Especially if equity issues are managed well, the PRP can be
used to demonstrate the company's value of human caring, further supporting its use as a
significant incentive method.

3. Individual-based PRP (IPRP)

3.1 Definition and Aim

First, individual-based PRP strategy (IPRP), defines as an employee's financial incentive
being directly tied to individual job performances, independent of coworkers’ perfor-
mancess (Beckmann and Kräkel, 2022). The kinds of IPRP include rewards granted in the
form of base-pay raises or one-time bonuses (Brown, 2020). IPRP frequently seeks to
stimulate individual potential and foster a meritocracy corporate culture by rewarding
high performers.

3.2 Evaluation
IPRP provide the benefits of Instant simulation and higher engagement. First, supported
by Expectancy theory (Vroom, 1964), an employee is instantly motivated because the
IPRP clearly demonstrates that with improved individual performances, the employee will
receive higher monetary rewards. Second, with an organization recognizing individual
contributions, each worker is more committed to their work (Brown, 2020), which is asso-
ciated highly with effective human resources management (HRM) measures to establish
engaged workforces. For example (Lincoln Electric Company, 2013), Lincoln Electric
bonuses employees based on their sales, with high-performers receiving significantly
higher than others. In qualitative interviews, managers stated IPRP approach has been

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beneficial for building a competitive environment for them to identify and stimulate the
most capable workers (Lincoln Electric Company, 2013). Therefore, IPRP would be bene-
ficial to increase employees’ emotional investment and physical output of their work, ulti-
mately contributing to the success of the organisation.

The limitations of IPRP will be explained in two folds. First, in the recent business-world,
work outputs conclude non-physical categories and place an emphasis on group-outcomes
(Gardner and Matviak, 2022), which are harder to allocate fairly to each individual. How-
ever, this contradicts Equity theory (Adams, 1963). Therefore, in these scenarios, IPRP
approach could not function appropriately as a motivator and could possibly lead to demo-
tivation due to unequal input/rewards.

Second, if the corporation only compensated upon easily measurable components among
job responsibilities, short-termism 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, Credit Suisse's
unethical money utilisation scandal was one of the primary reasons for its significant
share price decline (Walker and Morris, 2023), demonstrating the harm of IPRP when em-
ployees care only about revenue targets and not risk and trust management. Therefore,
IPRP may hinder organisations’ financial stability and long-term success, which places a
greater emphasis on difficult-to-measure tasks.

3.3 Role of Performance measurement in IPRP Effectiveness and Suggestion

The most essential factor influencing the effectiveness of IPRP is performance measure-
ment (Dahlan et al., 2019), which refers to evaluating the performances of individuals
based on different specifics of the organization (Brown, 2020).

The above findings indicate that IPRP requires fair and trustworthy performance measure-
ment 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 a direct supervisor, utilized in merit-based pay
(Carr and Walton, 2014). It correlates with the organization’s long-term objectives (Er-
shadi et al., 2019), hence providing a crucial and full view of the employee's perfor-

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mances. However, the behaviours-based outcomes are difficult to quantify and may incor-
porate 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), to be 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.

Although IPRP could effectively enhance employees performancess, to attain potential

long-term viability, it is essential that the organisation mitigate IPRP's equity concerns
and the risk of employees engaging in unethical behaviour as a result of a narrow focus on
sales targets. This essay suggests that IPRP should combine behaviour-based and result-
based performance measures to ensure employees’ performances aligns with organisa-
tional goals while also maintaining accurate assessments.

4. Collective - Group-based PRP

4.1 Definition and Aim

Second, this section evaluates group-based PRP strategy (GPRP), which defines as em-
ployees working towards a mutual objective and being rewarded based on collective per-
formances, 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 correlates monetary rewards with the group's joint achievements, leading to greater
internal information sharing and discussions (Gardner and Matviak, 2022), hence foster-
ing mutual trust and support within groups. An empirical study of 426 workers from 35
Taiwanese electronics-enterprises (Chiu and Tsai, 2007), found an association between
GPRP implementation and positive employees’ team behaviours. Therefore, Employees
are more likely to overcome hurdles to reaching goals, which may further fasten higher
performancess.

Second, GPRP is beneficial for achieving the company's long-term goals by nurturing a

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sense of shared responsibility among employees. Since group-members are rewarded for
collective accomplishments, employees are motivated to take ownership of the group's
initiatives (Paais and Pattiruhu, 2020). In the business context, it may refer to less individ-
ualistic actions that pose threats to achieving long-term objectives. Team bonuses as an
example of GPRP, which refers to the distribution of equal monetary bonuses within a
group for achieving specific performances goals (Guay et al., 2019). A study of a US re-
tail business with 200 outlets (Friebel et al., 2015), found that for the ones employing
team bonuses, there was an increase of $3.80 in revenue per-dollar bonus; and raised em-
ployee advocacy and customer satisfaction by 3% that other outlets, which are important
factors for long-terminism (Joseph and Radhika, 2023). Hence, GPRP can motivate em-
ployees and develop a healthy group-work culture to reach organisational full-time suc-
cess.

While GPRP has 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). Since GPRP’s
emphasis is on collective achievement and equal compensation, members may view that
their individual contributions have a lower bearing on the group’s rewards, based on Ex-
pectancy theory (Vroom, 1964), it may contribute to lower instrumentality and further de-
motivate employees for the lack of individual recognition. Free riders’ may also lead to
disproportionate input/reward among members, supported by Equity theory (Adams,
1963), which may make employees question the fairness of the scheme and result in em-
ployee 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 Belgium (Spiegelaere et al., 2016), for instance, indicate a relative stagnation
of employee intrinsic motivation shifts in actual organisational contexts applying GPRP
schemes.

4.3 Role of Employees’ Perceptions in GPRP Effectiveness and Suggestion

GPRP holds great significance, as the majority of nations, such as the US today place a
premium on partnerships and external collaborations for over 90% of its outputs and
brand portfolios (Manyika et al., 2021). Though in the context of GPRP, organisational
culture and employees’ perception will influence its effectiveness, the latter one has

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higher importance (Wang et al., 2019). Employees’ perception refers to employees' views
regarding their work, colleagues, and the establishment ().

The aforementioned findings indicate that GPRP requires employees' perceptions of com-
panies as supportive and fair in the evaluation to overcome free-riders issues and maintain
employees' satisfaction with reward schemes. 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 em-
ployee motivation. This is supported by the above-mentioned study (Spiegelaere et al.,
2016), as shown the results were more stagnant, nevertheless when explicit communica-
tion of the collective objectives and supervision from the upper management teams are
implemented, the results of employee motivation improve by 40%. Then, the benefits of
GPRP could significantly outweigh its disadvantages.

5. Collective - Organizational-based PRP

5.1 Definition and Aim

This section discusses organization-based PRP strategy (OPRP), which connects the mon-
etary compensation of employees to the achievement of organisational performances
goals, such as profitability growth (Shields, 2015).

As a collective PRP strategy, OPRP also encourages employees to collaborate to achieve

goals. However, OPRP is more concerned with direct organisational success and compen-
sates the key contributors (Ogbonnaya et al., 2017), instead of team performancess and
equal compensation like GPRP.

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

First, OPRP is beneficial for aligning each employee's objectives with the company's ob-
jectives for effective human resource management. By its nature (Ogbonnaya et al., 2017),
OPRP communicates the organization's perception of success to employees and constructs
a clear linkage between employee compensation with the organization's short-term and

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long-term objectives, such as market-share growth and respectful reputation. 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-qual-
ified stock options). Then, as the profitability increase, employees achieve a higher return
on investments, hence, they are more likely to contribute further to the company's success
through better performances. For example, a quantitative analysis of a US public corpora-
tion (Cappelli et al., 2019) demonstrated that employees with higher stock options value
perform 1.3% better than others, resulting in a $126,000/store profit boost. Demonstrating
how OPRP strategy aligns people and company, boosting organisational effectiveness.

Second, OPRP serves as a powerful motivator for improved employees loyalty resulting
in top talent retention. Specifically, OPRP schemes could involve offering a portion of the
company's earnings (profit-sharing) or a direct financial interest (stock options) to em-
ployees based on the success of the company (Green and Heywood, 2010). When employ-
ees are awarded 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 expecta-
tions, driving them to do even better, while lower-performing employees will be encour-
aged to train to become key contributors. Additionally, with increased belongingness, em-
ployees are more likely to develop loyalty and invest in the organization's long-term suc-
cess (Dhir et al., 2020), resulting in increased employee retention. In a quantitative review
of Pakistani companies in the financial, healthcare, and telecommunication industries (Ah-
mad and Allen, 2015), employees who participate in profit-sharing programmes have a
lower quit rate and a higher level of advocacy for their managers' leadership, with a statis-
tical significance level of 5%, both of which are crucial for the company's sustainable de-
velopment.

Nonetheless, OPRP has disadvantages. First, although OPRP is an effective motivator for
employee motivation, it is important for organisations to choose specific schemes based
on their country's legal requirements for optimal effectiveness. For example, in the UK,
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, and there will be a consequent de-
crease in employees' motivation to achieve performance objectives; therefore, schemes
like profit sharing would be preferred.

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Secondly, in OPRP plan, mediocre managers may receive generous compensation. Since
OPRP often compensates for collaborative performancess but towards the organization's
main contributors, which usually include upper-level administrators. Hence, some they
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). Accord-
ing to research (Haan and Vlahu, 2015), the correlation found between the level of execu-
tive-team performances and compensation level is not often consistent. When implement-
ing OPRP, it is crucial for organisations to minimise the likelihood that potential manage-
rial authority behaviours will influence compensation to enhance employees loyalty as
mentioned.

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

OPRP

Consequently, in OPRP, both the organisational learning and organisational culture will
impact its effectiveness, with the latter one referring to higher influences (Dhir et al.,
2020). It refers to the physical elements, shared-assumptions, and company-norms that de-
velop within an organisation and govern the behaviour of its employees (Paais and Pat-
tiruhu, 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 re-
gression analysis on stock exchange-listed firms and found that to achieve positive rela-
tionships between stock options and abnormal returns, organizational culture, including
regulations, and guidelines, is an essential variable factor. So, to potentially enhance the
organization’s sustainable growth and outweigh its negatives, the company should build a
positive culture to foster collaboration and integrate clear and fair remuneration to better
implement OPRP.

5. Suggestion and conclusion

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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 Eq-
uity theory and makes basic assumptions to support the rest analysis, and identifies PRP to
be an effective motivator which also concludes human caring factors, differentiate from
other non-performance-related tactics.

For different PRP strategies, this essay concludes that organisations should mix the three
tactics to maximise reward performances 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 sustainable success. This
can lead to a competitive culture that may not align with the overall values and goals of
the organization. However, while PRPs can be effective as HRM measure in utilizing
monetary incentives to motivate employees and construct effective positive culture, it is
important for organizations to consider the non-monetary motivations, such as work-life
balance (), and to design rewarding systems in a way that encourages collaboration and
aligns with the organization's overall values and goals.

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