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Performance Related Pay

1. Basic of performance-related pay (PRP)
The popular reward system, performance-related pay (PRP) is defined as ¡¥a method of payment where an individual employee receives increases in pay based wholly or partly on the regular and systematic assessment of job performance¡¦ (Lewis, 1998). It is based on the expectancy theory that employees will increase their effort and/or direct it in specific directions to receive higher payment. (Taylor, 2000)

It usually takes one of the following two forms. The first form is merit-based. In this form, line managers evaluate the work performance of people who work beneath them. Part of employees¡¦ remuneration is then tied to the evaluation. The second form is goal-based. At the start of the appraisal period, managers meet with employees, and discuss a list of objectives to be met. At the end of the period, employees¡¦ work performance is assessed based on the achievement of those objectives, and their pay is directly linked with the appraisal. (Torrington, Hall and Taylor, 2005)

2. Is PRP fundamentally flawed
There has been a rise of a interesting phenomena with respect to PRP in the past two decades. On one hand, it has attracted a lot of criticism from academic researchers in the reward field. They attacked all different aspects related to PRP, and announced that PRP has fundamental flaws which cannot be overcome. For instance, psychologists question its use of money to motivate workers. Sociologists think it as a tool to enforce management control. The loudest voice comes from advocates of total quality management (TQM), because PRP represents the opposite of everything they believe to be essential to obtain and sustain competitive advantage. (Torrington, Hall and Taylor, 2005)

On the other hand, managers like the idea of linking a proportion of pay to the achievement of specific performance objectives. As a result, PRP has become increasingly popular in both private and public sections.
It is rather surprising...