This paper examines financial rewards in the workplace, with a particular focus on performance-related pay (PRP) and its role in employee motivation and job satisfaction. It outlines the components of remuneration — including base pay, benefits, and perquisites — and explains the mechanics of various PRP schemes such as profit-related pay, skill-based pay, competence-based pay, and executive bonus arrangements. The paper also evaluates the advantages and disadvantages of each approach, addresses the debate over individual versus team-based pay, and provides an extensive cross-cultural analysis of how different national and regional contexts shape employee attitudes toward pay incentives. It concludes that a hybrid reward system is likely to be most effective.
Motivation, job satisfaction, and pay are closely related to one another. Individual or team achievement cannot simply be rewarded by giving credit for a job well done; it must be adequately rewarded in order to provide motivation, maintain momentum, and encourage employees to surpass themselves in their work. Traditionally, the objectives of rewarding employees were to "attract, retain, and motivate" them. The standard salary was intended to attract potential employees to an organization, benefits were used to retain them, and incentive and bonus schemes were employed to motivate them.
Rewards are generally considered to consist of three separate components: remuneration or compensation, benefits, and perquisites or "perks." Remuneration is based on salary structure, incentive schemes, and job evaluations (Thomson, 1999, p. 84; CIPD, 2009). Benefits are not employee- or team-dependent and are usually provided to all employees; they may include items such as holiday parties or paid leave. Perks such as private healthcare or car allowances are typically provided only to certain categories of employees. However, in recent years this divide has broken down, and several studies have shown that it is the rewards system as a whole that attracts, motivates, and retains individuals in an organization.
Rewards may be of various types, some financial — such as profit-related, results-oriented, or performance-dependent pay — and some non-financial. It has been observed that financial rewards in the form of pay can be a significant source of job satisfaction, but pay is not regarded as a highly motivational factor unless it is directly linked to performance (Thomson, 1999, p. 85; CIPD, 2009).
Performance-related pay is most commonly found in non-profit-making organizations, where enhanced performance leads to higher pay and decreased performance leads to lower pay (Thomson, 1999, p. 85; CIPD, 2009). Performance-related pay extends beyond the strict confines of basic pay to a wider range of financial rewards, varying from profit sharing, pay incentives, and bonuses to equity sharing and profit-sharing schemes. It may take the form of an increase in basic pay or a cash bonus and is directly coupled with performance assessment, usually against previously defined objectives.
Performance-related pay may be added cumulatively to basic pay until the upper limit of the specified grade — relative to the performance level — is reached, or until the maximum pay rate for that grade is achieved. Alternatively, a variable method may be used, whereby increases are delivered through cash bonuses for consistently high-level performance or for special achievements (Armstrong, 2002, p. 261; McKenna, 2002, p. 562).
The variable method may be a more reasonable approach than the annuity approach, in which performance-related pay increases become a permanent component of basic pay. The annuity approach is often criticized as an open-ended reward, raising the question of why a person should continue to receive such rewards for something accomplished long ago. Providing performance-related pay as a consolidated addition to base pay means the organization bears increased pay costs without any guarantee that the performance will be repeated or that productivity will increase. The variable pay model, by contrast, rests on the premise that cash bonuses must be earned each time and are payable only when accompanied by improved performance or profits (Armstrong, 2002, p. 261; McKenna, 2002, p. 562).
Profit-related pay is another financial reward scheme that links an employee's pay to company profits: when profits increase, pay rises, and vice versa. This scheme gained popularity in the United Kingdom following the 1986 budget, and approximately two million employees were covered by it by 1995 (Thomson, 1999, p. 84). In skill-based pay, employees are compensated according to the number, level, or type of skills they have developed or deployed. Competence-based pay is an effort-based system that depends on a pay-curve scheme in which pay increases are directly linked to increases in competence (Preker; World Bank, 2007, p. 170).
Performance-related pay in the form of bonuses may also be provided to employees who have reached the top of their pay grade but continue to perform exceptionally well. This serves to address the problem of de-motivation for individuals who have reached the ceiling of their financial reward potential. Senior executives and directors may also receive incentive schemes or executive bonuses in the form of substantial payments above their base salary. These remuneration packages contain a degree of risk, with pre-defined conditions and specific rewards and penalties, since the package is usually tied to the achievement of profitability and growth targets.
Executive bonuses are generally larger than might be justified by individual performance alone, but they are typically employed as a strategy to attract high-quality management talent and to underscore the role that management plays in an organization. This system can be viewed as an "outcome-based payment," since the bonus is directly related to overall organizational performance, in which management plays a key role (Preker; World Bank, 2007, p. 165; Armstrong; Murlis, 2007, p. 308).
Some organizations base their performance-related pay on formal performance ratings determined through periodic performance reviews or special pay reviews. Key principles underlying such assessments include the following: the assessment must measure results rather than efforts; it should be observable and objective; the results should be within the employee's control; and the measures used should be adaptable or reusable across different settings (Preker; World Bank, 2007, p. 168; Armstrong; Murlis, 2007, p. 308).
Other organizations base pay increases on a general evaluation of how much an employee should receive, taking into account potential, performance, market worth, and comparison with peers' pay levels. Some organizations use a formula in the form of a pay matrix to determine the size of a pay increase. Pay progression through a graded structure in a decelerated manner is consistent with learning curve theory, according to which pay increases should be higher in the early phases of a job when learning is typically at its peak (Preker; World Bank, 2007, p. 168; Armstrong; Murlis, 2007, p. 308).
There has been considerable debate about the degree of motivation that financial rewards such as performance-related pay provide, but there is no doubt that its outcomes may differ from person to person and even for the same individual over time. The issue of individual performance-related pay has received considerable attention in recent years and has highlighted several problem areas. First, it is difficult to establish the basis on which performance-based pay should be determined. Second, it is doubtful to what extent such a financial reward is monetarily worthwhile. Third, the efficacy of using performance appraisal systems for making vital decisions about staff development and pay remains uncertain. Various studies have suggested that individual performance-related pay may be phased out and that team pay may gain more prominence (Bee; Bee, 1997, p. 118).
The benefit of profit-related pay is that it offers clear tax advantages; however, since it is an outcome-based scheme, both principals and agents must share the risk. With regard to skill-based pay, the main advantage is that employees are motivated to develop more skills, which can directly and positively affect their performance and company productivity. However, skill-based pay has the disadvantage that the acquisition of skills does not necessarily translate into improved job performance, since employees are paid in proportion to the level and number of skills acquired rather than on how proficiently those skills are applied at work (Preker; World Bank, 2007, p. 178; Armstrong; Murlis, 2007, p. 315). The disadvantage of profit-related schemes is that they may have limited influence because employees often have little control over the factors governing an organization's profitability (Hellreigel; Slocum, 2009, p. 178).
At the macro level, two further benefits of performance-related pay can be observed. First, in profit-related schemes, new recruitment reduces the amount existing employees receive unless profits also increase, which can cause dissatisfaction. Second, performance-related pay increases may help to check inflationary tendencies, since such increases are the outcomes of greater productivity. Both managers and employees benefit when profits or performance rise, as higher earnings flow to staff. Conversely, when profits fall, a reduction in performance-related pay can help protect employees from job losses. There is also enhanced motivation, as employees can identify with the success of the business. Depending on the information-sharing practices of management, pay variations may also give employees greater insight into the fortunes and misfortunes of the business (de Silva, 1998).
Additional advantages of performance-related pay include: it provides an effective mechanism for addressing poor performance; introducing such a reward system can help develop a performance culture within the company; it can serve as a direct incentive for employees to meet defined job targets; it gives employees due recognition through a tangible reward for their contribution; it can help build and retain a capable workforce; and it is likely that employees will place greater emphasis on areas requiring improvement when improvement is directly tied to pay (Unison, 2006).
According to Armstrong, individual performance-related pay has conspicuously failed to deliver results in numerous instances, shifting focus toward team pay and other types of incentives that reward the entire team. Peters has stated clearly that "Rewards should go to the team as a whole." Many experts contend that in practice, individual performance-related pay impedes the performance of the team as a whole. It promotes individual achievement at the expense of collective effort, encouraging team members to further their own objectives rather than work toward team goals. It does not foster team spirit, where individuals ideally set aside personal achievements and work collectively. Moreover, it may cause managers to place undue emphasis on individual performance rather than team performance (Bee; Bee, 1997, p. 118).
However, proponents of individual performance-related pay argue that it remains a powerful tool for recognizing and incentivizing specific contributions, particularly in roles where individual output is clearly measurable. The debate between individual and team-based pay continues to evolve as organizations experiment with hybrid approaches that seek to capture the motivational benefits of both models.
"Weighs macro and individual benefits against key limitations"
"Debates individual PRP versus collective team reward systems"
"Compares PRP attitudes across countries and cultural dimensions"
Vance, Charles M.; Paik, Yongsun. 2001. Managing a Global Workforce: Challenges and Opportunities in International. M.E. Sharpe.
Warner, Malcolm. 2005. Human Resource Management in China Revisited. Routledge.
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