Classification of Contingent Pay for Individuals - By: Robert II Smith

There are many different forms of PRP and in the early 1990s they have become more commonplace. In the context of performance management the most prevalent form of the PRP seems to be ‘individual merit and performance-related systems based on some form of appraisal or assessment of the individual using various input or output indicators. They often involve a payment which is integrated into the basic salary’ (Kessler 1994).

Heneman (1992) reported that ‘a number of studies have shown a relationship between performance ratings and changes in pay’. That is higher performance ratings are associated with higher increase in merit pay. In other words, there is some evidence to suggest that organizations are able to relate PRP to past performance, and to this extent it is possible that the reward function of PRP is being satisfied. However, Heneman notes that ‘The magnitude of the relationship between pay and performance in these studies in not large.’ (1992). Association is not strong, in other words, pointing to the possible impact of other factors, which may affect merit pay decisions. For example, PRP guidelines may serve as a constraint, thus reinforcing the impression that the name of the game is control of the wage bill (Milkovich 1992).

Fletcher and Williams in their part of the IPM (1992) survey also gathered opinions about PRP, both from HR and line managers. They have discrepant views about PRP.
In the interviews with the HR and line representatives of the organization visited, there was little consistency of viewpoint on the motivating power of money. The majority felt that the real motivators at management levels were professional and personal pride in the standards achieved. On the other hand, there were those who believed that money was the prime factor in motivating improved performance. An example of the latter view came from the personnel department of a large retail organization; however, they saw matters differently. As one of them said, he was self-motivated – the money came as a result of that, not as the cause of it (Institute of Personnel Management 1992: 117).

Money can solve all the problems is a wrong opinion, there is growing sentiment for letting workers choose their own “blend” of reward from the 13 I note on the Exhibit 1.3. We may be overpaying in cash and missing the opportunity to let employees construct both a more satisfying and less expensive reward package. Known as cafeteria compensation, this idea is based on the notion of different reward having different dollar costs associated with them. Armed with a fixed sum of money, employees move down the line, buying more or less of the 13 rewards as their needs dictate. While widespread use of this type of system may be a long time in the future, the cafeteria approaches still under cross the need for integration of rewards in compensation design.

What do we really mean by contribution related pay and how is it different from PRP? What are the key building blocks? What do you have to do to get this right? This is a new concept in contingent pay design, which links pay both to performance, as measured by results, and competence. Paying for contribution will be the most popular method of rewarding managers and staff. Such an approach reflects a general dissatisfaction with flat rate market rises but it also reflects problems experienced with pay progression linked solely to individual performance (outputs) with no appreciation of how they are achieved, and with progression exclusively linked to skills or competencies (inputs) with no recognition of results. Most private sector white collar/management pay systems link progression to results, the use of skills/ behaviors (competences/competencies) and market movement – we used to call it a ‘mixed model’ (Armstrong 2002).

About the Author

Jeffrey Smith was born in New York City in 1984. He has spent more than 5 years studying at New York University. He was always ineterested why students turn in plagiarized papers. Finally he found a solution of this problem - he invented his own free plagiarism detection system that helps people to avoid plagiarism.

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