Performance-related pay in the UK

A 1998 survey by the Institute of Personnel and Development (IPD) throws light on the use of performance-related pay (PRP) in the UK. The research, however, still leaves large gaps concerning the nature and extent of such schemes.

Most European economies have experienced, or are experiencing, a general move toward some kind of decentralised pay determination. At the same time, in many organisations there is reported to be an increasing use of individual performance-related pay (PRP) schemes, or "merit pay" as it is sometimes known (it should be noted that the term can have widely differing interpretations throughout the EU). In Britain, PRP schemes have become increasingly popular over the past two decades. Throughout the 1980s and early 1990s these schemes were seen as a means of improving both individual and organisational performance, and as such were heavily promoted by the governments of the day. However, as opinions differed as to their motivational effects, the schemes have been thought to be experiencing a relative decline. Yet, as there have been no large-scale studies on the extent of PRP, very little is known about its real nature and coverage. Those tentative studies which have been conducted show that anywhere between 20% and 45% of companies have at least some proportion of their staff paid via such schemes.

What is PRP in the UK?

Individual PRP (not to be confused with payment by results or piecework) has been used for a long time in the UK, but was traditionally used as a merit payment over and above the annual pay award, and more as a means of rewarding "good behaviour" rather than performance. It was also largely concentrated in white-collar managerial occupations. Since the 1980s, however, PRP schemes are purported to have been utilised for a wider range of occupations and have been increasingly linked to organisational objectives, against which individuals are appraised on an annual basis. The rating awarded at the appraisal is used to award the individual a certain pay rise or bonus payment. There are a range of different schemes which utilise a variety of individual, team-based and skill-based criteria for making such awards - in reality the schemes often involve some combination of the three. In many schemes, the employees involved now have all of their annual pay increase awarded through this method.

The IPD survey

In February 1998, the Institute of Personnel and Development (IPD) - the body which represents personnel professionals - published the results of a PRP survey of 5,000 organisations in the UK ("Performance pay survey", IPD, 1998). The survey distinguishes between:

• individual performance-related pay (IPRP) - merit pay or bonuses determined by individual objectives;
• team-based pay - related to the achievement of team objectives; and
• skill/competency pay - linked to the acquisition of skills or behavioural development.

The survey finds that 40% of organisations have IPRP schemes for management employees, but only 25% have such schemes for non-management employees. A higher proportion of non-management employees (11%) than management employees (6%) were paid under competency pay schemes. Some of the main findings on the extent of PRP are set out in the table below.

Source: IPD 1998

According to the survey, well over half (59%) of the organisations using IPRP had introduced it within the last five years, and fewer than one in 10 organisations intend to discontinue their schemes within the next two years. This suggests, according to the IPD, that the schemes continue to gain in popularity.

Public versus private sector

Despite the fact that public sector organisations were aggressively encouraged to utilise PRP schemes by successive Conservative governments, which saw them as a means of further decentralising pay, the IPD survey finds that public sector organisations make less use of such schemes than do private sector organisations. The public sector organisations surveyed were less likely than the private sector to think that linking pay to pre-arranged objectives had a positive effect on performance, and were more likely to say that it had a negative effect on motivation. Consequently, they were also more likely consider dropping IPRP schemes than were their private sector counterparts. The IPD says that although IPRP schemes have been widely adopted in the public sector, it seems that managers have doubts about their effectiveness.

The use of PRP

The fact that a PRP scheme is in use does not in itself indicate that it is important within the organisation. Two indicators of importance utilised by IPD are the proportion of employees covered and the size of the award in relation to base pay.

• The IPD found the average proportion of employees covered by an organisation's IPRP scheme to be in the range of 70%-80%, while for team-based and skill/competency-based schemes the coverage rate was somewhat below 50%. However, it should be pointed out that the IPD survey covered mainly large organisations, and may show an over-representation of both coverage and the number of schemes. For example, if small and medium-sized companies are added and if questions are asked concerning the largest occupational group in an organisation, the percentage of organisations utilising PRP falls (to 20% in the Warwick pay and working time survey).
• It was found that managers, in general, get bigger awards than other staff, with almost a quarter of schemes making awards of over 10% of base pay to senior managers. Yet at the lower end of the hierarchy, awards were very small, producing an average value of only 4% of base salary.

On these measure, PRP may not seem so important to organisations, yet the IPD found that many organisations continue to spend time and money experimenting with their schemes. In a third of organisations, schemes were being dramatically restructured.

Effects on performance

One of the primary reasons for the use of PRP schemes is that they are thought to motivate staff, yet only 21% of organisations in the IPD survey said that these schemes have a positive impact on the behaviour of "high performers", and only 4% thought that they had a positive impact on the more average performer. Nevertheless, the majority of employers feel that IPRP does have an on overall impact on employee performance (74%) by encouraging employees to focus on organisational objectives. Many also feel that they can deliver a clearer message about the importance of organisational performance (69%). However, other research ("Performance-related pay: Organisation and effect", MW Gilman, Unpublished Phd thesis (1997)) highlights that employees are often extremely frustrated by such schemes, seeing their objectives as extremely vague and inappropriate to the real work that they do.

Commentary

The IPD survey highlights some interesting factors, but gives a far more positive picture of PRP than most of the case studies carried out to date. Part of the problem lies in the fact that different results can be obtained by surveying different-sized companies, different-sized occupational groups, and different people within the organisations. This means that much more widespread research needs to be carried out into the nature and extent of such schemes. The fourth Workplace Employment Relations survey, which is imminent, may well provide the first real widespread picture of the extent of PRP (MW Gilman, IRRU).