MAXIMIZING STAFF MOTIVATION THROUGH PERFORMANCE-RELATED PAY (HUAWEI)
As globalization continues to expand opportunities to firms, it is also opening up a wide range of challenges. As firms have gained easier access to raw materials and labor, they are becoming more open to competition. For this reason, firms are gearing for optimization of all resources at their disposal so as to compete effectively with others. Firms are increasingly investing in the development of progressively efficient systems and structures. Similarly, firms are also utilizing scientific ways of maximizing the output of their human resource. This is being achieved through, among other strategies, hiring staff with the best skills and talent, and through training to enhance their capacity.
One area that firms are increasingly trying to explore in order to have the best output from their workforce is employee motivation. Monetary and non-monetary means of motivating staff are being employed. Performance related pay (PRP) is one of the monetary avenues that firms are using to achieve this. PRP refers to linking the remuneration of employees to their performance. The most common form of this is the commission system or the use of performance bonuses. Under PRP, firms set performance targets and ask the employees to reach them in return for bonuses. PRP has been utilized by many firms and has many benefits and shortfalls. Huawei Company Limited has managed to utilize this system to greatly motivate its employees and achieve continuous growth. This has helped the company in becoming the leading telecommunications company in the world.
Table of Contents
Huawei Company Limited…………………………………………………………….5
Human Resource and Productivity…………………………………………………….6
Goals and Objectives…………………………………………………………………11
RESULT AND ANALYSIS………………………………………………………………….22
The HR and the Use of PRP…………………………………………………………22
Performance Related Pay……………………………………………………….……25
Employee Motivation in Huawei Technologies Limited……………………………..30
Advantages of PRP…………………………………………………………………..36
Shortfalls of PRP……………………………………………………………………..41
Maximization Staff Motivation through Performance-Related Pay
1.1 Background Information
Technological advancement leading to globalization has opened a world of opportunities for many businesses. This has also increased the rate at which the presence of an organization can be felt throughout the world (Eriksson 1999). Products made by one company in one place, for instance, the US or EU can now be distributed more easily than ever to other parts of the world. Products made in China can now be consumed in the US and vice versa. Additionally, globalization has also increased the rate at which raw materials and various classes of labor can be sourced. The above shows how the world has also opened up in a great way (Berliner, Greenleaf, Lake & Levi 2015). Global integration has occurred mainly due to the development of capitalist, free market economies as well as regional trade blocks such as the EU, the CIS free trade union between the former Soviet republics and the proposed Eurasian Economic Union (Berliner, Greenleaf, Lake & Levi 2015). This has led to the diminishing importance of physical geography in trade. Today, an online business in the US can be felt as well as effectively serve the needs of millions in China, Africa and India. Despite all these advantages of internationalization as well as globalization, it has also created a greater pool of competitors for every business (Armstrong & Baron 1998). For this reason, any international business has to compete with many others across the globe for the same resources and the same market (United States 1996). Therefore, businesses have to develop a competitive edge in order to succeed. This has brought a need for business to optimize the use of all their factors of production in order to remain profitable. Businesses are continuously coming up with innovative ways to maximize the output of land, capital, entrepreneurship, management as well as labor as factors of production to ensure that the maximum possible output is obtained from all of the above factors (Cross & Lanaghen 2015).
As firms try to optimize the output of their factors of production, labor is one area where preferential treatment is placed. Labor is the factor of production upon which all others depend on for any production of any significance to take place. Manual input is required to operate and coordinate the use of machinery, in preparation of land or natural resources needed in production, in the construction and maintenance of capital such as building and machinery as well as to aid the management in aspects such as auditing and quality control (Bridger 2014). Labor as a factor of production involves workers, members of staff, and employees among terms. For the purpose of this paper, the term members of staff will generally be used to refer to labor as a factor of production or simply the human input in production (Bridger 2014).
1.2 Huawei Company Limited
Huawei Technologies Co. Ltd, is a Chinese tech giant that is headquartered in Shenzhen, Guangdong Province. It specializes in the production of telecommunication gear, networking, as well as servicing. Already the largest telecommunication corporation in China, 2012 saw Huawei overtakes Ericsson to become the largest telecommunication company in the entire world. The company is one of the largest employers in the world as well as an investor in research and development. In 2014, the company had approximately 140,000 workers. It has also attached a significant amount of attention to research and development (R&D) and has 21 institutes devoted to R&D spread out in 15 countries across the world. Forty-six percent of the company’s workforce is engaged in R&D. In 2014, it recorded a profit of $5.5 billion (CNY34.2). Huawei distributes products to over 140 countries around the globe through serving 45 firms out of the 50 largest telecom firms (Fu 2015). The company has assumed a leadership role in various forms of employee motivation. These include the use of perks such as health and retirement benefits, and the creation of a friendly working environment among others. In addition, the company uses Performance Related Pay (PRP) in which employees’ salaries are raised to recognize exemplary performance (Alon 2008). In other instances, the company has participated in the employee stock ownership plan (ESOP) in which a certain percentage of shares have been offered to staff. This is one way of awarding some degree of ownership in which the concerned employees work hard to promote the company they have stake in. This also enables such employees to share in the company’s progress as they have an access to a portion of the company’s profits (Anderson 2013). The overall effect is in most cases motivation of employees who work harder and become more innovative (Zhang 2013).
1.3 Human Resource and Productivity
Throughout the history of organizations and economies, various terms have been utilized to collectively refer to all the employees in the workforce. The most inclusive of such terms is human resource. Human resource (HR) refers to the individuals making up the workforce in a firm, a sector of the economy or the entire economy. The term is synonymous with human capital. However, the term human capital is narrower as it refers to the skill set or the talent that individuals can contribute to an organization. Other terms that have been used to refer to the human capital and loosely to human resource include labor, talent, manpower or people (Amstong & Brown 2006).
The first recorded use of the term human resource was coined by the economist John Commons in his book ‘Distribution of wealth’ published in 1893 (Rogers & Heller 2007). As a result, the term gained popularity at the turn of the twentieth century. Between the 1910s and 1920s, researchers, scholars, business management as well as employees movements argued that human resource was an asset or capital, making it very key in production (Galbraith 2007). Another important scholar who popularized the use of the term, and in the process giving it its modern meaning, was the renowned economist E.W. Bakke, who extensively used it while compiling and economic report (Rogers & Heller 2007).
Humans are complex beings whose output may vary depending on a large number of factors (Pepper 2015). The amount of output also varies from one person to another and each person’s productivity may vary from time to time depending on many factors. In an attempt to optimize the productivity of members of staff, managers and many researchers have for years come up with many models, principles and hypotheses which have been applied today in management of human capital. One such combination is Human Resource Management (HRM) which focuses primarily on the optimization of the performances of members of the staff in firms (Pepper 2015). In HRM, several ways are utilized to obtain the best output from employees. These include hiring the best and the most qualified individuals, availing the best training programs, the adoption of the best technology by firms and the use of various ways to motivate the staff, which may include proper remuneration and benefit schemes (Pepper 2015). In firms administration, the staff is seen as asset, and management also recognize that the productivity of employees can be enhanced. The process of continuous optimization of staff is referred to as human resource development (Lussier & Hendon 2012). This is achieved through education which enhances productivity.
HRM is designed as a holistic tool to ensure that the full productivity of the staff is obtained. In most cases, HRM is used synonymously with HR. For the purpose of this paper, both terms may be used interchangeably to refer to a series of steps a firm uses to enhance employees performance. Firms establish procedures and structures aimed at developing and sustaining high performance for the employees. HR departments in organizations are involved in activities such as hiring, training, performance evaluation and compensation. The HR managers also establish and maintain compensation and the benefit systems. Firms operate within states and governments that outline how employees should be treated in terms of their working conditions, remunerations, and benefits. For this reason, HR departments are also involved in industrial relations to guarantee that the employees can access and utilize benefits of labor organizations in addition to involving themselves in the collective bargaining process.
In the current environment, most firms have developed their workforces in a way that gives them a competitive advantages over others. For this reasons, a large number of firms have their HR departments focus on minimizing employee turnover so as to avoid losing corporate skills. Consequently, such firms invest in preserving the talent and the knowledge base already present in such among the members of the staff. This is due to the recognition that the process of hiring new employees can be very expensive. Additionally, it can be a challenge to find employees with knowledge and skills when replacing those who leave. Additionally, with the right corporate knowledge among the employees, it becomes easier to motivate them with a view of enhancing their performance. Employee motivation is one area of HR which is done to enhance employee retention as well as improving their performance. There are various ways through which employee motivation is achieved by firms. One of the means of achieving this is through proper remuneration and benefit schemes.
Staff motivation is very crucial and has been proven to boost the productivity of individuals. Human beings achieve the best and aspire to achieve more when they are motivated. There are many ways through which firms choose to motivate their staff. This paper will look into how the management can use Performance-Related Pay (PRP) to maximize staff motivation. It will also look into how Huawei Company has utilized this system to motivate its employees hence boosting their performance. Additionally, the paper will look into how PRP can be utilized for employee motivation including how it can or has been wrongly used in the past and which led to immense losses.
PRP is a monetary remuneration system for employees in which a part or the total of their compensation varies according to how they perform. Generally, the organization establishes a system of assessing employees’ performance over time. This system can be used for an individual, a team or even the entire workforce. The general idea behind this system is that each of the members of the staff earns according to their respective performance levels. It is synonymous to commission system and is widely used for sales persons at such places of business as auto dealerships and insurance companies. Sometimes, PRP may take a form of gratuities, profit sharing, commissions or other benefits that companies may give to their employees either to reward excellence, progress or as a means of motivation them to perform better. Various organizations use PRP strictly for the purpose of motivating or retaining employees. In most organizations, it is incorporated as a bonus system to incentivize and not as a basic way of remuneration. The use of this system can have various effects on members of staff depending on how it is utilized.
The process of setting up and successfully applying PRP varies in many organizations. However, there are a number of basic steps that can be utilized in making the system functional. The most crucial of them is that firms establish ways of measuring performance among the employees, teams and groups. This is done to ensure that incentives are extended objectively to those who have earned them through some degree of achievement measured against some standard. The standard of achievement is based on setting of objectives and appraising work results against the objectives in order to relate employee achievement to pay. In some jobs, HR might not be able to measure the output of a given worker. This poses an important challenge in the application of PRP. In instances where performance may not be measure or graded, the management may chose not to give any bonuses at all. However, every employee or team that achieves exemplary performance may feel demotivated when not duly recognized. For this reason, the HR management may come up with other ways of motivation such employees. For instances the company may give average bonus to staff working in maintenance as it is hard to measure or grade maintenance work against any objective.
In other instances, an employee’s salary could be made up of several components and may include a base salary and a bonus amount based on output of satisfactory quality. The bonus could be paid on a biweekly or monthly basis. The HR managements in many organizations have individual Performance Related Pay (IPRP) for workers hired on a permanent basis. In such instances, the employees salary package includes a fixed component in addition to a provision for a bonus paid based on the achievement of certain objectives by the employee. In most cases, the bonus is not consolidated and the periods after for payment of the same vary. PRP has many advantages and disadvantages; in addition, the system’s success depends on a wide array of factors besides being impractical in a number of circumstances. In some instances, it may encourage workers to work hard and achieve the organization’s objectives. In other cases it may cause the employees to work in a rushed manner, ignoring the fine details which may later have undesirable consequences on the performance of the firm.
1.4 Goals and Objectives
The reviews of PRP are mixed in various research papers depending on the researcher’s schools of thought (Guaspari & Kouzes 2015). Some view it as a relatively new idea while others insist that it has been around for a long time. Some forms of PRP have been used for a long time, an example of which is the commissions system; for instance, where the sales representatives earn a percentage of their sales. Many organizations have also used PRP to supplement other forms of remuneration. The general idea has been to boost the performance of workers or reward exemplary performance. The results obtained from the use of this system have often varied from one organization to the other and from time to time. Sometimes, the purpose for which PRP is utilized or employed is not achieved for a number of reasons (Kloster & Swire 2015).
This dissertation will seek to determine how PRP can be used to maximize staff motivation by first finding out the efficacy of this system in its current usage. Huawei Company utilizes this system to achieve remarkable employee motivation and greatly maximize their output. This has greatly fueled growth in the company to the degree where it now leads the world. This paper will provide an in-depth view of how it has achieved this and what other firms can learn from it. The paper will also discuss the advantages and the shortfalls of this system and why it has failed in various occasions in achieving or enhancing high levels of staff motivation. The paper will also look into how this system is utilized by Huawei, its areas of success as well as areas where it could be improved. The dissertation will finally seek to find out how some shortfalls can be corrected to make the system work in achieving high levels of staff motivation in the current corporate setting where competition for resources and markets is more pronounced than ever.
There are various instances in the past where this system has been employed and championed in an immense way. Some aspects of performance have been highly emphasized, for instance, advisors at banks and financial services are sometimes been paid according to the number of financial products they manage to sell. This may generate immense competition between institutions as well as between various salespersons. In the backdrop that every salesperson wants to earn as much as they can, they may fail to carefully scrutinize the background checks of the potential clients’ in order to establish their eligibility for such services. Indeed, this has happened in several instances and has led to losses and the collapse of such systems. This will also be discussed along with the various means of avoiding such in the future. Finally, firms need to find means of ensuring the fairness in the application of PRP such that all the employees can own it making it a success. The means of achieving this will be discussed.
2. LITERATURE REVIEW
PRP has become one of the most significant means of employee motivation for one major reason: a significant number of people work exclusively for the purpose of making money. Even if many of them would continue working even without financial need, financial reward is the most potent form of recognition for people working either to fulfill their societal duties among other reasons. While a large percentage of people find motivation to work from sources such as a service to country, religion or the society, a large percentage of people work to earn money, pay their bills and afford to buy goods and achieve a higher social status. Regardless of their main motivations, very few employees would turn down the extra money that comes with going the extra mile in their work. In consideration of this, several motivation programs are based around financial benefits. This section of the paper focuses on the views of various researchers and specialists who have compiled studies around this subject. According to Kloster & Swire (2015), a strong link between remuneration and the level of output has been found in many firms. In addition to the output that can be achieved through proper and well planned basic pay, various theorems in HR practices show that this can be stretched further by incorporating PRP, which could be done in form of gifts and bonus schemes, ESOP as well as other forms of profit sharing schemes (Kloster & Swire 2015).
2.2 Materials Reviewed
According to Eriksson (1999), many firms ensure that the base pay set for every individual is satisfactory and that with the combination of various other factors, it is adequate to inspire the employees to deliver an acceptable amount of output and also reduce employee turnover. With this in mind, firms will sometimes pay their employees a generous minimum amount to prevent them from leaving. Such firms may use other means to inspire their workers to consistently increase their output. Many firms choose to use several means. For instance, Google uses a relaxed and highly advanced working environment to inspire maximum productivity (Pepper 2015). The company also places emphasis on healthy working habits, sports as well as specially prepared meals. Other companies on the other hand use performance-related pay. The above forms of employee motivation have registered mixed performances depending on their application and other factors specific to each work environment (Pepper 2015). Increases in the income of any employee may mean an increase in status and comfort; whenever a company has a bonus system that rewards teams, team leaders or individuals who achieves given targets, the ability to achieve their goals increases (Pepper 2015). The financial reward if fairly implemented has the capacity to inspire employees to achieve more than they otherwise would in the absence of rewards (Eriksson 1999).
According to Pepper (2015), in a common working environment today, the assumption that the bosses benefit the most and prosper the fastest is a very common perception. Many employees tend to believe that they don’t earn enough in proportion to the amount of work that they do relative to their bosses. This is the case with the entrepreneurs and top managers who are seen as the overall beneficiaries of profits made by firms. The only way to ensure that such types of resentments do not develop among employees involves fostering partnerships with the firms’ top management or the entrepreneurs themselves. There are several ways through which firms attempt to achieve this. Aside from the company uniforms, tags, benefits and perks, the single most effective ways of ensuring that the employees feel included in their firms is by enabling them to share in the firm’s profits. According to Pepper (2015), this form of PRP is very important and means that the workers share in the profits only if the firm makes profits, otherwise, the workers are only left with their base salary. In such an arrangement, workers feel compelled to work hard and increase the company’s profitability which is directly associated with the reward of them taking home a larger income (Pepper 2015). In the same arrangement, firms can vary this form of PRP in which the additional amount depends on the amount of profits earned by the firm.
Guymon (2008), states that one form of PRP that is very successful in inspiring the employees to work hard and achieve the firms’ goals includes giving them ownership in the firms. The basic mechanism through which the employees are inspired in this system is not entirely clear. Galbraith (2007) argues that this act of transferring a small unit of ownership to the employees makes them feel like partners to the firm and hence will make them more loyal (Armstrong & Baron 1998). Other analysts argue that the real rewards to these employees occur when they are allowed access to the firm’s earnings through profit sharing. However, it is important to note that firms actually offer this amount of shares as a reward to some employees after an achievement. The shares, which would otherwise be sold to investors outside the company, serve as a motivation to the employees who end up receiving them and increase their loyalty. This is also important as it enables employees to participate in the companies’ profits. This in most cases shows a long term commitment between the employees and the company. Huawei Company is one of the companies that have offered an amount of its shares to its employees through ESOP. The overall effect of this is improved performance as well as higher rates of retention (Berliner, Greenleaf, Lake & Levi 2015).
According to Negash (2014), many employees feel less empowered when their total salary is fixed by the employers. Negash (2014) further states in today’s corporate culture, the salaries of most of these employees are determined by the firms. According to Thomas (2000) this powerlessness and lack of control is linked to reduced employee loyalty and hence reduced performance. This occurs even when the firm offers salaries that are in tandem with what the market as a whole industry is paying (Negash 2014). In other instances, the employees may be given slight leeway to negotiate their salaries and receive a slight increase (Thomas 2000). In many forms of PRP, the employee has the opportunity to vary his/her own pay even if it is by a very small degree. Workers under ESOP can collectively work hard and increase the company’s profits hence increasing the earnings per share. Through this, they are able to increase their income. On the other hand, if there are performance bonuses paid to workers when targets are attained, the whole idea gives the employees the idea that they have the ability to determine and to some degree influence how much they earn. This has been seen to improve the performance of such people and by extension that of the whole firm. In addition to employees feeling in control of their earnings, PRP also creates a feeling of appreciation. In most cases, firms introduce additional goals and objectives which sometimes may seem to be outside a worker’s job description. So in addition to the worker doing his or her routine job, the additional goals and targets make some workers feel like they are called upon to do the firm some form of ‘favor’. The discussions around this arrangement as well as the planned rewards may also be relaxed and less tightly bound by strict rules of the corporate culture. According to Negash (2014), many employees report that such instances enhance cordial and partially formal communication environment between the management and the employees. This makes the employees for once to extend some favor to the employer and work hard to meet the targets. When this happens and the financial rewards promised are passed to the employees, this creates more mutual trust. Some workers get attracted to the thrill and the adventure of attaining very ambitious goals and may actually approach the management to set other goals. At the same time, the successful individuals receive financial rewards in various forms. As earlier discussed, this increased income plays a crucial role in employee motivation. When the employee is able to afford extra items or vacations or other basic or secondary needs, his/her brain draws a strong link between success in form of attainment of goals and betterment of personal or family life. This may have far reaching consequences enhancing employee motivation (Negash 2014).
According to Kloster and Swire (2015), human desires are unquenchable in nature. The authors also note that they require money to meet them. With this in mind, it is safe to argue that no amount of money can be too much for an individual. Even for the highest earning executives and top managers, any opportunity to add personal income even if only a slight percentage is always welcome. Many firms use this to their advantage reasoning that the basic pay revived by the employees can also motivate them to work to a certain level. Afterwards, other factors are needed to boost the output of their work. For these managers, actually planning very ambitious goals and calibrating them against amounts of money in that individuals attaining them to a certain degree will get the corresponding degree of financial bonuses or benefits. The management bases the largest financial bonuses on the achievement of the entire goal. In this case, the employees may work hard to achieve the set targets, and not for any other reason but to make extra money. This is among the reasons for why performance related pay is among the most effective means of encouraging high performance among the workforce. With this form, the employees can achieve what they otherwise would not have even attempted.
In some instance, PRP becomes the only applicable means of employee remuneration (Frey 1997). However, this happen for employees who would otherwise not have contributed to the organization if other forms of employee remuneration were used. For instance, a sales person would not benefit the organization if he/she does not achieve any sales, and this would ultimately be a loss to the organization if he/she only received a fixed base salary; it serves as the primary reason for why people start working for the given organization. In this case, the commission system encourages workers to be more creative and work harder. Such people become very innovative in coming up with ways to sell even more and in such cases, this system becomes very crucial for employee motivation (Frey 1997) A good example is the story of Joe Girard who sold 13000 vehicles between 1963 and 1977 and became the greatest salesman of all time. He shifted his focus from walk-in customers and personalized his customer service to achieve the highest number of customers’ referrals (Sant 2006).
Like any other system, PRP has a number of disadvantages. The system places emphasis on achieving the set goals which may be narrow in scope and not focused on firms’ long term well-being. In this instance, all the employees are forced to follow the management’s vision and goals and this limits innovation. The only persons who are allowed to come up with goals are the managers. For this reason, the employees are converted into machines focusing wholly on following the managements’ commands. Employees may lack personal initiative. Furthermore, PRP reduces equity by introducing variations in the amounts of money paid to the employees. Employees who are perceived to have achieved the best in terms of the set objectives earn the most while the rest may receive nothing in the form of bonuses. This may play a role in causing disunity and disharmony in the workforce, which adversely affects the productivity of workers.
Under PRP, the process of performance appraisal may become less objective as the HR management may chose to focus on the financial achievements. The growth or innovation of each employee or team may be ignored if it is not in-line with goals set by the management. The overall effect of this is the continued growth of a firm may be affected. Another disadvantage of this is that the management may set very high goals which are not achievable. The undesirable effect in occurs when the employees are unable to achieve the set goals even after giving it their best. The strained employees may be unwilling to try even other achievable goals due to these past experiences.
The other major disadvantage of this system is that it might rely heavily on the judgment of the HR/line manager when objective measurement of performance is not introduced. The quality of judgment in such instances become very crucial and determines who gets benefits and who does not. In some instances, it becomes almost impossible to establish a written checklist for determining who has achieved and who has not. In employee motivation based on goal setting, while setting the goals the executives might not be able to set clear goals for the staff who work in repair and maintenance. The management sometimes ignores them in the process of setting goals and might not be able to find ways to motivate such people. The human resource management needs to come up with a means of motivation such employees who are maintained in the company payroll, not to do any specific task, but to deal breakdowns in machines and systems used in the course of the day-to-day operations. The amount of repair and maintenance work to be done by this staff can be difficult to predict. Additionally, their work does necessarily lead to any in value of the original system. The system may also fail to recognize personal development in workers. This means that their output can easily be ignored. The human HR need to come up with way to financially motivate these groups.
The most important shortcomings of PRP is that it encourages competition among the individual members of staff such that harmonious co-operation can potentially be hindered. When the financial reward is given to the successful team, this causes resentment and unhealthy competition between the teams. For this reason, teamwork in the workforce is eroded as everyone rushes for the individual prize. It goes without saying that teamwork is very crucial for the success of many firms. Over time, HR departments have tried to come up with ways to utilize PRP without causing unnecessary competition among employees. Some HR managers set targets to be achieved by teams in order to foster teamwork. However, this has sometimes led to unhealthy competition among teams.
According to Pepper (2015), even when the system is used in a fair manner, the amount rewarded as a bonus can be decidedly less than what the employees feel they deserve. For the HR department that relies strictly on monetary means of motivation their employees, this might not be achieved in this instance. In other instances, the management may fail to periodically review and adjust the amount paid as bonuses in response to inflation. Inflation may diminish the significance of such an amount such it no longer inspire employees (Bratton & Gold 2012). Application and successful use of PRP is sometimes very tedious and requires close management to ensure that it serves the purposes of making employees continuously motivated especially when the firm has not set up a structured and objective ways of measuring performances at each level and assigning appropriate rewards (Pepper 2015).
Pepper (2015), PRP can be a very potent means of employee motivation. Its use and means of application vary but the basic principle is that employees in most cases want to earn more and will readily embrace avenues through which this may happen. On the other hand, the employers like to receive the best value for the amount they receive. Sant (2006) states that this balance is usually hard to strike: employers use basic pay and a system of monetary as well as other forms of bonuses to achieve it. As the materials reviewed above indicate firms can still utilize PRP as an HRM strategy to boost staff productivity. According to Guymon (2008), there are ways through which this can be done effectively in order to achieve the targets of the management without making the employees feel either overworked or over strained. The employees should feel duly rewarded and recognized for firms to be successful at this, failure to which leads to the failure of the system as a whole. Various forms or PRP such as ESOP or profit sharing schemes for the employees indicate a long-term commitment to the employees and can motivate them to work hard in the short, medium or long run. In profit sharing schemes for employees as well as ESOP, all the employees are required to work hard so that the firm can make a profit. In this sense, every member of the workforce must focus on what they can achieve as a team, which is important for building the teamwork needed for the firm to succeed. On the other hand, PRP is not applicable or beneficial for all organizations or in all instances. Some cases severely limits its efficacy or make the system require a significant amount of supervision or follow up by HR management. Other important factors that make the system difficult to use includes how it may encourage stiff competition among employees as well as various teams which threatens teamwork needed for success of firms.
This section is dedicated to finding data to respond to the research questions and to ultimately achieve the objectives of this research. For this reason, data will be sorted and be used to discuss how the HR management can use PRP to motivate employees. In addition, the data and information found will also be used to review various instances in which PRP cannot be applied or cannot be used successfully including instances in which the system failed, leading to losses for the company. In order to accomplish this, the dissertation will rely majorly on secondary sources of data. These include materials such as books, articles and web resources (Amaratunga, Baldry, Sarshar & Newton 2002). Huawei has also on many instances tried to use PRP as one of the HR strategies to motivate their employees. Various books, articles and internet resources have been written about such attempts, including the successes and challenges encountered by the company while using PRP. Such sources will be utilized to discuss how the company has performed in using PRP for motivation of its staff members. Additionally, these sources will also be utilized to determine the challenges that the HR department at Huawei has faced while implementing the system as well as lessons and recommendation for successful utilization of PRP in future.
Several books and articles all with varying scope, but relating to PRP have been compiled. Some include research or previous experiences of firms with PRP including why, how or when it failed, these will be utilized in this dissertation. The reason for adopting secondary sources of data is that they are easier and cheaper to obtain than primary sources. Primary sources such as interviews, surveys and personal observation require the researcher to book many appointments and follow up in order to obtain the data required. Additionally, administration of questionnaires leads to cost of posting the questionnaire, sending it online or even traveling when it is administered orally. The administration of survey tools as well as the use of personal observation as a method of collecting data may cost the researcher more resources. In addition to the difficulty of accessing the primary data, the researcher may also require special skills in order to make sense of information collected through primary sources.
Secondary sources of information do not pose all of the above challenges in terms of collecting or interpreting. The researcher can access all the information needed from a library and analyze it accordingly. In most cases, information from secondary sources such as books and articles are usually analyzed and conclusions are also drawn. In such cases, the researcher does not have to analyze the primary data. Most importantly, secondary data offers diverse viewpoints from many scholars, researchers and specialists. For this reason, the researcher is able to reach an objective conclusion as a result of analyzing many viewpoints.
Various ways of collecting data will be used with an aim of finding out how PRP can be utilized effectively. Additionally, the data will be used to find out various instances of how PRP can be applied in various firms as well as the success and challenges that accrue. The use of the PRP system in Huawei, including how the system can be utilized in the same company in the future, will also be discussed using data collected from secondary sources.
4. RESULT AND ANALYSIS
4.1 The HR and the use of PRP
The human resources departments of firms have different responsibilities depending on the specific firm in question. However, the main function of the department is dealing with the matters relating to employees; it is the HR department that enables firms to deal with their human capital. HR ensures that firms have the right workers, who are provided with the right training and environment in order to optimize their performance. The realization that productivity of staffs can be enhanced through training and motivation and the participation of governments and labor organizations in matters relating to workers brought about the birth of human resources management (HRM). The main reason for the establishment of HRM in firms through the 20th century was to elevate the efficiency of the company’s staff. Firms will do what they can to increase the per unit output of any of the factor of production acquired.
On the other hand, governments and labor organizations have required many firms to adopt strategies that take into consideration the interests of the workers. These strategies create a legal-political environment in which firms need to comply with certain standards of working conditions, health and safety standards and remuneration. Specific guidelines offered by various governments and labor organizations require that workers be provided with safe and healthy working conditions and a salary that provides them with safe, healthy and productive lives. Such specifications have also established the rights and responsibility of all workers in a trade union to participate in collective bargaining for their general welfare. Many governments, especially in the developed world, try to ensure that workers share in the firm’s progress and can save enough to spend when they can no longer work, especially once they reach the age of retirement.
Company staff also have to follow certain requirements in order to perform well. For example, workers need a certain set of conditions to be set or met by their employers in order to agree to work for some firms. Additionally, there are factors that boost the morale of employees and keep them motivated, which drive the firms forward. Furthermore, the rate of workers turnover, especially involving the highly skilled workers, has been on the rise. This happens in the backdrop of firms trying as much as possible to protect their corporate knowledge in order to develop and maintain a competitive edge over competitors. This has been the main reason why HR departments of many firms do everything within their control to keep their employees satisfied and motivated. Firms hire and maintain HR departments in order to harmonize and synchronize the conflicting needs of firms, employees and regulatory requirements. Additionally, they also assist in managing various dynamics between the parties
Research shows that staff perform the best when the work they are hired to do is thought-provoking, safe, receive satisfactory acknowledgement for its contribution to the firm’s overall success and involves just compensation. From this, it can be seen that having motivated and well-performing workforce takes more than pay as many other factors must be considered. Motivating employees takes many other forms depending on individuals, and some workers would be adequately motivated by honest appreciation by their employers. However, monetary motivation is also very crucial for employees and can encourage them achieve the organizations’ performance goals. It is important to note that how money is utilized in employees’ motivation is very important and determines the efficacy of PRP.
Conventionally, most HR managers understand that money is among the prime stimuli for any employee. A large percentage of workers globally do it to earn money, pay their bills and get ahead financially. Beyond that, money has several significances to employees. Employees use the amount they earn as the measure of how the employer value them. Underpaid employees feel less valued and may even feel like the employer is taking advantage of them. Employees who are paid less may also feel like their contribution to the firm is not appreciated and may not be motivated to give their all to serve the firm. However, it is very rare that the motivation for an employee to work hard and achieve the firms’ goals is based solely on pay. This means that money does not solve all the motivation problems of the employees. Therefore, firms should both ensure that their employees earn a fair amount and compliment this with other means of motivating their staff.
4.2 Performance Related Pay
PRP was designed not as a means of motivating employees but as a means of basic remuneration. Initially, it was viewed as a commission system and is commonly referred to as pay for performance (Bratton & Gold 2012). The most basic of such a system may include the commission earned by salespersons upon a successful sale of an automobile. It was easy to observe that the promise of commission would motivate staff to start working and looking forward to making sales even without a promise of fixed salaries. Initially, the bonus system was utilized in a setup where the firm would not pay the employees unless very ambitious targets of making sales were met. The ‘target’ for the salesperson is to sell the quantity that will earn him/her the amount he/she needs as bonus or earn nothing at all. Due to realization of this, the sales persons become very innovative and come up with ways of reaching their targets. As a result of high discipline and innovation that results from this setup, many HR managers have used a similar system for reaching at employees’ salaries or bonuses. Such HR managers set a low basic salary for their employees but high bonuses to encourage them to achieve high targets. Those who fail to reach these targets earn far less compared to high performers and this encourages them to either achieve the set targets or seek employment elsewhere. Today, the idea of PRP has significantly shifted. What the HR management does is linking small sections of staffs’ salary to individual, team or organizational performance. The primary salary awarded to such employees is adequate and fair while the HR use extra bonuses to stretch the employees performance further and achieve the desired results.
Figure 1, showing the proportions of the total pay (Source: Frey 1997)
In most of the corporate environment today, the HR management would like the employees to feel valued regardless of potential bonuses. For this reason, the amount offered as the base salary makes up the largest proportion of the total income amount. This in itself is a means of motivating employees by making them feel valued. This has the potential of making the employees feel needed and therefore work hard to achieve the firms’ goals. Benefits make up the second largest amount of the total pay. In most case, the HR management make the employees feel like the two portions make and should make the total pay. When this amount is set high enough, employees feel more valued. Their benefits make them feel like their employer cares about their wellbeing and would provide purpose to achieve more in an attempt to be appreciative. The top section is what the HR convinces the employees that it’s a reward for exceptional performance. By so doing, they are able to set very ambitious goals for the employees, while the employees view this as an opportunity to make extra money. Although the amount offered as bonuses makes up the smallest proportion of their total income, it gives the management a significant leverage to motivate the employees to reach the set targets.
In such instances, it is not the amount offered that matters but how it is presented to the employees. As seen in the in the figure 1, even though the bonus given is actually less than the base pay and benefits combined, it help employees feel more in control over their earnings. This is the only section of the employee’s total pay that he/she can voluntarily control.
Figure 2. Knowledge of cause and effects relations: (Source: Thomas 2000)
As a result, the employee may feel that he or she is influential and very motivated through empowerment, which increases the employee’s self-drive. Such employees aim to achieve targets set by firms and earn the bonuses offered, leading to more self-confidence and motivating them to attempt higher targets. This becomes a self-sustaining cycle that can be capable of keeping employees motivated (Bunchner 2007).
Although the entire amount paid by firms to any employee is meant for the purpose of motivation, the HR departments of many organizations achieve more by linking a small percentage of additional pay in the form of bonuses, benefit sharing packages as well as ESOP to performance. The idea is that the employees feel empowered and in control of their pay. Employees knowledge of this is very important and helps them make conscious decisions to try and earn more. The HR management also makes it clear to the employees that their help is needed for the organization to achieve. In such instances, it is as though an appeal is being made to employees to work hard and achieve the goals that are very crucial to the organization and in return receive a good reward. Most people would like to feel helpful and useful, and they achieve this by helping. Still, others feel great and important after realizing that there is actually something they can do to help the firm they work for. Most employees report feeling important when they are given targets that make them go out of their way and assist their organization. Such employees may do it even more enthusiastically when their efforts brings earn rewards. The effective key in this model is setting out clear goals, explaining to the employees how the goals are important to the firm’s survival and letting them understand that the achievement of these goals largely depend on them. When all other factors in the employees’ environment are conducive, they are most likely to make a conscious decision to help out their firm and the financial reward associated with attainment of targets will be secondary to exercising their power and help their firm.
This is also the case with the use of ESOP in which the HR award stocks to some employees, in other instances, the organization may promise to give a certain share of stocks to employees if they attained a given target. These offers are used to show a firm’s commitment to the employees (Sun & Wang 2009). The stocks are not linked to or viewed as salary. For this reason, the firms through their HR demonstrate a sign of good will and long-term commitment to their employees that go beyond the salaries. Since these stocks are basically a unit of the firms’ ownership that can be converted into money, it is a monetary means of motivating the employees. Additionally, it is a means of promising the employees some share of firm’s profit. When the HR has extended this financial goodwill to the staff, they are likely to feel indebted and do something positive for the firm. Firms use this opportunity to set performance targets for the employees who are sometimes adequately eager to return the favor.
Figure 3. How performance and bonus correlate (Source: Frey 1997)
The promise of ESOP is a very effective way of financially motivating employees and making them stretch their performance. Other benefit-sharing schemes for employees work in a similar way. For example, PRP calibrates the performance goals for employees and set a certain amount of benefits against each level of achievement.
Research has established that there is always the maximum the employees can achieve when under a given amount of pay, non-monetary forms of motivation work up to a certain point from which the law of diminishing returns takes place. Afterwards, the HR department has to find ways of further inspiring their staff. At the performance threshold seen in the above diagram, any increase in the amount awarded as bonus results to an increase in output; any proportionate increase in bonuses leads to a proportionate increase in achievement as measured according to the goals set by the organization. This continues up to a point in the Y-axis in which any increase in bonuses does not affect achievement. As seen above, the best strategy for HR departments would be to optimize all other performance motivators and use PRP to inspire the employees to reach ambitious targets. Firms have a great opportunity to achieve more of their targets in the ‘incentive zone’ seen in the diagram. However, care should be taken not to waste bonuses as no appreciable increase in attainment of targets can be achieved if bonuses are given above the ‘bonus cap’. The maximum results for any employees or any team are achieved when the bonuses issued are just below the ‘bonus cap’ and all other factors of employee motivation are optimized. If this is not done, PRP may not maximize workers output, payment of bonuses could become a waste of scarce resources (Sotiropoulos, Milios, & Lapatsioras 2013).
4.3 Employee Motivation in Huawei Technologies Limited
Huawei is the largest telecom company in the world. In order to achieve continued success in the competitive business environment of the 21st century, there are a number of factors the company has prioritized on (Tao & Chunbo 2014). Due to the advanced technology seen in the products produced by the company and high level of investment in research and development, it is easy to assume that the success of this firm is directly and solely attributable to technological advancement (Wang, Wang, Yan & Yao 2013). In actual fact, company’s advancement is primarily attributable to application of scientific ways of management in all levels. This is done in all divisions of management (Alon & McIntyre 2008). From the executive management to all of the divisions including the HR department, the latest and scientifically-proven ways of running things are utilized. The HR department also utilizes scientific findings, theories and theorems in employee motivation. As a result, the department came up with and implemented a unique reward system for gratifying employees driven by the department’s recognition that motivation is developed through generation of forces that causes an individual to start and direct a project or a course and persevere despite all difficulties, to ultimately realize an objective. For this reason, the HR department always motivates the staff in order to increase their production, inspire inventiveness and improvements in this firm in order to come up with superior products. Employees are also encouraged to develop easier ways of going about the firm’s daily operations. In addition to various non-monetary means that the company utilizes in employee motivation, the backbone of the company’s employee motivation is monetary (Tao & Chunbo 2014).
at Huawei, the HR department has developed a system that enables the competitive remuneration of workers. It ensures that salaries for entry level jobs are high enough to attract the best potential employees and encourage them to work hard. The company’s salaries for entry level jobs for fresh graduates have been higher than the market average. For instance, in 2012, the company’s entry level salaries for university graduates were approximately $979 (6000 Yuan) in a market where nearly 70% of the fresh graduates were hired at $359 (2200 Yuan). There were very few companies at that time that were close to Huawei in employee compensation, although among them was its rival tech giant, ZTE (Tao & Chunbo 2014). Later on, from mid-2013, Huawei further hiked its pay for the same group to $1,305 (8,000 Yuan). At around the same time, salaries for entry-level post graduate entrants rose to $1,631 (10,000 Yuan) from $1,305 (9,000 Yuan). The reason for elevated entry level salaries is to attract the best skills and talent (Tao & Chunbo 2014).
Before the 2013 increment, the staff at ZTE received about 85-90% of what their counterparts at Huawei received. This gives the company an upper hand in attracting competent, industrious and innovative personnel. As will be illustrated, the company has among the most generous policy of rewarding its staff based on their performance. For instance in 2010, the company made a record net profit of $4.96 billion (30.6 billion Yuan). Company revenue for the same year was over $29.57 billion (182.5 billion Yuan). What attracted the most attention was its historic move to increase staff salary by 11.4% as recognition for their hard work and also to motivate them to achieve more. Still as a result of the high net profit, the earnings per share (EPS) rose to its highest amount ever of $0.48/share. This also tricked down to its employees as most of them have been allocated some percentage of the company’s stock. This HR strategy to let workers share in the company’s profits has help the company continuously grow to become the largest telecom company in the world (Tao & Chunbo 2014).
Huawei has a competitive and responsive welfare packages for all its employees. However, it also uses PRP to motivate them. As employees continue to work for this company, it periodically reevaluates the value of each and every employee based on individual performances, the result of which is used as a basis for rewarding each position in future. Under this system, employees who achieve the best in various levels earn high bonuses. The company has among the most complex and advanced bonus systems. More motivation is generated by the fact that bonuses range from between 70% and 300% of the basic salary (Cross & Lanaghen 2015). This means that the company has given its employees the power to determine their total pay to this high extent in addition to the fact the base income is adequately high. The company can be viewed as one of the best examples of how PRP can be used to maximize the employees output. It rose from a small company in southern China to a tech giant and ultimately to the largest tech vendor in the word. This great success is to a large extent attributed to keeping its employees motivated.
Another unique feature about PRP in Huawei is that it is employee-focused. Many other firms offer bonuses and profit sharing schemes to employees who help the company achieve more in terms of sales and customer relations (Armstrong & Baron 2004). On the other hand, Huawei offers hefty bonuses described above to motivate their employees to acquire new skills and competences necessary to give the company a higher competitive advantage over others in the telecommunication industry. With this in mind, employees work even harder to realize that the bonuses offered benefit the firm as well as each individual. At the end of the day, each high performing employee will have earned more in terms of money as well as skills and competence. From these motivated workers, the firm gains a lot in that it is able to generate and maintain a very innovative work environment making it highly adaptive to both the market forces and the consumer demands. This enhances the firm’s profitability and survivability in all runs (Tao & Chunbo 2014).
The HR department of this firm has also taken bold and leading steps to ensure that nearly all the staff has an opportunity to share in the firm’s profit. The manner in which this is done does not show a department that is eager to see the firm develop alone but also the one that would like nearly all the employees to participate in the firm’s growth, in both the short and the medium run. The manner in which this is done slightly deviates from the conventional ESOP where a firm may offer some percentage of stocks to be purchased by the willing employees. In most of the other firms, only a limited amount of staff, especially in the top management, can buy such their firms’ stocks. On the contrary, approximately 90% of Huawei’s employees own their stocks. The company does not offer these shares to individual employees. It links the issuances to performance in a manner that make employees aspire to achieve more to own of the firm’s stock and receive a better share of the company’s profits. Thirty percent of the shares offered to the employees are strictly reserved for the excellent employees who have shown exemplary performance in developing their skill bases and developing innovations (Kloster & Swire 2015). Forty percent of these shares are offered to the employees who show exemplary performance in making the management structure of this firm run efficiently (Tao & Chunbo 2014). The remaining percentage is shared among other recipients. Attaching the amount of shares given to each group or each individual to performances is very crucial an motivates the employees to always work hard to earn more of these shares which mean a larger unit of ownership of this firm and hence higher profits (Armstrong 2012).
The company’s ESOP also looks and grades the performance more holistically. The HR department recognizes the performance is an all-encompassing thing. Therefore, the department avoids simplification of scope when scouting for high performance. In the use of PRP in other firms, the performance of each individual may be over simplified, which may work to deteriorate the quality of output. For instance, a bank teller may earn bonuses for serving the maximum number of people but this measure overlooks the quality of services received by the customers. Similarly, the customer services representative may be incentivized for high performance solely based on the amount of time spent with each customer and a motor vehicle sales representative may earn more depending on the units sold without considering how much he/she popularized the firm and how well he/she served the buyers.
Huawei on the other hand notices that performance is an all-encompassing and multi-faceted parameter which is influenced by very many variables. The personnel’s performance is concluded from independent observation of several variables that include the aptitude, accountability, attitude towards the job as well as the degree of recognition of risk for each worker. The independent scores of all the above parameters are observed. Depending on the conditions of the firm at each specific time and the varying demands of each position, the findings in each of the parameters may be appropriately weighted to assign the importance that each deserves. This also has the effect of making the award of bonuses fair and more inclusive as there is no specific group of employees favored by the system. Those with an upper hand in academic and professional qualifications may not be as good in special talent or may not have the best attitude. This increases the equity in this system and hence more fairness as every worker has an equal chance of being a top performer in any of the above area. This was one area that the HR department managed to overcome one of the most important shortcomings of PRP. Equity, fairness and the broad focus of the system introduced by Huawei has yielded stability and sustained growth leading to continuous innovation and hence high performances by the firm. The company also carries out a strict annual follow-up of the stock ownership such that those employees who contribute more -through hard work- towards the firm’s success have the limit of their share increased. This increases their shares as well as the amount they would earn as dividends (Tao & Chunbo 2014).
The company has demonstrated in many instances that it has great reverence and appropriated significant investment into talent and skills. As a result, employees in this firm work very hard towards the success of their firm. This helps Huawei function efficiently and achieve incessant progression driven by innovation. As earlier discussed, the HR department of this firm is using the most advanced and scientifically proven principles. One of the formulas that is mostly applied by this department includes the hierarchy of needs developed by Abraham Maslow. According to Maslow, people demand physical needs at the basic level. Somewhere up the hierarchy, they start seeking spiritual fulfillment. Huawei offers all the employees adequate basic pay as well as benefits to afford all the basic, physical needs of considerable quality. Afterwards, the company is also concerned about its employees’ spiritual needs and creates an environment that enables them to obtain them. Every human being yearns to be appreciated, admired and recognized. The company creates a platform for all three using the advanced bonus systems as well as ESOP. However, the HR has also created another avenue for any employee to work hard and seek recognition and admiration. This is also performance related and involves money and can be seen as a form of PRP. The HR department of this organization came up with a varied collection of symbolic awards. The unique feature of this award is that it is purely initiated by the awardee than HR management. In this arrangement, staff who consider themselves to have done an amazing job or achieved excellence in their goals and in an efficient way are allowed to apply for a token reward described earlier. After application, the HR department evaluates the employees’ claims to ascertain them. If they are ascertained, the staffs are applauded publicly. This reward does not necessarily come with huge sums of money, but the little amount received goes a long way in motivating the recipients to be more imaginative and spontaneous. The pleasure and fulfillment that accrue may encourage the recipients over varying lengths of time- analyst argue for the short run. However, the whole HR strategy that allows and enables an employee to seek recognition after an exemplary performance has not been utilized before. This form of PRP designed and employed by the HR department of Huawei has the overall effect of empowering the employees to set high performances target for themselves and strive to achieve them. This is one of the very few instances in which employees can set their own performance targets and receive due recognition after achieving them, and has the overall effect of making employees own their firm even more and always strive to achieve more to help it progress.
4.4 Advantages of PRP
When properly applied, PRP is among the most potent means of monetary motivation that HR departments across organizations can use to maximize the output of their employees (Gooderham, Grøgaard & Nordhaug 2013). In other cases, it is the only viable means of remuneration. For instances, a retail shop might not have adequate resources to maintain sales representatives on their payrolls unless there is guaranteed sales. For this, the only sure way to ensure that such firms have an adequate workforce is the use of PRP in form of commission system. Some analysts argue that this might not be seen as PRP since it is used for basic pay in this instance (Armstrong & Baron 1998). However, the prospect of achieving sales and earning these commissions is what motivates people to be a part of such workforces. This makes the system PRP-related. Even when used to compliment other forms of payment or purely for motivational purposes, the system has the potential to greatly enhance their performance of employees if well implemented. As seen above in the Huawei case, the firm has relied on this system to greatly boost its performance. Additionally, the advanced and responsive nature of PRP used in this firm continues to give it unleveled amount of competitive edge compared to other firms. The staffs are continuously enhancing their skill bases and hence their performances which has helped to generate an atmosphere of continuous innovation in the firm, leading to growth and enhanced survivability in the long run. There are several benefits that can be realized if PRP is properly applied. For such benefits to be realized, the HR department of the firm has to come up with ways of altering the system and tailor it according to the specific needs of the organization at that particular time (Cardon & Stevens 2004). The department has to ensure that the motivational needs of its staff is well identified. Additionally, the firm has to ensure that all other factors in the employee’s work environment have been optimized. Offering large amounts of money for bonuses may not lead to any appreciable increase in output if the firm does not use efficient technology or optimize its employees’ work environment. The HR department also has to ensure that the system is fair and has provision for maximum participation of employees.
One of the greatest advantages of PRP as a method of maximizing staffs’ performance through motivation is that it provides a means for rewarding excellence. The firm offers a certain amount to be earned by the employee who achieves the set objective. By so doing, the employees have some drive to work hard and aim to earn the bonuses through which the firm achieves its objectives. Incentivization provides a reasonable justification for employees to stretch the limits of their abilities than many other means. Through this, such employees can learn of their abilities while others can acquire new skills. When a worker achieves targets he/she previously considered impossible, it increases his/her confidence level which would make him/her attempt higher targets in future. Repeating this cycle several times generates a self-sustaining cycle of motivation for staffs which also increase their bonuses and abilities (Andersen & Poulfelt 2014).
The second and the most important advantage of PRP for employees is that it provides them with an opportunity to get ahead financially. The employees’ achievement of the set objectives earns them tangible financial rewards. As earlier discussed, it is a means of allowing the employees to determine their pay to varying degrees; sales people who earn entirely on a commission basis can be said to be in charge of how much they earn. In other forms of PRP where bonuses constitute only a small percentage of the pay, the employees are also in directly control of this small amount and are in less control of their total pay. As noted, performance bonuses at Huawei ranges from 70% to 300% which offers employees the control of their total pay (from slightly less than a half to three times the basic pay and benefits combined). When employees are empowered to this extent, their autonomy as well as innovation to seek ways of attaining the highest targets for the rewards is greatly enhanced. The employees may also feel valued and sometimes indebted to return the favor to the employer.
The third advantage of PRP is that it can be used to introduce a performance or innovative culture in firms. In the traditional corporate set up, high pay and the ability to earn bonuses was associated with seniority where managers in high positions were awarded hefty bonuses for their prestige. The then lack of global integration and existence of strict national and regional boundaries reduced competition for firms such that the optimization of the use of various resources was not necessary. Since the late 20th century to the early 21st century, firms have been consistently faced with situations that force them to reward all their employees on merit in order to inspire efficiency and innovation. One of the most promising means of achieving this is the use of PRP. In this system, the HR departments of firms are required to come up with ways of grading the performance of employees, set performance goals and reward the ones who show excellent performance with bonuses (Fargus 2000). PRP has generally created a platform where firms can review their remuneration traditions adopting the ones in which high performance is rewarded and not only the preeminence nor the prestige of senior employees.
The fourth advantage of PRP relates to its ability to set up a framework for establishing the performance of each individual worker. Although firms perform the best when its staff works as a team, it is important to note that a team succeeds when all team players understand their roles well. In an attempt to grade the performance of each individual, the HR departments of firms have been developing a framework to break down the contributions of each staff member and rank it against the performance objectives. If this process is carried out objectively and in detail, HR departments can learn to identify the non-effective members and take the appropriate action. With PRP, the individuals behind the firm’s success are rewarded rather than rewarding the entire workforce, such that freeloading or non-performing members of the workforce who are undeserving of bonuses. It motivates the well performing staff while identifying the ones performing poorly so that each group can respond appropriately.
The sixth advantage of PRP is that it makes the staff realize what they need to do to improve their performance and earn bonuses and improve their pay. When bonuses are linked to pay, the employees that are judged to have performed poorly do not get bonuses. This motivates them to improve themselves so they can get bonuses the next time. This is a unique instance in which the PRP can be used to motivate the high performing as well as the low performing ones (Cooke 2012).
Finally, since proper application of PRP leads to rewarding of the best performing workers, it becomes a very effective way of dealing with poor performance (Dyck & Cragg 2003). As discussed, the system is based on effective quantification of performance to separate performers from non-performers. Due to this, the HR department and indeed the entire firm can come up with ways of improving the performance of the poorly-performing members of staff. Additionally, the data obtained in the process of performance evaluation can be used for various other functions. The HR departments will always know the most industrious workers and will always seek to retain them during downsizing or layoffs. Most members of the staff do not seek to be perennial non-performers. Most of them would do their best especially if they realized that their performances were rigorously evaluated against firms’ performance objectives. This encourages the entire workforce to work hard and achieve the firms’ objectives either for the reasons of earning bonuses or to avoid being labeled as poor performers.
4.5 Shortfalls of PRP
In the application of PRP, very few firms have categorically achieved the result they aimed for, and far fewer firms obtain positive results. A large number of them obtain a negative evaluation and in some instances, the use of this system has had catastrophic repercussions to firms, and on the domestic as well as the global economy. Other firms report that they were certainly unable to successfully apply the system either due to complexities involved and unforeseen and yet devastating effects during application among others (Shields 2007).
One of the major shortfalls that arises from the use of this system results from over simplification performance while setting targets for evaluating the same. In such instances, a complex task is degraded to a single linear way of measuring. For instance, a bank teller’s performances may be measured solely depending on the number of individual customers served. The quality of the service given to the customer or the balancing accounts of is ignored. In the long run, the client who receives unsatisfactory customer service may seek services from another firm hence the bank will ultimately decline despite awarding hefty bonuses to hasty employees (Cooke 2012). Firms need to find ways to objectively evaluating the performance of employees before awarding bonuses. This can be achieved through observing and evaluating many parameters which may include staffs innovation, risk awareness, responsibility and intuitiveness among others as seen in the case of Huawei.
Before the global economic downturn of 2007/08, a large number of American banks wanted to increase their client base. Many of them wanted to sell the largest number of loans in the form of mortgages. As a result, they mounted a lot of pressure on their direct sales representatives to lend as much as possible. This was ultimately the greatest catastrophic failure of PRP in the early 21st century. The measure of performance for these banks was the amount of loans issued. This generated a lot of competition among direct sales representatives. Through their haste, a large number of direct sales representatives did not scrutinize background checks of their clients to ascertain their eligibility, which led to the issuing of mortgages to many non-qualified clients. On the bank’s side, the loan officers were judged to have performed well and earned large sums of dollars in commissions. However, the quality of work was not satisfactory over time; many of the clients who got these mortgages were unable to afford them and banks experienced a condition of mass defaults. The default rate was higher than the rate at which these banks would have resold properties acquired through the mortgages as foreclosures and banks lost their money. In an attempt to recover their lost money, banks increased interest rates for loans and mortgages which greatly increased the cost of credit which in turn reduced production, consumption and other economic activities. The ultimate result was the economic crisis of 2008, which was ranked as the worst since the Great Depression (McDavid, Huse, Hawthorn & McDavid 2013. The main cause of this unfortunate occurrence was poor application of PRP in a sector that is one of the most crucial drivers of the economy. Although the occurrence is regrettable, it is the improper use of PRP that caused it. Banks should have come up with a measure of performance that did not oversimplify the issue and that would have ensured that all loan officers adequately cleared the background checks for all prospective clients. This would have ensured that only the eligible applicants could have qualified for the loans, which could have helped reduce the default rate and saved the economy. Nonetheless, the case provides one of the most vivid examples of the repercussions of improper use of PRP through the use of simplistic and single-faceted means of measuring performances (Negash 2014)
Another shortfall that prevents PRP from achieving a meaningful degree of employee motivation is that it may lack equity in payment of bonuses. Simplified tasks and performance indicators lead to the awarding of financial bonuses to only a group with a narrow range of abilities and not to the others. In the earlier case, only tellers who are fast would have receive more bonuses while those who delivered quality services would ultimately be ignored as they would be seen as being slow. Similarly, the careful tellers who ensured that their work was not erroneous and balanced all the customers’ accounts well may also fail to be incentivized. The overall effect would be that such would learn to increase their speed and sacrifice their desirable attributes hence speeding up the process of bank’s decline or fail to work as enthusiastically as before, which would be undesirable. To solve this, firms should broaden the parameters on which performance is evaluated so that as many groups of workers as possible are incentivized. The performance evaluation system when include parameters such as intuitiveness, responsibility, quality of service, innovation, attitude among others. The judgment of who performed the best should ensure that all the groups of employees are covered such that no one is left disgruntled, which would cause resentment amongst the staff (Lee & Bruvold 2003).
The third most significant causes of failure for PRP is that it may breed unfair competition between individuals or teams in the workplace, which hinders teamwork and adversely affects the firm’s performance (Boring 2006). HR departments may design their PRP such that the best performing employees earn hefty bonus for a job well-executed. Regardless of how fair the criterion or criteria for evaluating employees’ performances could be, everyone would like to be the best by outperforming the rest. This competitive environment minimizes cooperation, as no one would be likely to assist the team. Corporate workplace today requires a significant amount of teamwork to succeed and achieve more. This reduced cooperation reduces the effectiveness of PRP and makes such firms continue to decline even after awarding bonuses to incentivize the ‘excellent performing staffs’. To counter this, firms can introduce shared bonuses for teams. This would reduce inter-employee competition and boost the firms’ performance. Huawei has avoided this by ensuring that basic pay and benefits for all employees is high enough such that employees can make a decent living without bonuses. Additionally, the company ensures that the evaluation criteria for performance is all-inclusive and accommodates all the groups. The company has also set several categories of bonuses to be paid according to each level of performance. This means that the worker who does not fall into the group of top performances falls into the second or the third group, all of which is assigned a significant amount of bonuses. The company has also done the same for its ESOP plan where the performances are rated into three groups, each of which is assigned a given percentage of shares. Although the group of top performers owns a large percentage of stocks, other groups have a significant amount as well, which reduces the disparity between the group and hence harmonious coexistence in the work environment leading to better results. Assigning performance bonuses and ESOP to groups reduce interpersonal competition as a larger number has opportunity to fall into each group and earn bonuses (Saunders, Lewis & Thornhill 2009).
Despite the capacity this system has to maximize the output of the employees and increase a firm’s profitability, it may face opposition from various parties. Some of the opposition may be caused by genuine concern arising from health and safety while others could be motivated for their own personal gain (Davies & Liang 2011). For instance, a taxi firm may lower the percentage pay earned by the driver per mile. If the driver is to be paid the sum earned over a fixed period of time, for instance a day or a week, he/she may be forced to speed in order to cover the maximum distance necessary to earn a substantial pay over this period. Such a move could be opposed as speeding is risky as it could lead to loss of life and destruction of property if not trouble with authorities. In such instances, drivers could oppose PRP for a system offering them fixed pay. In other instances, PRP can be opposed for ill motives. A firm could opt to shift from a system that compensates the staff according to seniority to PRP. The less productive senior officials, not wanting to earn less than their hard-working junior counterparts may vehemently oppose PRP (Weixi 2006). In the first instance, the firm should develop a good system for paying and motivating their workers. For instance, the percentage paid per mile could be increased to so that drives do not need to speed in order to cover the maximum distance over a fixed period of time. Still, the firms can choose to offer them fixed pay or find other ways to incentivize drivers other than PRP. In the second instance, the firm would lose more by heeding to the opposition by less productive seniors. It can either choose to ignore them or replace them (Guymon 2008).
Some research suggests that there are particular instances in which PRP can be utilized successfully and others where it is simply not applicable for staff motivation (Saperstein & Rouach 2002). Many researchers are of the opinion that the system achieves more when applied for tasks that require physical expertise. The argument is that such activities will take less time as the worker will not need to think very much as the tasks are thought to be straightforward. Additionally, the outcome of the whole process is easily visible and measurable against the set objective, an argument they put to support PRP as being suitable only for physical tasks. However, not all physical tasks are simple in nature and some would take huge amounts of workers intellectual resource. In other instances, while the outcome is not always easily measurable against the set objective, PRP is nonetheless more easily applied in such tasks. The assumption that PRP is not applicable or beneficial for tasks needing cognitive skills is not always true (Weixi 2006). Tasks needing cognitive skills can also be broken down into schematic steps that can be followed to accomplish them with ease. Additionally, the targets for grading the performance in terms of time, the level of completion of tasks as well as the quality of the finished tasks can be measured against the schematic steps for carrying out the task, and the quality of the finished product. For this reason, PRP can still effectively and profitably be used for cognitive tasks. The reason suggestions seen at the beginning of this paragraph resulted from lack of clearly broken down (schematic) objectives for carrying out tasks, detailing the whole process as well as the description of the finished results. This makes the judgment of performance for allocation and issuance of bonuses very difficult. Some researchers concluded that physical tasks mostly lead to a concrete results that can be observed hence judging the performance of the worker becomes easier. However, this makes the process very subjective and those tasked with making the decision about bonuses would make different judgments regarding whether or not to issue them. On the tasks that require cognitive skills, the researchers concluded that it would be virtually impossible to judge the performance of the worker, based on the product and the whole process could be lengthy. This is not the case if a schematic way of accomplishing the task is generated and graded against the objectives such that the completion of the entire process and the achievement of the desired results earn the worker the total amount of bonus. For this reason, PRP can be used successfully for physical and cognitive tasks (Redman & Wilkinson 2001).
A large number of firms have tried to utilize PRP in their operations and have achieved varying results. Many of these firms have tried to utilize the system as a means of motivating their employees so that they can maximize their output. In such instances, the system has been used to complement other systems of remuneration, most of which are used to determine the fixed part of an employee’s pay. PRP has been used to give staff the opportunity to try and vary their incomes in return for performance goals set by their organizations. Often, the firm sets ambitious goals that are calibrated into levels and each level relates to a percentage of bonuses to be awarded to the workers who achieve it. The principle reasoning behind PRP is that every employee works to earn money and none of them would mind making extra money. This comes from the economic principle that human wants are infinite and unquenchable in nature and require finite resources to satisfy them. While this principle is valid and applies to all humans, there are other factors that may determine if the targets set for workers to achieve for bonuses are actually achieved. Nonetheless, there are other factors that determine whether staff attempt their performance targets and whether or not they are enthusiastic about them. On the other hand, the second form of PRP is solely depended upon to determine the total amount received by the employees. This means that the employees pay is based 100% on commission (Whiteley, Cheung & Quan 2000).
Regardless of the type of PRP, the working framework for this system is very similar in that the management sets performance targets and calibrates them assigning each level of achievement to a certain amount of bonuses which are either awarded to individuals, teams and departments. In order for this system to be effective in motivating the staff to work hard, it should have the following characteristics. First, it should be fair and equitable. The HR management should be seen to set the means of evaluating performances that are fair and acceptable to all employees. As discussed earlier, many HR departments may over simplify the performance making it to focus on only one aspect. When this is done, other crucial aspects of performance may be ignored leading to failure of the firm. Additionally, the management might introduce performance evaluation measures that are biased in which only a selected group of staff may be able to achieve. When this is done, other employees who do not stand a chance to earn such bonuses may be disgruntled leading to disharmony amongst the staff, which lowers the firms’ performance.
Even when applied well, PRP generates stiff competition between the individual staff members or among various teams as every individual or team would like to earn the bonuses offered (CIPD 2009). It is important to understand that winning means edging others (Cuervo-Cazurra & Ramamurti 2015). This can be unhealthy for any work environment as teamwork would be destroyed by stiff competition, which limits cooperation between individual workers. HR departments in various firms need to avoid such competition or at least find ways to reduce its effects.
The other major factor that reduces the efficacy or the success of PRP is when the management does not adequately involve the staff in setting the performance targets. In such instances, the staff may view the set targets as being firm oriented and refuse to own them. Successful firms try to engage their staff and their views concerning the setting of the performance target as well as the bonuses earned. Huawei, one of the most successful firms in the use of PRP, tries as much as possible to make performances target staff-oriented. For instance, the company has been seen to offer generous bonuses to staff who have achieved exemplary performance in personal development. The firm views this as the basis for further advancement of the firm as it encourages its employees to become increasingly skillful, knowledgeable, efficient and innovative.
These factors that have caused PRP to fail either through achieving less or nothing at all in maximizing employee motivation. Huawei has done a lot of work in improving its management through the use of scientific principles (Guaspari & Kouzes 2015). Its HR department is also highly advanced and has developed a very innovative form of PRP that responds to all the challenges seen above. First, the company has come up with an all-inclusive format of evaluating employees’ performance that checks factors such as employees’ attitude, innovation, and awareness to change including spontaneity among others. This format allows proper evaluation of performance to insure it is all inclusive and also guarantees that every worker has an equal chance of being selected as a top performer. This increases the quality of output as well as equity among the employees resulting to harmonious working environment.
The HR department also engages the staff in the entire process of setting the performance goals. Additionally, it makes performance goals that result in mutual benefit. For instance, it awards bonuses to individuals who develop themselves personally as well as others who come up with the most efficient ways of doing things. The company reduces competition by ensuring that staff are awarded in groups and according to varying abilities of individuals. All people who show superior performances are placed into various groups. Additionally, the difference in bonuses earned by each group is kept low to promote equity. The same is done in the firms ESOP. Additionally, the firm has a rare provision that allows members who feel they have performed exemplarily to apply for an appraisal that result in bonuses.
The percentage of bonuses awarded by this firm is also very motivating. Despite the firm paying the highest in the industry, the amount offered as bonuses to recognize excellence range between 70%-300% of the base pay. This is adequate to recognize excellence as well as inspire all the employees to improve their performance so as to earn these benefits. These fair and friendly systems of earning benefits and large sums offered as bonuses give the staff large control of their total pay. Similarly, they also inspire loyalty among employees by preparing them to offer their best services to their firm in return to the great deal of goodwill extended to them.
Company’s PRP strategies go further in the profit sharing schemes which come in the form of ESOP. Ninety percent of the workforce owns a share of the company’s stock meaning they have an access to the firm’s profits despite having access to huge bonus schemes. The awarding of stock is done to groups, each of which is awarded according to performance of the individuals. The difference in the percentage of shares issued to each group is kept at minimum to guarantee equity. This means the group composed of low-performing individuals can still have some stocks which make them feel appreciated and hence work harder.
Huawei Company provides a good model of how PRP can be used to maximize staff performance. Its HR department came up with ways of rewarding employees according to their performances while avoiding most of the shortfalls that other firms experience as a result of using PRP.
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