Four ways to perfect your performance-related pay scheme

Almost a quarter of pay awards each year are based on a measure of employee performance. Sheila Attwood looks at how employers can make the most of their paybill budgets in this way.

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Performance-related pay links the outcome of the annual salary review to an assessment of individual performance. Organisations often use it to encourage a culture of high performance and to reward high-achieving employees.

However, XpertHR research has found that while such a system will motivate those employees that are already performing at a high level, it may do little to encourage average or poor performers to up their game. How can employers turn this around?

1. Review the appraisal process. Almost all organisations use an appraisal to assess employee performance, with the outcome of this review used to determine the value of pay award that the employee receives. Organisations should check that they have an effective performance management process in place, including making sure that employees understand how their performance is being measured and what they would need to do to achieve a higher performance rating.
2. Train line managers. Line managers will be setting objectives for the appraisal and reviewing employee performance against these, so must be fully trained and competent in these processes. For employees that are not performing well, line managers need to have the capability to hold difficult conversations with them, and also to develop a plan of action to improve the performance of these individuals.
3. Look at the pay review budget. If there is only a very small budget available for performance-related pay reviews, the resulting pay rises may not be enough to motivate employees to perform at a high level, nor to differentiate between different levels of employee performance. If an employer does not have a sufficient budget for performance-related pay, it could look at other ways to pay the annual pay review (such as with an across-the-board increase) and to recognise employee performance (for example, with the use of a recognition scheme).
4. Engage employees in the process. If employees do not have faith in the performance-related pay system, it is likely to fail. Employee engagement can be increased by ensuring that they fully understand, and are provided with training on, the system and processes. Involving employees in the design of a scheme is a great place to start, but if there is a scheme already in place, employers should seek employee feedback at the end of every pay review cycle.