Performance influences pay in quarter of all deals

A quarter of recorded pay deals in the year to August 2004 have an element based on merit or performance, according to new research.

This indicates that employers see pay as the the key to improving individual and company performance, according to research by Personnel Today’s sister title IRS Employment Review.

But there has been speculation that the current economic climate is not best suited to performance-related pay. With low inflation, budgets for pay awards also remain low, leaving employers with little cash to play with. Hugely different pay awards between performers of different levels are not always possible.

The findings are based on responses from 74 private and public sector organisations.

Key findings:

– Performance-related pay schemes are rarely offered to manual workers

– More than one-third (38 per cent) of organisations operate one scheme to cover all employees

– Pay awards are most likely to be based on the performance appraisal rating received. Almost all (92 per cent) of the staff from the organisations surveyed are subject to a performance appraisal, the outcome of which is used to determine the pay award level

– Performance-related pay is most effective for employees already performing at an average or above-average level, with little impact being recorded on the performance of the lowest performing staff. Almost half (46 per cent) the survey’s respondents reported no change in the performance of staff not already performing to the best of their ability, as a result of introducing performance-related pay

– Survey respondents recommend that to be successful, a merit pay scheme should be consistent, transparent, communicated to employees and sufficiently funded to motivate employees.

IRS Employment Review pay and benefits editor, Sheila Attwood said: “Performance-related pay came to fruition primarily as a way of promoting performance in the workplace and to encourage a performance-based culture.

“The research has shown that merit pay schemes can be a highly successful method of motivating employees, although unfortunately we also found that it is most successful with employees who are already performing well. In addition, the process can be time consuming, and employers must avoid pitfalls such as insufficient funding and lack of consistency in approach.”

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