Performance Pay – Why Does the Debate For and Against Performance Pay Continue?

Performance-related pay (PRP), the system where employees receive cash based bonuses or increases to base pay linked to performance assessment, has been around for decades. Yet, despite its widespread use, performance pay still remains controversial. While many acknowledge that recognising performance through financial rewards can motivate people to achieve superior levels of performance, money may not of itself be a motivating factor. Also, in a low inflation environment, will 2% really motivate people to go the extra mile?

What are the advantages and disadvantages of performance pay?

Advantages of performance pay	Disadvantages of performance pay
Acts as a motivator	Acts as a demotivator if decisions are unfair
Reinforces culture and values of organisation	Inconsistent decisions work against organisation
Establishes clarity on performance expectations	Favours individual rather than team performance
Promotes the achievement of desired behaviours	Demotivates people who don’t get rewarded
Focuses attention on contribution and performance	Supports short terms targets over longer term goals

What makes performance pay difficult to implement?

The frequent appearance of performance pay in the headlines indicates that organisations find practical implementation more difficult than the theory. The role of line managers is crucial to success yet are they properly equipped to make consistent performance assessments that directly impact people’s pay levels? While some organisations use general performance assessment in preference to a more formalised system, a robust and ‘felt fair’ approach is essential to promote the desired outcomes.

What are the alternatives to performance pay?

One of the main alternatives is contribution-related pay where, in addition to the assessment of performance outcomes, it also takes account of the behaviours and competency levels that have influenced the outcome. There is a growing trend towards the holistic approach that contribution-related pay offers and it will be featured next year in Just Rewards.

Take a look at the Tips section below on what are the Do’s and Don’ts of performance pay?

Tips: What are the Do’s and Don’ts of performance pay? **

DO

• Design a scheme that is aligned to the organisational values and goals.
• Establish effective performance management processes and goal setting.
• Involve line managers and other key stakeholders in the implementation.
• Ensure consistency applies between managers rating performance and applying rewards.

DON’T

• Make it more complex than it needs to be.
• Focus on short term objectives to the detriment of long term goals.
• Allow inconsistency to creep into performance assessment and pay decisions.
• Forget that managers make or break performance pay so ensure they are equipped for the job.

Website of the Month

For this month’s website review we look at the Tomorrow Project which undertakes research, consultation and communication about people’s lives in Britain over the next 20 years, including how employees will be rewarded.

Why look at the site? – Interesting and well researched reward content which forms part of a fascinating research programme into people’s lives in Britain over the next two decades.

What works well? – The content which covers topics such why only a minority of employers adopt a strategic approach to their reward practices and how base pay practices are becoming increasingly flexible.

What could be improved? – Site navigation would benefit from a revamp and more clarity is required on the scope of the project to ensure the Tomorrow Project has practical applications beyond the academic research.

Just News

Executive bonuses measuring combination of financial and non-financial measures on the increase

In the 2007 Annual & Long-term Incentives report which surveyed 500 businesses, PriceWaterhouseCoopers reported an 18% increase to 31% in executive reward packages using non-financial and individual measures against the previous year. The increase in customer based and operational performance measures indicates the growing importances of long-term performance as part of the continuing shift towards ‘at risk’ pay. Maximum bonus opportunities have also grown where chief executives of FTSE100 companies experienced a 20% increase to 123% of their base pay from the previous year.

Vatican to introduce performance-related pay in from January 2008

A statement issued by the Vatican on 21 November 2007 confirmed that a form of incentive pay will be introduced from 1st January next year. The meeting involving Cardinal Tarcisio Bertone, the new secretary of state to Pope Benedict XVI agreed the introduction “into the Vatican pay system of an element of incentive and remuneration that takes account of factors such as dedication, professionalism, productivity and politeness”. There are 2,600 people employed by the Vatican which has its own court system, police force and fire brigade as well as gardens, supermarket and post office. Lay workers will be included in the new scheme while priests, bishops, monks and nuns which forms part the papal administration will be excluded.

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** Please note that this advice is provided as guidance only. If you need specific advice relating to your requirements, please call Reward First on + 44 (0) 1367 710 618.

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