Performance pay: why is the jury still out?

Performance pay is not a ‘neutral’ topic – most people have a view on whether it genuinely contributes to higher levels of performance or not. As we know, the reality is not that simple and may explain why the jury is still out on performance pay.

Sylvia Doyle from Reward First People Consulting

Performance pay: why is the jury still out?

According the CIPD 2011 Reward Management survey, over half the organisations in the UK use some form of performance pay. So why, despite being so widespread, does this reward system remain controversial? In this article we explore whether it’s to do with performance pay itself, or the way it’s implemented.

What can a well-managed performance pay system deliver?

When it’s correctly implemented, performance pay can deliver significant advantages, such as:

• Motivating staff
• Recognising achievement
• Improving goal-setting
• Encouraging commitment and loyalty
• Retention of valuable staff

Focus on ‘best fit’ to ensure that the performance pay system is aligned to your organisational culture and values will be critical to a successful outcome.

What happens when performance pay doesn’t work well?

Unfortunately, when performance pay is not well implemented, it can give rise to a number of undesirable outcomes, including:

• Demotivating staff and undermining morale
• Undermining development
• Working against teamwork and cooperation
• Encouraging a focus on short-term results
• Rewarding favourites

Organisational context is key

To work successfully in any given organisation, a performance pay scheme must be aligned to your culture and values as well as your wider organisational goals.

As a very general rule of thumb, performance pay tends to be a better fit with private sector organisations – and especially those that look at individual performance. If yours is a not-for-profit organisation thinking about performance pay, you may want to consider what you are trying to change, how you will measure it – and whether performance pay really is the right system to help you achieve your objectives.

“What gets measured gets done!”

Measuring the right things is critical. Measure the wrong ones, and you may encourage dysfunctional behaviour. Consider too that if you’re linking pay progression to the assessment of individual performance, you need to prioritise performance management processes and objectives. Performance measurements should be manageable in number, relevant, defensible and linked to meaningful (e.g. SMART) objectives.

Keeping things consistent and fair

Consistency is another factor that influences the success or otherwise of performance pay schemes. Some organisations prefer a general performance assessment to a more formalised approach. It’s absolutely critical, though, that the approach you use is robust and perceived to be fair. It can be demotivating to staff if, say, they see a colleague who is contributing less than they are receiving the same increase.

Line managers in the frontline

The role of line managers is crucial, both when you are developing the approach you will take in your scheme and when you make the performance assessments that determine people’s level of pay. What this means in practice is firstly that line managers (and other stakeholders) should be involved from the outset in planning your scheme, and secondly that they need to be equipped to make consistent performance assessments.

If you’d like advice on whether performance pay is right for your organisation, support with introducing a performance pay system or help with fine-tuning your existing scheme, do get in touch .