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Performance related pay

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Financial motivation - Performance related pay

Performance-related pay is a financial reward to employees whose work is:

• Considered to have reached a required standard, and/or

• Is above average

Performance related pay is generally used where employee performance cannot be appropriately measured in terms of output produced or sales achieved. Like piece-rates and commission, performance related pay is a form of incentive pay.

Whilst the detail of performance-related schemes varies from business to business, there are several common features:

• Individual performance is reviewed regularly (usually once per year) against agreed objectives or performance standards. This is the performance appraisal.

• At the end of the appraisal, employees are categorised into performance groups – which determine what the reward will be (if any)

• The method of reward will vary, but traditionally it involves a cash bonus and/or increase in wage rate or salary.

Performance-related pay has grown widely in recent years – particularly in the public sector. This is part of a movement towards rewarding individual performance which reflects individual circumstances.

According the Equal Opportunities Commission, a well-designed performance-related pay scheme would have the following elements:

• Objective setting
• Communication and understanding of objectives
• Consideration of performance against objectives
• Translation of evaluation into performance rating
• A link between ratings and the determination of pay
• A separate appeals procedure

Disadvantages of Performance Related Pay

There are several problems with performance-related pay:

• There may be disputes about how performance is measured and whether an employee has done enough to be rewarded

• Rewarding employees individually does very little to encourage teamwork

• It may encourage unhealthy rivalry between managers

• There is much doubt about whether performance-related pay actually does anything to motivate employees. This may be because the performance element is usually only a small percentage of total pay.

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