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.