Considerations For A Performance Related Pay Policy
Getting the pay structure right within a business is critical in retaining the most talented people and allowing the team to do their best work.
What is performance related pay?
The professional body for people and development, the CIPD, define performance related pay as “a way of managing pay by linking salary progression to an assessment of individual performance, usually measured against pre-agreed objectives.”
At the beginning of each year, every employee will agree to a number of objectives that link into the overall business goals. Alongside setting these objectives and applying timescales, a review structure will be set up to measure progress throughout the year.
This can be used to anticipate any emerging roadblocks and to update an individual’s expectations in terms of their end of year rating (otherwise an unexpected rating can have a severely detrimental impact on their performance and their overall relationship with the business).
The scales used to rate performance can vary, but they need to be consistent throughout the team.
Types of performance related pay structures
Individual performance related pay
This focuses purely on the performance of the individual against their objectives. It usually consists of an individual pay rise linked to the rating they achieve.
Where teamwork is integral to the success of the business, setting up a payment structure based on what the team achieves together may be more effective.
All team members get the same pay incentive depending on the overall performance of the organisation.
Some companies choose to go with a combination approach. They may have individual performance related pay but the organisation’s performance is also taken into consideration. For example, if a business had a really good year it might provide ‘exceeding’ individuals with a 10% increase. On a bad year it may only be 3%.
Another factor that can be incorporated into the structure is market rating. The idea is to ensure there isn’t a big pay gap between what salary your business pays for a role and what your competitors pay for the same role.
Performance related pay - advantages and disadvantages
In some organisations performance related pay can draw attention to the difference between those at the top of the pay scale and those at the bottom. This possible disadvantage can lead to companies choosing to have a separate structure for senior managers and the rest of the team.
It can also lead to tension within a team, between those who are happy with their rating and those that are not. How much each team member gets paid is a sensitive subject - any performance related pay structure has to be handled with the same discretion.
Consistency across teams
Getting consistency right can be difficult, especially in a business with lots of different managers and different role types. Providing managers with comprehensive training and a supporting toolkit, as well as having good quality moderation sessions, can help with this.
Team motivation is key to success. As the company benefits, the team benefits, and vice versa. Done well, performance related pay should be a win-win.
It should also help with retaining the high performing team members. The really ambitious should have a structure in place to be proportionately rewarded for their extra efforts.
Attract top talent
Who doesn’t wanted to be rewarded for their success at a company? While performance related pay is unlikely to make you stand out from the crowd in the recruitment market. It could leave you lagging behind other companies if you don’t have it. In many industries and job roles, it’s a prerequisite for attracting the best people to work at your company.