Does performance related pay work?
I’m currently planning the salary review process for a client. The general principle is that we reward for performance. It’s something I’ve heard expressed many times before and on one level it makes sense. Why not give more to your best performers? The problem is that salary budgets have been low for years (less than 3%) so practically it becomes very difficult to adequately differentiate between average and excellent performance. So does performance related pay work?
What are you hoping to achieve with performance related pay?
An additional 1% salary increase is not enough to motivate your top performers. If you are placing all your hopes on this then you will be disappointed. The actual quantum involved will be minute once tax and National Insurance are taken off the gross increase. And this is where performance related pay gets unstuck. I’d go as far as to say if this is your only strategy to motivate your top performers then you shouldn’t bother. Why? Because if you are robbing the performing bulk of your organisation to give a little extra to the best performers, you will turn off the backbone of your workforce.
Should I bother rewarding for performance then?
Yes but it should be part of a package of interventions. Think about building a talent package with compensation being one element of a wider offering. If possible, create a meaningful merit budget to provide a genuine financial reward but don’t rely on cash being the only lever that you can pull. You can reward your top talent by providing development opportunities, giving them exposure to major projects, providing internal or external mentoring above other things. Don’t just give a small increase in isolation or it will be demotivating.
What should I do then?
As I’ve mentioned, performance related pay is fine as long as it is part of a strategic series of HR interventions. Consider rewarding immediate good work via a recognition scheme. Look at providing a performance related bonus if possible that rewards overperformance. Ensure that promotional increases aren’t taken from the merit budget. All these things will help and explain why having a well thought through Reward strategy is critical.
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