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?
If you are placing all your hopes on a 1% additional salary increase, being enough to motivate your top performers then you will be disappointed. The actual quantum involved will be minute once tax and National Insurance are taken off the gross increase. 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.
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