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Does linking pay to performance really work?

Pay is typically considered a base salary or wage for any given job. In addition, some companies use bonus payments and incentive awards to further differentiate the overall amount of remuneration provided to employees. Typically performance reviews are linked to pay increases and bonus payments. But does this really motivate employees to perform at a higher level and if so how should you measure and manage performance get to more out of your employees?

Take this example: If you are a manager of a small business of 5 employees who all report to you and do an identical job, then paying everyone the same base salary or wage may sound reasonable. If the roles fall under an award, then that may actually be a requirement. Using bonuses and equity to reward higher levels of performance in the team could be an option. However, base salaries or wages are often directly linked to bonus and incentive awards so it is important to think about whether you have a fair foundation to move forward with your assessment. You may also want to consider whether other non-monetary benefits of working for your company will have a better chance at driving performance. (Sometimes non-financial rewards actually motivate more effectively).

Assuming the roles in your company do not fall under an award, then it is important to establish the scope of the role and what you expect of each member of the team. Are the roles really identical? You may need to define the job descriptions and evaluate the job level which typically takes into consideration the level of complexity and autonomy of the role and the capabilities, education or qualifications each individual would be expected to bring to the role. If the job levels are different, then it makes sense that you would differentiate their goals, WHAT you expect them to deliver. When you have established the different job levels in the company, you can obtain market data to establish the pay range that other companies pay for similar roles. Many companies use this range to differentiate the level of pay within the range for each individual based on their performance.

To evaluate performance fairly the following is essential:

  • The job level for each individual is reflective of what you are expecting them to do and the goals set consistent with that. The degree of difficulty of the goals should be similar for those at the same job level in the company.
  • In addition to knowing WHAT is expected of them, define HOW you expect them to behave. These behaviours need to be consistent with the values of your company brand and communicated to everyone in advance.
  • The goals are set for a period of time appropriate for the business. Some companies use annual performance cycles others use more frequent or project based cycles.
  • People managers are skilled in providing regular feedback and in assessing the WHAT and HOW of performance consistently. Often, there is an element of subjectivity in assessment and awareness of unconscious biases and discussing examples of performance with other people managers in the company can help establish a fairer assessment.
  • Determine how you are going to manage assessment of performance when situations change during the performance cycle. These can include new hires, promotions, transfers and long term absences from the workplace. Having this in place helps employees feel confident that they will be treated fairly.
  • Providing a comparable level of assessment. This can be a numerical rating or a description of how each individual performed and the evaluation criteria needs to be transparent. It is important that you are able to compare the performance of individuals at the same job level in the organization. Implementing a robust Performance Appraisal Process can assist in providing g the platform to measure and monitor employee performance.

Once you have information about the job levels and performance of each individual then you can more fairly differentiate the base salary or wage for individuals. Depending on your budget, you would look to potentially increase the pay of higher performers at a percentage greater than those performing at a lower level. Where companies often struggle is trying to make these adjustments based on where each individual is currently paid within that budget Performance can also vary over time so it is difficult to keep base pay at the levels you would ideally like. This is why some companies are choosing to use discretionary bonus payments to differentiate the overall level of pay or salary.

Often employees think of base salary or wages in terms of fairness compared to others in the market and in the organization who make a similar level of contribution. Emphasis is now shifting to the concept of total rewards and more broadly to the overall employee value proposition. Pay is only one motivator of performance. Often recognition, coaching and development opportunities, opportunity to do challenging and interesting work, alignment with the values of the company, flexible working and other benefits may be more important for those working for you.

If you need help thinking about how to drive performance in your organization, give us a call at HR Gurus so we can help you make the right investment in your team. We love assisting our clients to establish both Accountability through Performance Management and run training for Business Owners and Managers on this topic check out our sessions here => Accountability through Performance Management

Written by Senior HR Guru, Jade Martin

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