When it comes to salary, there are a number of ways to assess what your employees should be earning.
But one question I’m asked time and time again is regarding whether performance-related pay is a good idea or not.
The idea of a performance-related pay system is to reward an employee’s individual performance based on a set of pre-agreed objectives.
While it may seem like a justifiable solution in a sales environment, what about other fields of work and industries?
Does performance-related pay work?
What are the downsides?
Are there any alternative schemes you can use to help improve employee retention?
Here’s everything you need to know.
Does performance-related pay work?
Like most things in life, there’s a good side and a bad side to performance-related pay.
From a positive point of view, there’s a reason why this method of assessing an employee’s pay has been fully-utilised across public and private sector institutions for some years.
The immediate benefit is that offering a performance-related pay scheme improves efficiency and productivity across the business – with more employees trying to work harder to achieve a financial gain.
It can also help boost loyalty too, especially when a performance-related pay scheme is distributed to teams instead of individuals.
Establishing a financial tie to the business will give your employees more reason to stay put and work for you for longer.
In fact, a study by Genesis Associates revealed that 85% of workers surveyed said that they were motivated by monetary incentives.
But only in the short-term – which leads me onto the flip side of performance-related pay.
When performance-related pay doesn’t work
Performance-related pay may boost productivity and company loyalty, but generally speaking, it only helps solve short-term turnover issues.
A common example is when you offer an annual bonus to individuals or a team and they leave shortly after receiving it.
What’s more, it can often create an unhealthy working environment whereby employees have a “dog eat dog” attitude to getting results.
This competitive nature can soon turn toxic and make the work culture extremely negative.
From your point of view, knowing some of your employees might only be staying there due to the financial ties isn’t a nice feeling.
The key to an exciting and successful business is finding professionals who actually want to be with you on your journey, working collectively to reach a common goal.
In some cases, such as the retail or public sector, performance-related pay is hard to measure as well and is subject to a highly volatile market.
For example, if your Christmas sales are down this year, you can’t exactly promise a set bonus or pay rise without taking a big financial hit.
In the same way, it’s impossible to quantify the success of a teacher or nurse and give them an adequate pay rise.
Another example of when performance-related pay doesn’t work is when you’re dealing with managers.
Time and time again there’s been a correlation between increased risk-taking and businesses collapsing due to the decisions of managers.
And what about those employees who fall ill or suffer from mental health issues?
If they have time off, they’re effectively giving up their chance of getting a pay rise or a bonus.
This then feeds into the presenteeism epidemic, with more employees feeling like they can’t take time off because of the financial implications or pressures of keeping their jobs.
Other ways of assessing whether your employees deserve a pay rise
Instead of adopting a performance-related pay scheme, there are many other methods of assessing an employee’s worth.
As we highlighted in our previous blog, 10 Reasons You Should Give Your Employee a Pay Rise, there are 10 examples why they could deserve a little extra money:
- They sell really well
- They assist really well
- They are loyal
- They work hard
- They hit all their targets
- They have a great attitude
- They want to progress
- They add value
- They manage (when they’re not a manager)
- They’re going to leave
Putting an emphasis on how the employee is performing without the expectations of a performance-related pay rise will allow you to make a fair assessment based on long-term improvements.
However, if you want to run a tight ship where nobody can complain about you being biased, involve other professionals in the process of measuring any subjective elements like assisting well, showing a great attitude and adding value.
Final thoughts
All-in-all, it’s important to remember that money isn’t everything.
Whether you decide on adopting a performance-related pay scheme or assess on an employee’s unmeasurable progress, always think about your non-financial perks and benefits.
Granting them flexible working hours, extra holidays and childcare benefits can prove a lot more effective when trying to improve employee retention rates.
To learn more, take a look at this handy guide on addressing your benefits program.
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