REWARDING PERFORMANCE
New CIPD factsheet on performance-related pay
Some reward professionals are converts, others, sceptics, but whatever the opinion, it seems inevitable that there will always be people interested in performance-related pay. To cater for such individuals, the Chartered Institute of Personnel and Development has recently revised its factsheet on the topic.
The factsheet covers all areas relating to performance-related pay before stating that for the approach to succeed, effective arrangements must be in place to define, measure, appraise and manage performance.
%ADVERT%
Updated in January 2008, the factsheet explains：
what is meant by performance-related pay
how performance is measured and linked to pay
the coverage of performance-related pay
current trends in awards
key issues in the implementation of performance-related pay schemes.
To help gain a historical perspective, it also describes the evolution of this reward approach explaining how it developed from the “big idea” of the 1980s due to a desire to move away from service-related pay progression increments towards an ethos where individual or group employee performance goals, often linked to pay, were used to support business performance objectives. It also highlights how in some circumstances, performance-related pay proved a rather crude instrument resulting in some employers turning to new approaches altogether, such as skills-based pay or hybrid schemes.
Similarly, the guide notes that the notion of linking pay to a wider definition of employees’ “contribution” rather than simple “performance” is gaining ground. This emphasises not only performance in the sense of the output (the end result that is achieved) but also the input (what the employee has contributed in a more holistic sense).
Performance-related pay defined
The CIPD describes performance-related pay as a method of remuneration that links pay progression to an assessment of individual performance, usually measured against pre-agreed objectives ("classic" PRP also known as individual PRP or merit pay). Pay increases awarded through performance-related pay are normally consolidated into basic pay, although sometimes they involve the payment of non-consolidated cash lump sums.
The factsheet focuses on individual, consolidated performance-related pay, but notes that it can also be defined more broadly to include many differing systems such as bonus schemes that are covered by other CIDP factsheets.
Rationale
The CIPD says that the objectives of performance-related pay systems may be grouped under three main headings:
encouraging high performance levels by linking performance to pay
embedding an entrepreneurial or high-performance culture across an organisation
the notion of equity or fairness.
What performance-related pay can and cannot do
While championing the cause of performance-related pay, the guide also outlines its limitations. Most notably it concedes that: “Arguably, however, PRP is not actually a good motivator – although it may be that even where the direct incentivisation impact is limited, the use of PRP can act as an important lever for wider organisational change.”
In contrast, it adds that: “It is often the underlying improvements in performance management that have the greatest impact on bringing about positive developments, rather than the associated pay enhancement.”
Tips on implemention
The guide also provides detailed advice on how best to implement a scheme with guidance covering:
objectivity/consistency of line managers
distribution of pay awards
identification of development needs
time-consuming nature
undesired impacts on employee behaviour.
A final word
“PRP is not a silver bullet – for this approach to succeed, effective arrangements must be in place to define, measure, appraise and manage performance. The focus should be on encouraging high performance first – underpinned by effective performance management and appraisal systems – and only then on pay as an incentive to help achieve that goal. To create a sustainable high-performing workplace, the whole range of financial and non-financial rewards must be carefully designed to ensure that they support and are supported by PRP.”
Want to know more?
Title: Performance-related Pay Factsheet, Chartered Institute of Personnel and Development.
Availability: To download the factsheet, free of charge, go to the CIPD web site at www.cipd.co.uk/subjects/perfmangmt/perfrelpay/.
The Chartered Institute of Personnel and Development (CIPD) has more than 127,500 members and is the “leading professional institute for those involved in the management and development of people”. For more information visit www.cipd.co.uk.