For PRP 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 systems, and only then on pay as a reward 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.
The key issues for employers implementing PRP include:
Line managers' objectivity and consistency
Line managers are key to effective implementation of PRP. They should be involved at an early stage in designing systems to ensure consistency and transparency when assessing achievement. Some schemes try to eliminate marking differences between ‘hard’ and ‘soft’ managers using ‘forced distribution’ arrangements, that is insisting that all managers band a certain proportion of staff in each performance pay grouping (for example, 10% ‘poor’ and 10% ‘superior’).
Research evidence reported in Incentives and recognition: an evidence review suggests there is no difference between competitive schemes, in which only the highest performers are rewarded, and non-competitive schemes, where all employees whose performance increased receive an incentive. However, given the importance of perceived fairness, highly competitive schemes that are seen as ‘winner takes all’ may well demotivate people. In a similar way, our performance management evidence review found that the use of competitive ‘forced ranking’ in staff appraisal tends to backfire, due to perceived unfairness. On balance, it seems forced distribution can be used to an extent, but there may be little point in condensing rewards in highly competitive systems, as this approach is no more effective than more equitable rewards and risks backlash.
Ensuring objectivity is also important to avoid rewarding favourites. The potential for unlawful discrimination is particularly serious. It’s important that managers are made aware the impact that unconscious bias can have through training and for monitoring of merit pay awards by gender, ethnicity, age and so on).
See more in our line managers' role factsheet.
Distributing pay awards
Pay isn’t the only motivating factor, and sometimes might not even be the most important one. And the performance element of pay is often relatively small, particularly for those relatively middling performers forming the bulk of the workforce. The problem is accentuated in times of low inflation when the pay bill increase is usually limited to relatively small percentage figures. Even where PRP may have a motivational impact for high achievers, the corollary can be the demotivation of the lower or middle level performers. So it’s important to consider the issue of pay award distribution carefully.
Identifying development needs
A major concern is that linking pay awards to the performance review process might inhibit an open and honest discussion of an individual’s developmental needs in case this influences the size of their pay rise. One option is to split the pay review aspect of performance assessment from the broader performance/development review, for instance by holding separate meetings months apart.
Communication can also suffer as employees may feel constrained about having open conversations with their line managers in case this influences the size of their pay rise.
Time-consuming nature
The processes associated with PRP, such as performance reviews, can be administratively time-consuming. In general, it's important to allow enough time away from day-to-day duties for managers and staff to be able to engage in the PRP process effectively.
Undesired impacts on employee behaviour
While financial incentives can increase worker performance, behavioural science indicates that if they are leveraged too strongly, incentives may create excessive risk. As a result, they may either distort people’s motivations by incentivising unintended or excessive behaviour, or weaken the motivating effect if people feel averse to the added risk. Rather, the size of incentives should be commensurate with what employees can reasonably do to increase their performance. Research (Incentives and recognition: an evidence review) indicates that linking pay to both individual and team achievements may be better than just focusing on one or the other. For more on what behavioural science says about how employees might respond to financial rewards and incentives, see our report Show me the money!
