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.
Only then should the focus switch to 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 use ‘forced distribution’ arrangements. These aim to remove marking differences between ‘hard’ and ‘soft’ managers. Such approaches require that all managers band a certain proportion of staff in each performance pay grouping (for example, 10% ‘poor’ and 10% ‘superior’).
Our 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.
Highly competitive reward schemes, like ‘winner takes all,’ can demotivate employees because they feel it's unfair. Our evidence review on performance management also found that ranking staff competitively often backfires for the same reason. While forced ranking can work to some degree, concentrating rewards in very competitive systems is not more effective than fairer rewards and can cause negative reactions.
Ensuring objectivity is also important to avoid rewarding favourites. The potential for unlawful discrimination is particularly serious. It’s important that line management training highlights the impact that unconscious bias can have on pay decisions. Employers should also review merit pay award decisions by gender, ethnicity, age, and so on.
See more in our line managers' role factsheet.
Distributing pay awards
Pay is not the only motivator and may not always be the most important one. The performance-based part of pay is often small, especially for core performers who make up most of the workforce. This issue is worse during low inflation when pay increases are small. While PRP can motivate high achievers, it might demotivate core performers. So, it's important to carefully think about how pay is distributed.
Identifying development needs
One concern is people might not feel comfortable being fully honest about what they need to improve if they think it could affect their pay rise. It can also make conversations with managers feel less open. A good way to avoid this is to separate pay discussions from development chats, like having them in different meetings a few months apart.
Time-consuming nature
The processes associated with PRP, such as performance reviews, can be 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 fully in the PRP process.
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 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 focusing on one or the other. See our report Show me the money! for more on what behavioural science says about how employees might respond to financial rewards and incentives.
