Whether to link reward to employee performance is always a controversial topic, especially in light of media coverage of some well-known firms breaking this link. One of the findings from the recently published CIPD Reward management survey finds that performance-based reward is, despite the hype, still widespread in the private sector.

 

Not only that, the measures used in performance appraisals are still quite traditional. Nearly all employers in our sample assess performance against individual goals, with most using it to inform a salary and/or a non-salary reward decision. The next most common approaches are to assess achievement against: team goals; an absolute view of an individual’s performance; and an employee’s own self-assessment, though in these instances fewer organisations link the outcomes of these evaluations to salary and reward.

By contrast, recent innovations in appraising employee performance such as peer assessment, 360-degree appraisal or external assessment are used rarely by our survey respondents. Even when such approaches are part of the employee appraisal process, there is a reluctance to use them when it comes to making pay and reward decisions.

When and how it is appropriate to use such measures to reward employee behaviour is beyond the scope of this survey. The effectiveness of any performance-based reward scheme is likely to depend on how good the organisation is at defining, communicating, assessing and ascribing performance, as well as ensuring that it supports its value creation process and addresses the concerns of its workforce. HR has a crucial role in helping employers manage, develop and communicate performance. 

The fact that effective performance management and development is so challenging, especially at times of rapid changes, may be reflected in the finding that around a third of employers are planning to revise their existing performance practices in the future. While the research finds an interest in moving towards a more holistic approach to assessing contribution, there is little evidence that the relationship between pay, reward and performance is waning. Nor do we find support for the popular view that appraisals are now obsolete. 

An interesting development among those organisations that operate a collective performance-related reward scheme is the dramatic growth in the use of gainsharing, where employees receive a bonus linked to productivity improvements – or the reduction in production costs – at a group, sub-unit or team level. The UK’s productivity puzzle has hardly been out of the news over the past few years, so it may be that employers are starting to respond to this concern by using reward to boost the level of output or reduce input costs.

The success of such schemes rests on the organisation and its employees working collectively to explore and suggest opportunities to improve performance. This requires HR professionals to foster a high-trust culture in their workplace, where employees are encouraged to suggest ideas about what needs to be done and how, as well as then doing what needs to be done.

One component of trust is openness and our survey finds that many employers are quite transparent when it comes to reward. While we are some way off from full disclosure, a significant proportion of organisations are already willing to be open about the processes behind their pay decisions, while some are also willing to communicate to staff what have been the outcomes of these processes.

In part, this openness probably reflects the legal requirements on large employers to report pay gaps by gender. For many it also makes business sense; there’s not much point using pay to incentivise certain employee behaviours if you’re not going to be open about the potential outcome (how much you could earn) and the process (what you need to do, why, when, and so on). Pay disclosure also reflects societal concerns. Employees increasingly expect openness and transparency in most aspects of their life, and expect their employer, within reason, to also be transparent. 

Ten years ago, complying with something like gender pay gap reporting would have been time consuming for HR. Even if they had accurate information, reward and payroll professionals often didn’t have the tools that would allow them to collect, analyse and communicate the data. 

However, reporting Pay As You Earn (PAYE) in real time and automatic workplace pension enrolment has meant that employers have had to ensure that the data they have on their people is accurate. In addition, improvements in new technology means that an organisation can more easily, quickly and cheaply analyse this information. 

So does the will exist among employers to finance this new technology? Such disclosure initiatives as gender pay reporting present an opportunity for HR to make the case for investment in people management information systems. Not only will employers be able to comply with the law, but they will also be able to better understand how, where and why their employees create value. Not only will this knowledge help inform investment decisions in employees, but it will also allow a better understanding of how to share the value that staff have created with them. 

About the author

Charles Cotton, Senior Performance and Reward Adviser

Charles has recently led research into the business case for pensions, how front line managers make and communicate reward decisions, and managing reward risks, as well as the creation of a good practice guide on the annual pay review process. He is also responsible for the CIPD’s public policy work in the area of reward and is a Chartered Fellow of the CIPD.

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