HR professionals and employers like us are constantly seeking ways to motivate employees and drive results. Our recent Global Salary Planning Survey found that 64% of organisations take a pay for performance approach.

This links an employee’s pay to their individual or team performance. But does this method truly deliver on its promise?

Understanding Pay for Performance

Tying an employee’s pay to their measurable contributions to the organisation aims to incentivise going above and beyond, boost productivity, and align employee goals with company objectives.

Recent surveys from Payscale indicate that 81% of top-performing organisations utilise some form of pay for performance practices, compared to 74% of average companies. This suggests a correlation between this particular approach to pay and organisational success.

However, any kind of ‘performance management’ strategy needs to be implemented and managed correctly for organisations to be able to see the benefits.

Employee Perspective

If you were to ask employees what they think of when they hear the term ‘performance management’, it’s usually their annual appraisals and evaluations. But a common response is also “It’s about managing under-performance”.

After all, if someone is an exceptional performer, why do you need to ‘manage’ their performance?

So, if leaders don’t think the performance management process works and employees don’t trust it, then why do we keep doing it? And more importantly, why do we continue to link a process that we think isn’t working to pay?

The Problems With Pay for Performance

 

1. Annual Reviews

Performance management has evolved over the last two decades. But most people still associate it with their annual appraisal. They focus on the one or two conversations they have each year in which their manager assesses their performance over the last 12 months and gives them a rating.

In some ways, these are pay conversations too. If you are given a high performance rating, then you know you will get a high bonus. But if you’re given a lower rating, you know you’ll get a much lower bonus.

Instead of springing something as important as this on employees 12 months down the line, we should be having regular catch-ups to discuss progress and address concerns as they arise.

Even if there is a performance issue, simply telling someone is not helpful. Instead, there should be specific feedback and support available to help the employee improve. These meetings should focus on providing specific feedback and development opportunities through career conversations.

Not only does this improve the likelihood of mitigating poor performance throughout the year, but it can help reduce emotional reactions in the review and improve trust between employees and managers.

 

2. Lack of Training for Line Managers

As high-performing employees progress and develop, it’s common for them to be given people management or leadership responsibilities. They’re often expected to take this on, and many see it as the only way to progress their pay and careers within an organisation.

But just because they’re good at their job doesn’t necessarily mean they will be good at managing or leading people.

Despite this, very few organisations give formal leadership training to employees. Even fewer provide support on how to approach performance management and pay conversations. In fact, last year’s Global Salary Planning Survey found that 67% offer nothing at all.

In order for this process to be successful, leaders must build trust within their teams. Part of this is having real, human conversations and not ‘performance’ meetings that only take place once or twice a year.

We call these 3C conversations, standing for crucial, candid, and constructive. This applies to any situation where core issues are addressed, perspectives may differ, outcomes have impact, and strong feelings are involved.

Being thrown into this position of responsibility without proper training can lead to resentment, which ultimately damages the morale of the entire team.

pay for performance - 3C Conversations

3. The Forced Distribution Approach

One method of performance management has sparked particular debate in the world of HR: the forced distribution system. This is also known as a bell curve rating or stacked ranking. While some organisations believe this approach helps identify top performers and stimulate competition, it can severely damage company culture.

This method requires managers to categorise employees into distinct performance brackets, typically ranging from poor to excellent. Theoretically, a fixed percentage of employees fall into each bracket. For example, 1 exceptional, 8 good and 1 underperforming in a team of 10.

When employees hear about their performance rating at the end of the year, they’re often confused because it’s not what they expected and seems unfair. If it is unfair, there’s no time to make adjustments—and yet this will impact their pay.

This process also allows managers to say that they wanted to give another rating—but HR said no. The employee now resents HR, as well as the manager, who wasn’t strong enough to make a case for them.

Forced distribution can distort team dynamics and hamper performance. It can lead to increased office politics and negative relationships as employees try to ensure that their colleagues appear less favourable.

 

4. Performance Can’t Be Managed

Performance is not something that can be managed. Instead, it is something that can be nurtured and cultivated through the right environment and building strong relationships.

If we want to establish trust, we should start by getting rid of the term ‘performance management’.

Enabling Excellence is 3R Strategy’s approach, where we aim to redefine the entire performance management process. It refers to a set of values that help us inspire our colleagues to be motivated and committed by building a culture of collaboration and trust. It is about looking after the people in our organisations at all levels.

We can do this by engaging them with our core values and supporting their development, all of which ultimately contributes to the overall success of the organisation.

There are many factors that can impact someone’s performance and productivity, including:

  • They need balanced psychological and mental health
  • They need support around factors outside of work that may affect them at work
  • They need to be committed to the organisation—our vision and values
  • They need to have a good relationship with their manager
  • They need the right environment: whether they’re working from home or in the office

 

5. The Culture of Competition

The health of our teams and organisations is being impacted by these important 3c conversations, which are usually not taking place or not taking place successfully.

So how do we make sure people are having these conversations?

When we have a culture of collaboration and trust, it becomes easier to hold deeper, more honest conversations that transform our relationships in the workplace. By being prepared to stop avoiding these situations, we also provide clarity over responsibilities and define expectations.

Enabling Excellence focuses on providing regular feedback to your team members, acknowledging their accomplishments and providing guidance for improvement.

As part of this process, people agree their objectives with their line managers and can then update them on a more frequent basis. People should then be encouraged to share these goals and achievements with the wider team.

This promotes self-reflection and goal-setting to foster personal and professional growth. Ultimately, it is the collective wellbeing of our employees that leads to the success of our organisations. With your support, team members will have the chance to thrive and contribute to the wider goals of your company.

pay for performance - collaboration

6. The Past Doesn’t Determine The Future

Traditionally, we look at the last 12 months to consider how people have performed against their objectives. We then give them a rating, which determines their pay increase for the year. However, approaching performance management in this way can be problematic for several reasons.

We’ve already discussed some of the factors that may contribute to fluctuating performance. Despite being a consistently high-performing employee, one year could be particularly difficult. Through no fault of their own, this then reflects poorly on their appraisal and results in a lower bonus.

Instead, we should remove the link between performance and pay conversations.

The purpose of pay is to reward somebody for their ongoing contribution to the organisation and to reward them for the skills that they have. That’s what pay conversations should be about.

 

Conclusion

The concept of ‘performance management’ itself is flawed. Nurturing and cultivating performance through a supportive environment and culture of Enabling Excellence will yield much better results.

By prioritising the wellbeing and development of employees, we can inspire motivation, commitment, and collaboration, ultimately contributing to the organisation’s overall success.

With this in mind, we should consider approaching performance and pay separately. This allows managers to focus on continuous development and feedback for employees—addressing concerns and offering support as the needs arise.

Pay conversations should then come with targeted training for leaders so that expectations can be made clear and employees can be confident in the organisation’s decision-making processes.