Performance-related pay seems to be the answer; a quarter (25%) of recorded pay deals in the year to August 2004 have an element based on merit, or performance. Employers are indicating that the key to improving individual and company performance is through the pay system, according to research issued today (22 October 2004) in IRS Employment Review, published by LexisNexis.
But there has been speculation that the current economic climate is not best suited to performance-related pay. With low inflation, budgets for pay awards also remain low, leaving employers with little cash to play with. Hugely different pay awards between performers of different levels are not always possible.
The full survey, which looks at the issues facing employers who use performance-related pay, is available in the new issue (810) of IRS Employment Review (www.irsemploymentreview.com). The findings are based on responses from 74 private and public sector organisations.
KEY POINTS
Performance-related pay schemes are most frequently used for staff (43%) and management groups (34%). Few employers extend it to manual employees.
More than one-third (38%) of organisations operate one scheme to cover all employees.
The most common reason for operating a merit pay scheme is to reward the individual: providing a better mechanism for rewarding individual performance was cited by 90% of employee groups by firms when asked why they used the scheme. Other key aims include: motivating staff (70%), to improve organisational performance (64%) and to facilitate flexibility in rewarding staff (53%).
Few organisations realise all their merit pay aims. Just a quarter (26%) of employee groups met all their objectives. Some reported problems associated with merit pay are that it takes up too much management time (67%), and that the resulting pay awards are too small to motivate staff (60%). Evaluation methods include employee attitude surveys and management feedback.
Pay awards are most likely to be based on the performance appraisal rating received. Almost all (92%) of the staff from the organisations surveyed are subject to a performance appraisal, the outcome of which is used to determine the pay award level.
Many employers also take into account an individualís position in the pay range and their competency and skills levels when making a performance-related pay award.
Paybill budgets ranged from 0.2% to fund additional merit awards to 10%. Employees enjoyed median pay budget increases of 3% in the past year. This is the same level as the basic pay award recorded by the latest IRS analysis for the three months to August 2004.
Performance-related pay is most effective for employees already performing at an average or above-average level, with little impact being recorded on the performance of the lowest performing staff. Almost half (46%) the surveyís respondents reported no change in the performance of staff not already performing to the best of their ability, as a result of introducing performance-related pay.
Survey respondents recommend that to be successful, a merit pay scheme should be consistent, transparent, communicated to employees and sufficiently funded to motivate employees.
IRS Employment Review pay and benefits editor, Sheila Attwood said:
ìPerformance-related pay came to fruition primarily as a way of promoting performance in the workplace and to encourage a performance-based culture. The IRS research has shown that merit pay schemes can be a highly successful method of motivating employees, although unfortunately we also found that it is most successful with employees who are already performing well. In addition, the process can be time consuming, and employers must avoid pitfalls such as insufficient funding and lack of consistency in approach.î
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