Is Performance Related Pay A Good Idea?

A lack of recognition and reward at work is one of the 6 root causes of burnout.

There are various ways you can celebrate the achievements of your people, should pay be one of them?

What is Performance Related Pay?

A performance-related pay system rewards an individual based on their performance.

In order to measure the performance, employers have to track results and identify criteria that trigger the performance based pay. One common performance indicator is achieving a milestone in a project.

But does performance-related pay work?

To give you a better idea of deciding what’s best for your business, here’s a guide to the advantages and disadvantages of performance-related pay.

Advantages

Performance related pay comes with many benefits. Employee motivation being a big one! Knowing that we if we get excellent results, we will be rewarded with a higher pay cheque can be a huge incentive.

It can also increase productivity amongst high performing, ambitious people. More, better quality work = better pay! It can sky rocket performance.

Performance-related pay can also have a positive effect on loyalty too, especially when raises are determined by team performance and an individual’s.

Finding and hiring the most skilled and experienced employees is getting more and more competitive. Compensation packages linked to achievement can help attract the best talent and the right type of people who are motivated by performance based incentives.

When you have employees who are a good fit and thrive in your environment, you want to retain them. Performance based rewards can play a big part in helping you do this.

Disadvantages

Whilst it has its pros, performance related pay can have a negative impact on happiness and performance. In fact, there is some research to suggest the positives are often short lived

A recent study published in the Human Resource Management Journal found that employees who receive performance related pay work harder than those who don’t - but also experience higher stress levels. They often believe that they need to work harder to justify the incentive.

Whilst higher performing employees tend to respond well to performance related pay, it can negatively affect lower performing people who may feel that the bar is too high! It can therefore lead to disengagement and dissatisfaction at work that can spill over in to home life. Not everyone works well under pressure! If they constantly feel they need to get more sales or do a task quicker, they’ll eventually crack.

It can also lead to conflict within teams as some are seen to be getting better paid than others despite working the same hours, on the same grade with similar experience.

Also, when individuals become so focussed on their individual performance, team work can suffer which can be detrimental to certain projects and could create an unhealthy culture.

Post pandemic, employees care more about their wellbeing and want to enjoy what they do but if they feel like are in constant competition then environments can become toxic and conducive to wellbeing.

Conclusion

Whilst money is important, it is not the only thing keeping people in jobs! Covid opened peoples eyes and many are just as interested in working for a business whose values align with theirs, where wellbeing is a priority and where they feel a sense of purpose.

Performance related pay does have its place but not at the cost of a happy, healthy workforce.

Recognition is powerful but there are many ways to demonstrate it.

The ultimate aim is to put people at the centre and create an environment that is future focussed and fuelled for success.