David Shonfield explains the low-inflationary environment presents challenges to individualised pay
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When thinking about the future, it is unwise simply to extrapolate from the past. Because individualised performance pay has become such an important element in reward over the past 20 years there is a natural tendency to assume this will continue. But experts believe that any such assumption may be a mistake.
Although payments linked to performance are likely to continue, these may well not take the form of individualised salary increases.
The key to this is the continuing trend for low inflation, which leaves little space for manoeuvre when rewarding individuals through pay.
David Yeandle, deputy director of employment policy for the Engineering Employers Federation, says: "It might seem strange to describe low inflation as a problem, but it does mean that it is more difficult to differentiate in salary terms between the average performer who meets [arbitrary] expectations and the good people you really want to reward, and keep.
"If the size of the pot in the future is going to be 2.5% to 3% it means that if you want to make a significant award to the high performers, then quite a lot of people may not get very much. So, individualised pay increases can be perceived as an actual disincentive in these circumstances."
The future is also likely to see a greater emphasis on teamworking, a potential trend, which does not sit easily alongside individualised salaries.
Duncan Brown, assistant director general at the Chartered Institute of Personnel and Development, identifies one likely approach for the future that has come out of research into customer services organisations recently carried out with Professor Michael West of Aston Business School.
"Traditionally, the model for these sorts of jobs has been low pay and low skill, sometimes with an aggressive individual approach to performance pay. But those organisations we examined, certainly the most successful ones, had individual progression based on competency and or performance, with bonuses linked to team or group performance. Moreover, the performance element was based on quality and service measures rather than workrate or output."
Brown observes that while the talk is of a future knowledge-based economy, much of the growth in jobs is among service-based organisations, where the organisational structure is naturally flatter and the payment systems encourage teamwork, and also single status conditions.
Another characteristic of these types of organisations is stepped payment systems that reward staff as they acquire skills and develop competencies.
As Alastair Hatchett, head of pay services at Incomes Data Services, says, there is a similarity here with the public sector. "The issue in the public sector, and indeed in much of the commercial sector, is getting progression right. Providing people with clear career progression has become a major retention tool, for example in teaching and the NHS – and looks like being so for the foreseeable future. Employers are also seeking to grow skills within their existing workforce and one obvious way to do this is to link your reward system to skills development," Hatchett adds.
Apart from these emerging trends to reward performance employers are also likely to resort to bonuses.
"With inflation staying low, at least by historical standards, employers will want to hold general salary levels in check – so it’s very likely that bonus payments will become larger and more widespread. Bonuses do not add to fixed salary costs and they also have the added benefit of not adding to long-term costs because they are not pensionable," says Hatchett.
For Yeandle, bonuses "provide a way of differentiating between people without disrupting the salary structure. They are an attractive approach – always provided they are clearly linked to the performance management system."
But are bonuses and payments based on performance that relevant for the public sector?
Sheila Wild, employment policy director at the Equal Opportunities Commission, says there are many public sector jobs where performance pay is inappropriate, or would make little or no difference to the way people do their jobs. The problem in the public sector, "is that it is much easier to measure bad performance than good performance, especially where soft criteria are involved. And this is especially true of the large pools of women’s employment, such as teaching and the NHS", she says.
Where performance pay does exist in the public sector, it is now linked to productivity or efficiency savings.
Outside the public sector, the general consensus is that bonuses linked to enterprise performance will continue to be popular. But the payments may not necessarily have a direct link to the stock market. Instead they can be tied to profits or sales, or other forms of gain-sharing that provide a better reflection of real performance.
Apart from salary increases and other payments, employee performance can also be rewarded through benefits schemes that offer flexibility and choice. Brown says that total reward need not be just for the elite because there is scope for recognition and non-cash awards at all levels in many organisations.
Although salary increases offer little scope for rewarding individuals for their performance due to ongoing low inflation, there are still other methods that allow employers to acknowledge the work of their valued employees.