The logic of rewarding top-performing employees is clear, but unless staff are convinced the process is fair, there are likely to be problems for all parties. Jenny Keefe reports.
While that old adage, money can’t buy you friends might be true, the debate over whether cold hard cash will make employees feel more engaged rages on. There are those who shudder at the very thought of performance-related pay (PRP) and others who believe it can boost performance and engagement.
Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development (CIPD), says: “The jury is still out on whether performance-related pay can improve employee engagement. There’s evidence to show that it does and it doesn’t.”
What seems to be most important is the context in which it is introduced and how it is applied. “PRP is not a silver bullet – it has to be aligned to the business strategy and it has to be supported by other reward and HR programmes,” Cotton explains.
According to the CIPD’s 2005 Performance Management Survey, nearly a third (31%) of organisations have some sort of PRP scheme in place. Performance-related pay schemes encompass everything from profit sharing to bonuses and can be applied to an individual, a particular group or the whole organisation – often with a scheme design taking the performance of all three into account.
Whichever type of scheme a company opts for, the first step in achieving employee engagement is to get management buy-in. “If line managers do not have the right skills and attitudes it doesn’t matter how well the scheme is designed. You need to involve line managers early on and design the programme around their capabilities, improving these through training and development,”Cotton adds.
Fairness and clarity
Transport for London (TfL) introduced a performance-related pay system in 2006 to incentivise senior managers. Jo Kelly, the company’s head of group compensation and benefits, says: “The system created clear financial incentives to encourage individuals to improve performance. It also means greater transparency of performance targets – at corporate and individual level.”
Kelly says that one of the trickiest parts of setting up the scheme was to get everyone on side. “It’s vital to engage and agree your business case with stakeholders. This approach helps to bring issues into the open early on,” she says.
TfL, which has 19,500 workers, also pays its operational staff by results. As part of a recent three-year pay offer, its London Underground workers get either £250 or £500 as an annual bonus if the company meets its customer satisfaction targets. Other administrative and management staff receive bonuses based on individual performance.
Kelly says it is vital to keep tabs on whether a PRP scheme achieves its goals. “We conducted a post-implementation review to evaluate the scheme’s success and to build plans for continuous improvement,” she adds.
When devising a performance-related pay system, the consensus among experts is that it must be fair, transparent and consistent for it to have the desired effect of engaging employees.
Paul Sparrow, director of Lancaster University’s Centre for Performance-Led HR, says: “Employees judge PRP schemes on how fair and just they feel the process is and whether the sort of performance that is rewarded is what they consider to really be part of doing a good job.”
Hence the scheme rules must be clear to employees to avoid any suspicion of unfairness. Dee Young, personnel manager at Broadland District Council, says: “It’s best if the scheme is easily understood and staff know how to achieve their objectives. Goals should be realistic and achievable.”
Feedback is an essential part of this process, which is where performance appraisal meetings come in. Broadland Council, for example, conducts reviews for its 250 staff at the start of the financial year, measuring them against set targets. “The assessment is translated into a pay award, with exceptional performers receiving higher awards than those with adequate performance,” Young explains.
Employers also need to make sure that, in rewarding the best individuals, they don’t undermine teamwork. London-based information technology training company, Happy Computers, runs a profit-sharing scheme for staff. Henry Stewart, its chief executive, says: “If you reward a techie or a salesperson because they are great at their core skills, don’t be surprised [if they] respond to this rather than your calls to work together.
“Employers need to address the mismatch between calling on people to work as a team and paying bonuses for individual achievement. If they want teamwork, they must reward teamwork. We abolished individual bonuses in 1996. We were smaller then and, after a heated debate, the vote was 11-to-one against. I was the one. I was wrong.”
If organisations accept the argument that PRP does improve engagement and performance, they should also bear in mind that the award given needs to have enough value to make a difference to the employee. “The money needs to amount to from 20% to 33% of base [salary] to have a lasting financial pull. Anything less is just seen as a nice pat on the back,” says Lancaster University’s Sparrow.
Yet, if you want to leave a lasting impression on employees,there may be better ways to do it. The CIPD’s Performance Management Survey found that just a quarter (24%) of employers rated PRP as more than partly effective.
“For long-term engagement, change the design of jobs and the autonomy and power you give people,” argues Sparrow. He believes that giving staff the tools to do the job is far more important than using money as a way to make them do it.
CASE STUDY: Richmond Housing Partnership
Richmond Housing Partnership (RHP) is a housing association that offers performance-related pay (PRP) to all of its staff.
Alison Henderson, RHP’s human resources manager, says: “The aim of the PRP scheme is to reward individual performance and actively engage employees in achieving goals.”
Everyone at the South-West London social housing association has an annual pay review in May to assess their performance over the previous financial year. Line managers award each employee a rating ranging from one (under-achievers) to five (top performers).
Top performers – those scoring four and over – receive a cash bonus and an extra pay rise on top of a standard pay increase. Those with a one rating, however, stay on the same salary and are earmarked for extra training. Six months later, they are appraised again. “The outcome would either be that an employee was now effective and would be entitled to receive the standard pay award for the remaining six months of the year or would be rated as unacceptable [and not be eligible for a pay increase].”
Henderson adds that the rules should be very clear or employees are likely to feel aggrieved. “For the scheme to be successful it is important that it is simple and easy for employees to understand,” she says.