What is Performance Related Pay?
Performance related pay (PRP) is a process that links an employee’s salary increase to their individual performance. The concept of PRP is that performance is measured against pre-agreed objectives agreed between a manager and employee, over a set period of time, usually a year.
Salary increases usually get added to an employee’s basic pay, on an annual basis, although in some circumstances they can be a one-off cash lump sum payment.
Businesses can use PRP when they are not able to measure an employee’s performance on output or sales figures.
The concept of PRP is to encourage good performance and to prevent employees obtaining an increase in wages due to hitting certain milestones in their length of service and can take away low performers getting salary increases that are the same as high performers.
Types of Performance Related Pay
There are two main types of PRP these are:
1.Short-term schemes – which utilise commission or bonuses which can be based on sales achieved by individuals or work completed. These schemes are a way for employers to have an incentive for employees to increase and improve their performance.
2.Long-term schemes – are used to increase loyalty amongst employees and as well as pay increases, can offer share options for employees also.
Why do businesses use performance related pay?
Businesses use PRP to try to motivate and encourage employees to worker harder, achieve higher performance and become more effective. PRP rewards those that are good performers. Businesses that use PRP say that PRP works as an incentive for employees, as they are rewarded for their individual efforts and not that of a team or just receiving a yearly agreed salary increase.
Benefits and drawbacks
Benefits of PRP are:
- It can act as an incentive to increase employee performance and efficiency, through goal-setting, as employees want to achieve the best pay increase.
- It can improve motivation, focus and morale in the workplace.
- It can assist to achieve a strong bond between employee and company.
- Usually most effective when rewarding employees on an individual basis for effort and not for group performance.
- Rewards the best employees and high performers.
- Helps to create a healthy performance-based culture.
- Can lower costs and help businesses to remain profitable.
Drawbacks of PRP include:
- Setting goals that are unachievable can demotivate employees.
- If the culture becomes too competitive then morale can be lowered.
- Employees may expect more payments for work and performance above and beyond their goals.
- Focus of achieving a goal can become all about getting a reward and not for the good of the business.
- Sometimes the measuring of performance can be subjective, for example a clash with a supervisor could result in lower performance ratings.
How do businesses measure performance?
Managers and employees will agree on individual objectives that the employee will need to meet over a period of time, usually one year. These are usually set as SMART goals (Specific, Measurable, Attainable, Relevant, Time based)
These objectives are in addition to an employee’s day to day responsibilities, they will be specific tasks or projects they are required to work on.
During the year, a manager and employee will meet regularly to discuss the employee’s performance and to see how things are going. The manager should see if there is any assistance the employee requires to meet their goals. The frequency of these meetings will be agreed between both parties, they will usually be fortnightly, or monthly or in extreme circumstances quarterly.
At the end of the appraisal period both parties will rate how they feel the employee has done against their goals. Pay increases will depend on how employees have performed; high performers will generally receive a higher increase than an average performer.
How to implement PRP schemes
To implement PRP systems in a small business, businesses must ensure they:
- Determine the needs of the process and define the metrics – holding face to face meetings with key stakeholders.
- Set organisational and individual goals – these should be SMART Goals, (Specific, Measurable, Attainable, Relevant, Time based).
- Track progress on a regular basis – to ensure what is required is being achieved.
- Communicate achievements – recognition and feedback is essential to the success of the process.
- Provide coaching, training and development where needed – for both employees and managers. If employees are struggling with their goals, they may need extra support from managers; Managers may need coaching on how PRP can motivate their employees.
- Reward success.
- Evaluate – to ensure the process is fulfilling the needs of the business.