A guide to Performance Related Pay Software
Paying for performance makes sense. It links individual progression with organisational goals in a way that allows everyone to feel included in the success of the company. However, performance-based payment plans must be carefully planned and managed if they’re to deliver the right results. Using performance related pay software to underpin and manage your strategy will ensure your plan stays on track and remains aligned to company values.
What is a performance related pay model?
Performance related pay, or PRP, is a way of linking employee contribution to reward. Far from being just a mechanism to motivate short-term individual goals, PRP can be used to encourage team working, team performance or even the acquisition of new skills. PRP works by setting agreed objectives with a manager, then reviewing progress towards them over a set period, usually a year.
Types of performance related pay
PRP is usually categorised into short-term incentives (such as bonus payments or sales commission) and long-term schemes that are designed to encourage retention. Here are a few examples of longer-term PRP schemes:
Appraisal-related pay. This type of reward links the achievement of an employee’s annual objectives with reward such as a bonus. This is integrated into the company’s annual performance management process.
Profit-related pay. These schemes link company performance with individual performance. When individual and team goals are aligned to organisational goals, it makes everyone feel part of the success story.
Project-linked pay. If a company has teams working on major projects, either internally or for customers, these can be linked directly to reward since they have a direct bearing on business performance. Once a project is completed the employees or teams receive a bonus.
Competency-based reward. This type of PRP rewards employees for developing new skills and competencies, therefore directly linking personal development with company aspirations. Since a company with better leadership skills or better customer service skills benefits, so do employees as they build those capabilities.
What are the benefits of performance related pay?
Performance related pay benefits productivity, engagement and culture when it’s done well. It should feel like a win-win if you get it right. Here are some of the advantages of PRP:
- A healthy performance culture. PRP that is rooted in a company’s values and mission can encourage healthy competition as employees work collaboratively towards their personal and company goals. Employees see that they can benefit by achieving their objectives, rather than working overtime or waiting for an annual appraisal.
- Instilling an entrepreneurial mindset. Although leaders need to be mindful of the risks of this, which we’ll come onto later, a PRP can encourage employees to think and work in more innovative ways to accomplish their objectives.
- Boost engagement. When PRP schemes are well thought-out, employees understand how their contribution makes a difference to the overall success of the organisation as well as to their own reward. Building in recognition as well as financial reward helps to boost engagement.
- Clarity on performance goals. A PRP can ensure that managers and employees have mutual clarity on short- and long-term goals. Reward-linked objectives should still be SMART so that managers can have open and honest discussions about progress during an appraisal.
- Builds collaboration. PRPs can be structured so that collaboration within and across teams is encouraged. Aligning employees and teams around common goals can help break down silos, surfacing new ways of thinking and working.
What are the potential drawbacks of performance related pay models?
It’s important that business leaders don’t make assumptions about the aspirations and motivations of employees, which we know are not always financial. That’s why it’s important to implement performance related pay in a thoughtful way that is underpinned by the culture and goals of the organisation. Here are some of the pitfalls to look out for.
- Unhealthy competition. Healthy, collective competition can be good for teams. However, if competition becomes unhealthy and driven by short-term personal gain, it can damage engagement and promote behaviours that are counter-culture.
- Loss of focus. Managers and HR need to be intentional about setting and measuring objectives. Otherwise, employees may become inclined to focus their efforts on easy-to-measure activities that are directly linked to compensation, neglecting other priorities.
- Impact on wellbeing. If schemes are not well-managed then employees may feel encouraged to over-work, resulting in poorer wellbeing or even burn-out. This will adversely affect employees who already feel they’re struggling to achieve in a demanding role.
- Risk taking. PRP schemes need to be set within the company’s framework and offer guidance on how work is to be done so that unnecessary risk-taking isn’t encouraged.
- Bias and unfairness. We already know that performance management can be subject to bias when there are gaps in process and inconsistencies in ratings and management. If this is the case when pay-related decisions are made then bias and unfair treatment will be compounded.
How to set up a performance-related pay system
A performance-related pay system should be created in line with a company’s culture and long-term goals for the business and for employee development. Here’s how to plan the process and get set up.
- Design the scheme. Create a scheme that promotes your company values and ambitions. Structure it so that the right behaviours and achievements are rewarded, and with fairness and transparency at the core.
- Involve line managers. Your managers are the greatest source of wisdom when it comes to what’s achievable as they already have their finger on the pulse when it comes to individual and team performance. Work with them to determine how the PRP scheme fits into the broader performance management process.
- Set bold yet achievable targets. The PRP is designed to inspire performance and so targets should be clear, specific and achievable, while acknowledging they will look different for different teams. Some targets may be specific to customer-facing employees, others can be organisation-wide.
- Track performance regularly. Embed the PRP in your performance management process and track progress through line managers at check-ins. Ensure that progress is logged using your performance management software. Remember that discussions about the PRP should only be a small part of performance coaching conversations.
- Measure employee behaviour and engagement. While merit pay can have a significant positive impact on motivation, it’s important to guard against the risks. Taking a regular check on how employees are feeling and their level of engagement will provide feedback on how well the scheme is working.
Discover more by listening to our podcast episodes on this topic:
- Navigating Performance Management | Pay & Reward Podcast Episode
- Navigating Performance Management | Recognition Podcast Episode
How performance related pay software can support your process
As we’ve seen, a PRP needs to be carefully managed to ensure it’s fair, transparent and aligned to company goals and culture. Performance related pay software can support your process and provide the audit trail for any performance-based payment plan.
A system such as Appraisd provides a central location for setting, storing and tracking progress against objectives, as well as logging outputs from check-ins and appraisal conversations. Software can also reduce the administrative burden of monitoring progress towards objectives by auto-scheduling meetings and providing collated data to team leaders and HR leaders.
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Case studies on performance related pay policies
If you’re thinking about what performance related pay and benefits might look like in your business, learn from some of our clients who link pay and performance while remaining true to their mission and values:
Recognising top performers
Watford Community Housing is a not-for-profit organisation which owns and manages more than 6,800 homes. The association had an established appraisal process, but it wasn’t supporting the business as well as it could. Pay in the organisation is linked to performance, so getting the process right was vital in ensuring that those that excel were rewarded for their efforts. With some employees having limited IT skills, as well as a significant proportion working out in the field, it was essential that a new solution was easy to use and could be accessed via mobile.
Watford Community Housing chose Appraisd to provide a performance related pay platform. Since switching to Appraisd, 99% of mid-year reviews and 100% of end of year reviews have been successfully completed and the information has helped HR to build a talent grid, highlighting those employees with exceptional performance and rising stars.
Implementing an organisation-wide performance related pay policy
The Ironman Group operates a global endurance sports portfolio with more than 230 triathlons, trail running, cycling and mountain biking events across 57 countries. As a result of employee surveys, the organisation discovered that employees wanted more feedback and recognition.
A company within the Ironman Group, based in South Africa, was already using Appraisd. The business had 40 employees who were being integrated into the Ironman Group bonus system and timelines. This business unit provided really positive feedback about Appraisd – especially on how well it had helped them to raise the status of performance and so the group adopted Appraisd organisation-wide.
Data is now available to show who is performing well and highlight areas of development. Since the Ironman Group has introduced a new remote/hybrid working policy, it’s helping all employees to stay connected with how they are performing against their objectives.
Performance related pay is an integrated part of performance management for many of our clients at Appriasd. If you’re ready to have a conversation about systems to support it, talk to us or take a quick tour of Appraisd.
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