If you run a small or medium-sized business in the UK, you’ve probably implemented some form of bonus system for your employees that rewards them for hard work. This is the essence of Performance Related Pay.
But as with any pay system, poor implementation can be disastrous for any company. That’s why we’ve provided you with this handy little guide.
What is Performance Related Pay?
Performance-related pay (PRP) is a process that links an employee’s salary increase or bonusses to their individual performance. The concept of PRP is that performance is measured against pre-agreed objectives between managers and employees over a set period of time. This is usually somewhere between three months to a year.
Why offer Performance Related Pay?
The concept of Performance Related Pay is to encourage good performance and prevent employees from looking elsewhere for better paid jobs. It can also stop low performers getting salary increases in line with those who work harder, which can prevent resentment amongst staff
What types of Performance Related Pay can I implement?
There are two main types of Performance Related Pay that small and medium-sized businesses can implement. These are:
Short-term PRP schemes
Short-term schemes often offer commission or bonuses which are based on sales achieved by individuals or the level of work they have completed. These schemes are a way to offer employees an incentive to increase and improve their performance.
Long-term PRP schemes
Long-term schemes are often used to increase loyalty amongst employees by offering larger bonusses if they meet long-term targets. These bonusses can come in the form of one-off payments, share options, or even pay increases.
What are the benefits of Performance Related Pay?
There are many advantages to offering Performance Related Pay in the workplace and these include:
- It gives managers and workers an incentive to improve efficiency and productivity. This can lead to lower costs and help the firm remain profitable and dynamic.
- It gives workers a feeling of being tied to the fortunes of the company making it easier to empathise with cost cutting measures.
- It can improve workers morale and loyalty if they feel their hard work is rewarded.
- It can ensure loyalty amongst staff who will be less likely to look elsewhere for better paid jobs if they feel they are receiving a fair level of renumeration.
- It can prevent businesses from paying too much to those that are underachieving. It can also help prevent animosity between those who work hard and those who don’t.
- It can improve motivation, focus and morale in the workplace.
- It can assist to achieve a strong bond between employee and company.
- It can lower costs and help businesses remain profitable.
Are there any drawbacks to Performance Related Pay?
As with any type of pay system, there are drawbacks to Performance Related Pay. These include:
- It can see you setting goals that are unachievable and this can demotivate employees.
- If the culture within the workplace becomes too competitive then morale can be lowered.
- Employees may expect more payments for work and performance above and beyond their goals.
- Focussing on achieving a goal can become all about getting a reward and not about 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 can a business measure performance?
In a robust Performance Related Pay system, managers and employees will agree on individual objectives that will need to meet over a period of time. The period of time can be anything and will be based on the company’s individual needs.
It’s a good idea to set SMART goals, that is targets that are Specific, Measurable, Attainable, Relevant and Time based.
Often These objectives are in addition to an employee’s day to day responsibilities and will be specific tasks or projects they are working on.
During the year, managers and employees will meet regularly to discuss 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 but can be anywhere from weekly to monthly (or even in extreme circumstances quarterly).
At the end of the performance period both parties will rate how they feel the employee has done against their goals. The employee will discuss any issues that may have prevented them from achieving their goals and the employer will discuss how they see that the employee has performed.
Any bonus, pay rise, or other incentive relevant to the employees’ performance will then be given to them. Often, businesses will offer incentives in a sliding scale with high achievers receiving the most. Some low achievers may receive nothing.
It’s important that all employees are treated fairly and bonusses are administered as per company policies. Any employee who believes they have been unfairly treated may have a claim they could take to a tribunal.
How can I implement a Performance Related Pay scheme in my small or medium-sized business?
Implementing Performance Related Pay system in a small or medium sized business can be tricky. To do it successfully businesses must ensure that they:
- Determine the business and employee needs and define the metrics they will use. This can be done by holding face to face meetings with key stakeholders, for example line managers and staff.
- Set organisational and individual goals. These should be SMART Goals, (Specific, Measurable, Attainable, Relevant, Time based) and need to be beneficial to the business and achievable by staff.
- Set up a process to track progress on a regular basis. This will allow you to ensure that targets are working and achievable.
- A system to communicate achievements. Recognition and feedback are essential to the success of any Performance Related Pay system. If you don’t celebrate the successes, staff will assume nobody achieves the targets
- Offer coaching, training and development where needed. This can be for both employees and managers.
Performance Related Pay is common in the modern workplace but can be tricky to implement. We hope that this guide has helped you to understand it a little more.