Contemporary Pay for Performance System
LINKING COMPENSATION WITH PERFORMANCE APPRAISAL
Building a Contemporary Pay for Performance System
Over the last two decades, most organizations have moved away from pay systems that are driven by tenure to those that reward performance.
The basic premise of a pay for performance system is that it rewards high performers - employees with high performance appraisal ratings – proportionately more than low performers. Performance ratings in an organization may follow a standard continuum; employees are compensated more as they move up the range.
Based on the spread of appraisal ratings, a company may allocate its pay for performance budget in primarily two different ways: • Certain employees may receive a performance bonus if they have achieved or exceeded their targets • Other employees may receive a permanent base salary increase that may or may not be coupled with a promotion
Bonuses recognize exceptional performances over less than an annual period, while pay increases reward longer term achievements. An upcoming option that combines both methods involves building a ‘control point’ in the pay band. A control point fixes or controls an employee’s base salary at a certain level, usually one at par with the average market rate. Based on his accomplishments, the employee may keep receiving base pay increases until he reaches his control point; if his performance warrants a pay increase beyond that point, he is awarded a one-time bonus instead of a permanent pay hike. Most large organizations currently use control points to strike a balance between motivating high performing employees and controlling their pay costs.
In order to manage costs, companies may sometimes use a forced distribution, where they establish predetermined percentages of employees to receive specific bands of ratings. Such a distribution often assumes the ‘bell curve’, with the majority of workforce being designated middle range ratings and a smaller percentage receiving very
Building a Contemporary Pay for Performance System
Over the last two decades, most organizations have moved away from pay systems that are driven by tenure to those that reward performance.
The basic premise of a pay for performance system is that it rewards high performers - employees with high performance appraisal ratings – proportionately more than low performers. Performance ratings in an organization may follow a standard continuum; employees are compensated more as they move up the range.
Based on the spread of appraisal ratings, a company may allocate its pay for performance budget in primarily two different ways: • Certain employees may receive a performance bonus if they have achieved or exceeded their targets • Other employees may receive a permanent base salary increase that may or may not be coupled with a promotion
Bonuses recognize exceptional performances over less than an annual period, while pay increases reward longer term achievements. An upcoming option that combines both methods involves building a ‘control point’ in the pay band. A control point fixes or controls an employee’s base salary at a certain level, usually one at par with the average market rate. Based on his accomplishments, the employee may keep receiving base pay increases until he reaches his control point; if his performance warrants a pay increase beyond that point, he is awarded a one-time bonus instead of a permanent pay hike. Most large organizations currently use control points to strike a balance between motivating high performing employees and controlling their pay costs.
In order to manage costs, companies may sometimes use a forced distribution, where they establish predetermined percentages of employees to receive specific bands of ratings. Such a distribution often assumes the ‘bell curve’, with the majority of workforce being designated middle range ratings and a smaller percentage receiving very