What is Performance Related Pay?

Clare Parkinson

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08 Jan 2019

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Performance related pay (PRP) can help you motivate an under-performing workforce, but it can also be a point of great tension.

Getting your system right is vital for the smooth running of your workplace and for avoiding disputes with your employees.

We’ll start with a performance related pay definition.

Then we’ll discuss how to effective manage performance, how to avoid issues with pay, the different forms of pay, and some of the advantages of PRP.

What is performance related pay?

In basic terms, PRP is a system of managing pay by linking it to salary progression based on individual performance.

You typically use PRP when you’re unable to measure an employee’s performance based on output or sales.

You may be wondering: "If I don’t measure staff member activity on output or sales, how do I measure it?"

What is performance management?

Managing employee performance is as simple as having a once-a-year performance appraisal and collating feedback from the meetings.

However, to really go the extra mile, it’s worth implementing a more frequent performance management process.

Many leading organisations now opt for a regular ‘check-in’ system, over an annual review. These reviews are as frequent as bi-weekly to once-per-quarter. This form of performance management has clearly defined goals and metrics it aims to measure.

Every business will have different objectives and metrics, so it’s worth taking the time to decide what you want to measure.

For example, you may want your staff to complete a certain amount of projects in a month.

Or, you may want your employee to have made a certain amount of contacts by the end of the month—or reach a particular number of social posts, and so on.

Feedback from your members of staff is also vital to the success of a performance management system. So, between check-ins, collate the performance data and employee feedback, and use it to set realistic objectives.

If you have regular check-ins with your employee, it should help highlight any potential issues that might cause a dispute. One of the major points of contention in performance management is pay, especially with an OTE salary.

What does OTE stand for?

‘On-target earnings’ refers to a basic salary, plus commission, variable bonuses, and/or commission.

You can utilise all of the above pay schemes in performance-related pay, but must use them correctly in order to avoid complications.

Types of performance-related pay

There are two main types of pay-for-performance. These are:

Short-term schemes: These schemes usually utilise commission or bonuses, sometimes based on sales achieved or work completed. The aim of this scheme is for you to provide an incentive for staff to improve their performance.

Long-term schemes: Unlike the short-term scheme, you use the long-term scheme to boost loyalty. You can do this by offering share options for certain employees.

To avoid disputes, include details of any PRP payment in the employee’s contract. Include details on how you’ll make payments, as well as how often and whether it’s at your discretion.

Advantages of performance-related pay

There are a number of advantages to using PRP. Here are a few of them:

  • Sets a framework of goal-setting that improves individual performance.
  • Improves employee focus.
  • Rewards the best workers.
  • Highlights poor performance effectively.
  • Can create a healthy performance-based culture.

Exercise caution when implementing a PRP system, as it’s easy for some of the advantages to become disadvantages under certain circumstances.

Setting goals too high demotivates your staff, employees might expect additional payments upon exceptional work, and you can destroy a team atmosphere by pushing competition too aggressively.

Expert support

For assistance with performance related pay or any other pay & reward issue, speak to a Croner expert on 01455 858 132.

About the Author

Clare Parkinson has over 20 years’ experience in the Croner Reward business. As Business Manager, Clare leads a team of Reward Consultants who specialise in the delivery of pay and grading related advice, including tailored pay benchmarking and gender pay reports.

Over the years, Clare has contributed to various industry publications on topics such as gender pay, executive remuneration and market pay trends.

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