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Pick n Mix - How to reward your employees! Part 1

A debate over whether reward should be based on employee performance or driven by wider market or a combination of the two.

How do UK businesses tend to approach reward currently? Is there a shift in approach and if so, what is causing this?

Reward is a crucial factor when attracting, engaging and retaining talent within the organisation.

Performance Related Pay became popular in the 1980’s and 1990’s, and recent research suggests performance-related pay is still popular with around 48% of businesses directly linking reward to performance. However, whilst many organisations still utilise performance-related pay, they are more likely to offer variable pay elements such as a bonus based on achieving some set criteria.

It’s key to remember as businesses strive to be more cost-effective they have to consider affordability v’s performance related pay.

In recent years we’ve seen more businesses utilising salary benchmarking to gauge the marketplace and internal salaries and benefits. Whilst this is a useful tool as it gives a guideline there are most definitely roles where the market can drive the reward agenda, particularly roles with the technology space where the competition for talent is fierce.

With the recent government initiative to introduce Gender Pay Gap reporting this may well shift the approach as employers become more cautious about rewarding performance on base salary, however, as long as the HR function can deliver robust assessment tools to ensure fairness and consistency this shouldn’t create a challenge.

One area we are seeing change is how we manage performance. The traditional yearly appraisal, where managers looked back is being replaced by monthly coaching sessions as businesses become more agile and fast-paced it’s essential that employers and employees can react to these changes. Some organisations are removing any form of performance rating which would suggest we will see a move away from performance related pay as we know it today.

Furthermore, as we continue to make huge steps in terms of technology, it’s natural that employees have an expectation that their rewards and benefits packages will be easy to access via an app or other platforms.

Indeed, it’s predicted that within the next 3-5 years the use of automation and artificial intelligence in the workplace will almost double, reducing the need for many of our skilled jobs today. With this in mind, employers will have to rethink how they reward their employees.

Advantages and disadvantages of both approaches from a talent/retention and engagement/motivation perspective.

There are several benefits of performance related pay to enable organisations to retain talent and engage and motivate employees. Where performance related pay is embedded into the organisation, it can motivate employees to go the extra mile and deliver beyond expectations. Performance related pay can work well in terms of setting clear expectations for employees on what right looks like and it can reinforce the Values of the organisation.

Equally, there are disadvantages to performance related pay when it comes to retaining talent and engaging and motivating employees. Performance related pay can be subjective and there is the risk of a halo and horns effect – creating perceived levels of unfairness. Development can also be forgotten if the focus is purely on the pay element. It may also demotivate employees if unrealistic targets are set. If adopting a performance related pay approach, the reward budget needs to be substantial to make a difference when rewarding high performing employees. If the salary budget is 2%, then it’s very difficult to recognise high performance and it can end up demotivating employees.

The role of the manager can’t be underestimated in assessing employees as if the performance rating is directly linked to reward. This can become a very emotive conversation and the key areas of performance and future development can be lost. In addition, if using a force distribution, even high performers may fall into a successful criterion as managers are forced to limit the number of top performers.

Read part 2 to find out the advantages and disadvantages of a market lead approach to retain talent and engage and motivate employees.