Should a Pay Review be part of a Performance Review?
For decades there has been debate surrounding whether pay reviews should be discussed at the time of an employee’s annual performance review.
There are generally 2 schools of thought, with widely accepted arguments for each.
Companies require their managers to set performance outcomes with their direct reports on an annual basis to evaluate how an employee is performing in their job. And, remuneration is also reviewed annually to reflect performance or non-performance (A pay review does not have to result in an increase).
In the “Linked model” of remuneration and performance review, if pay is reviewed (with or without an increase) it reinforces to employees that increases are linked to their job performance and contribution to the company.
If there is no pay increase offered, it also tells the employee that they are not doing their job well enough to warrant an increase.
A pay increase (or no increase) may or may not incentify an employee to achieve their objectives but it does make the point that good performance is rewarded accordingly.
Using this model, a manager has to decide what funds (or percentage of a pool of funds) are available for each individual employee prior to evaluating and discussing the employee’s performance. The manager has to have the authority to discuss or award any increase at the time of the review. The downside to this model is that managers can spend more time around pay increases than the performance review itself and the important task of setting of new objectives for the next twelve months. The one can become clouded by the other.
In the “split remuneration / performance review situation”a performance review is not about pay. It is about an employee’s past performance, continuous improvement and goal setting to increase their performance and contribution to the overall performance of the company, and should not be hijacked or distracted.
The performance review is for establishing a shared understanding about what is to be achieved and how it is to be achieved. It is about raising the bar and it is usually through setting performance objectives that will increase efficiencies or processes within their real time working practices. The process relies on an open and frank dialogue and feedback.
The pay review should recognize its own rationale and can take into consideration six key criteria.
1. Performance in the job (including meeting or exceeding objectives)
2. Market rates
3. Employee retention
4. Rewarding longevity
5. Internal equity
6. Cost to the business (total remuneration increase value) and the business’s ability to fund the increase.
The split model recognises the need for open discussion at performance review time with any pay increases the subject of a separate review several weeks later and kept to a separate notification.
My preference is the split model because pay increases can be quite emotive and in the case of an employee who may be disappointed by the size or lack of pay increase, simply can destroy any good that should be expected to come from the performance review exercise.
Paddy Battersby, Battersby HR Consulting, Phone 09 838 6338, www.battersbyhr.com
