Performance‐related Pay: A Case Study
| Date | 01 February 1989 |
| Published date | 01 February 1989 |
| Pages | 17-23 |
| DOI | https://doi.org/10.1108/EUM0000000001016 |
| Author | A.I.R. Swabe |
| Subject Matter | HR & organizational behaviour |
PERFORMANCE-RELATED PAY:
A CASE STUDY
by
A.l.R.
Swabe
Polytechnic of Central London
Performance-related pay is becoming a fashionable concept in Britain in the latter 1980s.
There is a shortage of detailed analyses of how such systems have worked in practice. It
may, therefore, be useful to look at an example that enables us to see why such a system
was introduced, how it was negotiated, and how the new system has operated in the first
year of its life. The case study chosen is in a financial services sector company, where a
performance-related pay system was negotiated in 1986 and came into operation in 1987.
Before looking at this particular example, we need
to define exactly what is meant by performance-
related pay, for the term is often used loosely, in
such a way as to encompass other systems of
payment. Thus, if one is not careful, the term
becomes so diluted as not to be very meaningful
and therefore of not much use. By performance-
related pay, we mean a system in which an
individual's increase in salary is solely or mainly
dependent on his/her appraisal or merit rating. In
such a system, an average performer receives an
average increase, an above-average performer a
greater than average increase, whilst a below-
average performer receives less than the average
and a person whose work is appraised as
unacceptable may receive no increase at all. Pay
increases that allow one to move along an
incremental scale are now dependent largely or
solely on merit, and the absence of merit can mean
no progression.Some form of merit increase is very
common in Britain, a recent survey by the CBI
showing that 85 per cent of private service sector
companies make performance-related payments
[1].
However, this survey does not distinguish those
firms who use merit alone to determine pay and,
whilst the breakdown of the 85 per cent shows
that 51 per cent of all these companies have
variable merit pay, it does not tell us whether a
regular cost of living or general pay increase is also
received.
Another survey by the Institute of
Personnel Management shows that 40 per cent
of companies have a direct relationship between
pay and performance appraisal[2]. What
distinguishes the new systems from the traditional
systems for white-collar workers, with annual
increase topped up by merit increases, is that all
of an employee's increase may be determined by
their appraisal and its translation into cash terms.
This may seem very much like the traditional
payment-by-results schemes common among
manual workers, though far less frequently found
with clerical and junior to middle-level
administrative staff, even if quite usual among sales
staff. In a sense, of course, there is a similarity with
payment-by-results schemes, but these can be
differentiated from traditional systems, because the
results targets are not necessarily fixed in terms
of production norms or time allowances. They are
fixed in performance-related schemes in terms of
the attainment of agreed goals by employees,
defined in terms of efficiency, effort, behaviour at
work and, to a lesser extent, business targets set
with a quantitative format. Thus, the measurement
of success is less precise and ultimately far more
subjective than by a precise measurement provided
by a payment-by-results scheme.
An alternative performance measurement is that
of the company as a whole, not that of the
individual.
This could also be termed performance-
related,
but is more suitably and correctly termed
profit-related, as it is in the recent Government
promotion of such schemes in the 1986 and 1987
Budgets via personal income tax allowances. It
does seem reasonable to reserve the term
performance-related to schemes based on
personal appraisal and performance, and not to
encompass profit-related schemes based on
collective performance. To be realistic, such
schemes are affected by market factors often
beyond the control of the company concerned, let
alone the individual employee.
Having distinguished between these different kinds
of schemes, one other general point needs to be
made before we look at our case study.
Performance-related payment systems, either in
whole or in part, are quite common among senior
ER 11,2
1989
17
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