Compensation linked to employee performance reviews?

by on June 2, 2009 · 0 Comment POSTED IN: HR Info Center

Before linking employee performance reviews and compensation, make sure the objects, results, and rewards are clarified

Where output cannot be measured for an employee performance review, the sensible solution seems not to pay any bonus, however just because some jobs are difficult to measure, doesn’t mean that good performance shouldn’t be rewarded.

This problem has generally been tackled by providing a lieu bonus based on average bonus earnings to those employees – very often skilled maintenance staff and supervisors – whose work is difficult to measure.

Manual Workers
In most compensation systems linked to employee performance reviews for manual workers, the pay check is in fact made up of a number of components, usually including a fixed basic payment, a variable bonus paid on output of acceptable quality and a fall back provision. Bonus payments are usually paid weekly or monthly.

White collar
In some systems for white-collar workers, the pay packet includes a fixed salary element, where progress through a range may be according to performance, and / or a variable bonus paid out for achieving set objectives. Variable bonus payments are usually unconsolidated and may be paid monthly, half yearly or yearly.

Advantages of employee performance review linked to compensation

  • It provides a direct incentive for employees to achieve defined work targets
  • the contribution an employee makes is recognised with a tangible reward
  • a performance culture can be developed with its introduction
  • line managers can derive assistance from a corporate framework for setting goals. It should improve individual productivity and performance
  • employees are more likely to focus on what they need to do to improve if this is directly linked to pay
  • a good employee performance review system will reward the best performers
  • it is an effective way of dealing with poor performance
  • establishing a means of rewarding high performance can assist in retaining the most industrious staff .

Disadvantages of employee performance review linked to compensation

  • it reduces pay equity and can make an organization liable to costly lawsuits if not operated fairly
  • the appraisal process in the employee performance review can be affected detrimentally because of the focus on financial reward rather than developmental needs
  • employees can be de-motivated if the goals of the employee performance review set are too hard to achieve
  • too much of the process relies on the quality of judgment made by a line manager
  • co-operation and teamwork can be hindered
  • as reward is made for short-term quantifiable, goal it can be too narrowly focused
  • there is a danger that employees can expect an additional payout year on year
  • sometimes the rewards might not appear to be that great.

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