Performance Related Pay

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Health Assured team

31 July 2020

Encouraging high performance levels at work can be difficult. One way employers can do this is through performance related pay (PRP) systems.

PRP isn't just about giving out bonuses for individual performance. It's about knowing how to motivate staff and grow business loyalty.

It's important to manage these performance related pay systems properly. If not, you could end up paying financial compensation and losing talented employees.

In this guide, we'll look at what performance related pay is, who's entitled to it, and how to create a fair pay system within your business.

What is performance related pay?

Performance related pay (PRP) is a financial reward given to employees for their high performance or good contributions.

PRP includes anything from commission to bonus payments. Employees receive it on top of their 'fixed hourly rate'.

Performance related pay is often used in sales-based environments, like the financial sector. Here, employers can encourage good performance and commission as their workforce generally have the same goals.

PRP is a little harder to use in public sector jobs. That's because work duties usually vary from person to person - making it hard to give out fair rewards.

There are lots of ways employers can grow individual performance and output. When they initiate PRP, it benefits both employees and the overall business.

An employer reviewing an employees work

Examples of different performance related pay schemes

Employers can use all sorts of methods when it comes to performance related pay. Most of them count as a short-term or long-term scheme.

Let's look into each one in more detail:

Short-term schemes

Short-term PRP schemes are used to reward employees for reaching quick or nearing targets.

They usually involve giving out bonuses or commission. They also help to grow employee motivation on a shorter basis.

For example, a jewellery company offers staff 20% commission during their Valentine's Day period. This boosts their performance element as they're motivated to get the best sales commission.

Long-term schemes

Long-term PRP schemes are used to persuade staff to stay employed at a business.

They usually involve giving out things like, a pay rise, company shares, or salary progression. By investing in employees this way, it motivates them to stay working for you. This leads to higher staff retention and business loyalty.

For example, a senior staff-member worked at a company for 20 years and is considered a valuable employee. To reward their loyalty, they're offered company shares for their individual performance.

What are the advantages of performance related pay?

Most companies want to motivate staff to help them reach overall success at work. Let's take a look at the advantages of performance related pay:

Boosts productivity

When employees work beyond their norms, it grows overall output for the business. PRP systems help boost productivity far better than forcing employees to work overtime - in any given period.

Your staff will work better due to their own choice - protecting their wellbeing and welfare.

Encourages better performance

Most people would choose to work harder if offered a financial reward or incentive. That's why performance related pay systems are so popular within numerous business sectors.

Employees will better their own collaborative and individual efforts. In the end, they gain better skills, experience, and capability.

When rewarding employees, it motivates others to work harder so they can reach the same measurable targets and awards.

Improves staff retention

When employees are motivated at work, it means they're happy and content.

Performance related pay systems help acknowledge and reward their hard efforts. So, why would they want to leave their job?

A healthy and happy work environment helps improve staff retention levels. And it makes business become attractive to new candidates and prospective clients.

Strengthens employee relations

Usually, PRP systems help keep track of individual performance. But you can use it to award team achievements and collaborative decision-making.

Performance related pay systems help motivate teams to work together to hit their shared goals. Even if they don't reach them, teams will benefit from strengthening work relations during the process.

What are the disadvantages of performance related pay?

Whilst there are several benefits for using PRP systems, there are downsides you can't afford to ignore. Let's take a look at the disadvantages of performance related pay.

Leads to expensive outcomes

The costs can quickly add up when you offer financial incentives on top of wages. It's arguably a quick motivator, but it could soon leave you with an empty bank account.

You can't predict when your business will require additional money. For example, you might suddenly face an economic downturn or lose all your business investments.

If you don't budget pay increases carefully, it could lead to serious financial risks.

Causes unfavourable treatment

Creating performance related pay systems that treat all employees fairly requires more effort than you'd think.

That's because it's hard to manage work performance across several employees and departments. Each person or division will have their own duties and workloads. So, using one PRP system to manage them all isn't a great idea.

And if your systems aren't fair across your workforce, it could lead to unlawful discrimination. For example, if an employee requires additional support in a demanding job due to disabilities.

Creates unhealthy competitiveness

Performance related pay systems can cause unhealthy competition between staff. While PRP can be encouraging for some, it can also be incredibly disheartening for others, like low performers.

These employees may go to all kinds of lengths to win the reward. This kind of selfish or 'risk-taking' attitude isn't good for workplace morale. For example, in 2018, big bankers exposed their company's merit pay system to boost their own bonus packages.

Employees collaborating

What is the law on performance related pay?

In the UK, performance related pay isn't directly covered in employment law. However, there are relevant legislations that apply to your PRP and salary system.

The main laws employers must consider are:

  • The National Minimum Wage Act 1998 (NMW).
  • The National Minimum Wage (Amendment) Regulations 2016.

PRP are financial rewards given in addition to an employee's salary. You can't deduct money from their basic pay band just because they received PRP.

If your performance related pay systems is discriminatory, employees could raise this to an employment tribunal. If their claim is successful, you could end up paying compensation due to unlawful discrimination.

Tribunals may decide that you must pay back all wages that were illegally reduced. These claims also come with the risk of reputational damages, as well as losing talented employees.

an employee smiling to their colleague

How to manage a performance related pay system

Employers can use performance related pay to boost productivity and motivation in any type of workplace.

You just need to make sure your systems follow a fair and legal process. If not, you could end up demotivating staff- leading to low morale, business losses, and unhappy employees.

Let's take a look at how to manage performance related pay systems:

Create a performance related pay scheme

Employers should start by creating a performance related pay scheme.

This plan explains what your PRP scheme covers and how employees can receive rewards for their work.

You can add pre-agreed objectives for the scheme in employment contracts and handbooks. That way, your staff have access to all information on your effective arrangements.

Remember, PRP varies internationally, so avoid copying others on their merit pay systems. Instead, ask your staff what would specifically motivate their performance element.

Record employee performance properly

Employers need to make sure they record every employee's performance properly.

Targets and achievements should be recorded through a digital tracking system. It lessens the chance of mistakes or data being added wrong.

Remember, PRP systems shouldn't replace your performance appraisal process. This is when line-managers review an individual's performance and contributions over a set period, like annually.

Reward employees fairly

When rewarding employees, it's important not to judge them on their entire financial worth.

Employers shouldn't just reward people solely based on their sales achieved in a week. You need to reward them through fair performance indicators.

Good performers can be those who have recently worked well; or gone beyond their normal duties. Think about linking pay progression to teamwork or business loyalty.

Maintain your reward systems

It's important for employers to think about how much you can offer through rewards.

There's no point offering a £1,000 bonus if it causes business losses. Make sure you maintain your reward systems, so it doesn't lead to financial ruin.

All performance evaluation systems should be reviewed on an annual basis. That way, you'll be able to monitor all sales achieved and manage potential impacts.

An employee accepting a bonus

Get expert advice on performance related pay with Health Assured

Linking reward to employee performance is beneficial for any employer.

If it's done well, PRP works in any business - regardless of whether you're in the public sector or private sector. And employees are more likely to work harder to help reach business success.

But if you don't maintain performance pay properly, it could lead to huge consequences. Employees may decide to leave or raise discrimination claims against you.

Health Assured offers expert advice on implementing performance related pay. Our teams offer guidance on employee wellbeing whilst simultaneously meeting your business needs.

We also provide a 24/7 helpline that's open 365 days a year–helping you care for your staff all year round. Arrange a call back from an expert today on 0844 891 0352.

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