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Kent County Council plans to “improve motivation” by paying more for superior performance.

Talks with unions aim to remove annual increments with effect from April 2010, to allow the council more scope to reward better performers at the top of their pay grade.

While performance must be a vital focus of management, performance pay does not suit every business! It is vital to understand the landscape, consider how pay acts as a motivator in the environment and culture of the business and design systems to deliver these outcomes robustly.

Other organisations who have substituted incremental systems for performance pay and one-off bonuses at the top of salary scales have experienced mixed reactions from employees.

Spot salaries, annual increments and performance pay all exhibit positive and negative features  -

• Spot Salaries set a “rate for the job”, either paying everyone in the job the same level or treating every individual as unique.
• Increments also set a “rate for the job” – people reach it over a pre-defined time …. on the an assumption it takes time to become “fully effective”.
• Performance pay recognises the individual effort and contribution of employees and adjusts pay levels accordingly. Combined with salary scales and bonuses, the approach can be quite sophisticated.

Often suited to market-rate pay situations, spot salaries – with “lightly structured” pay or even links to job evaluation scores, can lead to uncontrollable pay escalation, inequalities and discrimination claims.

Increments will suit many organisations and are used widely in the public sector. Where it is important to strengthen performance improvement and development activities it can be useful to separate these from pay issues. Where business outcomes are more influenced by personal behaviour than teamwork, organisational systems or standards, the fit can be poor.

Performance related pay demands quite a lot from managers to improve performance while setting pay levels …. which some public sector organisations struggle with. HR needs to build capacity here if performance pay is to be effectively implemented.

Using performance pay , organisations often begin to “tamper” with managers’ performance assessments, applying forced distributions and other “moderation” tools so pay results “feel right” and are affordable … which can undermine the value of performance appraisal and demotivate both managers and staff who feel their scores are wrongly “adjusted down”.

The council will have to consider the extent to which they want bright young stars, new entrants with potential, to reach equivalent pay to experienced high performers. If, for example, all “high performers” get a 3% increase, this will never happen …. a sure way to send the wrong signal to younger talent.

Unlike the private sector, the council’s reward purse will always be tightly controlled which will make it hard to differentiate effectively in pay terms between high and satisfactory performers without the latter losing out financially.

There is just insufficient cash to spread round in a way that motivates additional effort. As Kent goes forward it will be important to use reward to support motivation for all employees, not just the one-third of staff at top of their grade.

What has your experience of performance pay?