PERFORMANCE PAY SYSTEM - CONTRIBUTION PAY
Choosing a Performance Pay System
There are a significant number of different Performance Pay Systems which can be introduced. Therefore, rather than painstakingly describing each of the systems and their merits or otherwise, it is perhaps easier to run through the major principles of any performance pay system and the choices available therein, making suitable choices to fit the culture etc of the company. We can offer advice on the performance pay system of your choice.
Principle 1 Pay Increase or Actual Salary is Reward
Pay increase – this is a simple performance pay scheme where the better the employee performs, the higher the pay increase they receive. This takes no account of where colleagues currently are in the pay range and therefore salary anomalies will persist.
Actual salary – the most popular method of performance pay is to use actual salary and have different positions in these relating to a position in the pay range equivalent to their performance, where colleagues currently are in the pay range impacts progression. Anomalies are resolved as all colleagues performing at the same level in the same pay range are eventually paid the same.
Although some companies use salary increase as a reward in their performance pay schemes, by far, pay range reflects different levels of performance. Therefore progression through the pay range is based on performance, the greater the performance, the faster the progression. Employees achieving all of their objectives can, over time, expect to earn the mid point/ market pay rate for the job.
Principle 2 Performance Pay or Contribution Pay
Performance Pay – rewards colleagues for how they perform against their objectives. Performance pay is seen as a one dimensional system.
Contribution Pay – rewards colleagues for how they perform against their objectives and how developed/capable they are. Contribution pay is based on the theory that a fully competent colleague would be expected to fulfil all responsibilities/objectives of the role whereas a new or developing colleague would only be expected to achieve fewer or less complex objectives or lower targets/measures. Whereas a “master” or expert in the role would be expected to achieve additional or more complex objectives than that required of the basic role. Contribution pay is a two dimensional system.
Generally speaking, best practice dictates that if the company has a development focus, is keen to help employees realise their maximum potential and has development plans in place for employees then contribution pay is chosen over performance pay.
Principle 3 Behavioural Competencies
Should behavioural competencies be incorporated into the Performance Pay or contribution pay System?
I.e. should employees be rewarded not just on what they achieve but how they achieved their objectives?
In a contribution Pay System, or performance pay system, the development of behavioural competencies is assessed together with the development of technical competencies and other skills pertinent to the job.
Most companies trying to focus on development and performance, particularly in the areas of customer service and teamwork include these within their performance Development framework. A Performance Pay System which rewards the development and demonstration of the right behaviours underpins not only the development framework but the challenges and aims detailed in their business objectives.
