Linking Pay to Performance

Most employees expect their pay to increase over time. As a result, many employers have policies that call for salary reviews on a periodic (usually annual and often based on date of hire or business cycle) basis.

If you want to use compensation to reward employees for doing a good job, then you'll adopt a policy that ties the amount of a raise to an employee’s performance. The key element to making that connection is the decision to provide periodic performance appraisals that give employees direct feedback on how well they're performing. It’s easier to decide how large a raise to give if you can track an employee’s progress against clearly established goals. Increases should be based on merit, not just on the fact that an employee has stayed on for another year. Many employers believe that this is a good way to recognize each employee’s unique contribution to the business.

It’s important that you establish both periodic performance and also compensation reviews. What is the difference between a performance review and a salary review? A salary review can reflect performance, but other factors such as inflation, what others are paying, how well your business is doing and salary equity issues, also require consideration. Many businesses try very hard to split performance reviews from salary reviews. Keeping the two topics somewhat separate can make it a lot easier to use each type of review to its fullest extent.

As part of the salary review process, you'll be called on to determine how much more to pay an employee than he or she is currently earning. The logical starting point is the same as it was when you decided to hire an employee in the first place. Determine how much more you can pay all employees this year than last. Then, based upon your appraisal of each employee’s performance, decide how to divide up the amount among your employees.

Some businesses choose to give everyone the same percentage or dollar amount raise. This makes it easy to predict the impact on your budget. But it doesn't recognize that some employees might be doing a better job than others.

For example, if one employee earns the minimum wage and another earns 20 times more, is it really equitable to give each a four percent raise? If two employees perform similar work, and one is more productive than the other, can you justify giving both the same raise? Similarly, consider the impact on employee morale if a newly hired employee is paid nearly the same amount as a long-term employee.