Performance-related pay is a financial reward to employees whose work is considered to have reached a required standard, and/or above average.

Performance related pay is generally used where employee performance cannot be appropriately measured in terms of output produced or sales achieved.

Whilst the detail of real performance-related schemes varies from business to business, there are several common features:

∞ Individual performance is reviewed regularly (usually once per year) against agreed objectives or performance standards. This is the performance appraisal

∞ At the end of the appraisal, employees are categorised into performance groups – which determine what the reward will be

∞ The method of reward will vary, but traditionally it involves a cash bonus and/or increase in wage rate or salary

Performance-related pay has grown widely in recent years – particularly in the public sector. This is part of a movement towards rewarding individual performance which reflects individual circumstances.

There are several problems with performance-related pay:

∞ There may be disputes about how performance is measured and whether an employee has done enough to be rewarded

∞ Rewarding employees individually does very little to encourage teamwork

There is doubt about whether performance-related pay actually does anything to motivate employees. This may be because the performance element is usually only a small percentage of total pay.