Performance Related Pay

09 July 2019
Performance related pay (PRP) is a way of rewarding staff for hard work in their role. Many businesses use it rather than simply giving staff extra money based on the length of time they’ve stayed in employment. As businesses look to motivate staff, performance-related pay in the public sector and private companies are becoming more common. This guide explains more about its purpose, how it can motivate staff, and whether it’s a good idea for your business to implement it.  

What is PRP pay?

Using the CIPD performance related pay definition, this pay practice links salary progression to an employee’s performance, usually measured against agreed targets or objectives. Most businesses will use individual performance related pay as a method to engage, motivate, and retain employees. After all, the amount of pay they receive is directly affected by their own performance. So, they’ll work harder than ever to receive more money. That’s the theory, at least. The idea is PRP prevents staff from just receiving an amount of money as they hit a certain length of service (or they’re still employed during bonus season). It takes away the expectation that low performing staff still get monetary awards.  

How does it work?

Companies that use performance related pay will often use a performance appraisal process. This process is as follows: First, the employee and their line manager agree on performance objectives that’ll apply over a specified period (i.e. the appraisal process). These objectives will normally be in excess of the employee’s general day-to-day duties, looking to get the most out of the staff member in their role. At the end of the appraisal period, the member of your team attends a formal appraisal meeting. Here the employee and their line manager will talk about their performance, including any areas where they have excelled or underperformed. The employee’s objectives will also receive a review. As an employer, you should also set new objectives and agree on these with them for the next appraisal period. Whether the staff member meets their objectives will then affect how much performance related pay they receive. Some companies will use the percentage method. In short, if they meet 50% of their objectives, they receive 50% of the overall bonus. Others may pay out a certain amount for each objective an employee achieves. Some schemes will only pay a bonus if the staff meet every objective. As well as individual bonus payments, other performance related pay examples may include:
  • Salary increases based on performance (usually using a salary framework).
  • Profit share across departments.
  • Profit share across the company.
Organisation-wide performance related pay ensures bonus payments are due to the efforts of the entire business. It also ensures large amounts of performance related remuneration are only paid out if the business meets a certain profit objective or target. Not only does this reward and motivate the entire workforce, but it also prevents the business from facing a precarious financial position if that amount of pay isn’t affordable.  

How to prevent any problems

To prevent PRP payment policies becoming troublesome, we encourage organisations to:
  • Agree on objectives that relate to the business and challenge members of staff.
  • Keep conversations about performance related pay constructive and positive – you want staff to buy into the scheme in order to achieve their targets.
  • Provide managers training on how PRP pay can motivate staff.
  • Keep PRP payment schemes under review. If it’s not proving effective or is costing too much, some changes may need making.

Need expert help?

We can help your business get to grips with PRP. We can also help you understand how to apply it to your business. Get in touch today: 0800 028 2420.

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