Pay to Performance
As a part of the process of coaching
employees, most employers take some time every six months or
every year to sit down with employees and discuss their
performance. This practice is know as performance appraisal. In
addition to talking with the employees about how they have been
doing in performing their jobs, you can also use the performance
appraisal to set goals for the employees for the period until
the next time you evaluate performance.
How well the employees measure up to those goals can help you
determine how much of a raise they deserve.
Pros and cons. Some experts say that linking pay and
performance is not a good idea, and that pay should not be used
to motivate employees to do a better job because they stop
focusing on things like quality of work and how to improve their
performance and start focusing on money and how much the raise
Others feel that pay for performance pits employees against
one another in competition for the highest raises. That's why
some businesses give the same, across-the-board raises to all
employees. It eliminates competition and ensures that the whole
workforce is working toward the same goal. But, if everyone gets
the same raise, there is no motivation to exceed expectations
and go the extra mile in the job. Only you can determine which
approach will work best for your employees.
For better or worse, most companies use money to motivate
employees in some form or fashion, whether it be by bonuses,
commissions, cash awards, or bigger raises for good performance.
How to link pay and performance. If you do decide to
pay for performance, the hard part is making the connection
between how well someone has performed and how much of a raise
you'll give to that employee. There are some basic steps to
follow in making that link:
- Know what your salary budget will be as a percentage of
budget, considering your sales forecast for the coming
- Decide what form the raises will take.
Will you make raises a certain percentage of
each employee's pay? Or will you work with
actual dollar amounts?
If you use percentage points, it becomes
easier to rank employees in terms of who gets
what percentage. For example, your best
performer could get 5 percent, while your
average performer could get 3 percent, and your
poor performer could get 1 percent or no raise
at all. Using this method simplifies the process
of ranking, but it does not take into account
what each employee is currently making. Using
the example above, if the best performer makes
$20,000 a year and the average performer make
$35,000 per year, then the best performer's
raise will be $1,000 and the average performer's
raise will be $1,050. Despite a higher
percentage, the average performer still gets
more money than the best performer.
If you use actual dollars, you can make sure that the person
who performs the best get the most money. The problem becomes
figuring out how to divide the money.
- Do performance appraisals on all employees.
- Rank employees based on their performance and the criteria
that you set for them.
- Divide the money up according to that ranking.
If you use a percentage method and you have a
set dollar amount in your budget for raises,
decide how much each person is going to get and
the calculate that back to a percentage of that
individual employee's salary. For example, if
you have $500 set aside for raises and two
employees, and you decide that Employee A (who
makes $15,000) will get $300 and that Employee B
(who makes $17,500) will get $200, the
percentages for Employee A and Employee B will
be 3.3 percent ($300 ÷ 15,000) and 1.1 percent
($200 ÷ $17,500), respectively.
If you don't have a certain amount of money
set aside for raises, just use percentages to
rank your employees, with the best performers
getting higher percentages and the poorer
performers getting lower percentages.
If you calculate raises based on actual
dollars rather than percentages, how do you
divvy up the money? The simplest approach is to
rank the employees and use this formula: take
the amount of money you have and divide it by
the number of employees. That would give you the
amount of the average raise. Use that as a
baseline and add and subtract from that number
depending on where employees fall in your
ranking. For example, if you had $2,500 set
aside and five employees, the average raise
would be $500 ($2,500 ÷ 5). Therefore, the
employee in the middle of the ranking would get
$500, while the two employees who were ranked
above him or her would get more than $500, and
the two below would get less than $500.