IDS Study 650, June 1998

Performance-related pay

• Looks at the pros and cons of performance-related pay.
• Considers why organisations have adopted this form of pay system and examines how differing objectives are reflected in the way their schemes operate.
• Case studies of performance-related pay arrangements in six organisations.

Organisations decide to implement performance-related pay systems for a variety of reasons, only some of which are directly pay-related. It may also be introduced, for example, as a means of developing a more market-orientated environment or as one element of a wider change programme. These differing objectives are reflected in the way their schemes operate:

This new Study explains:

• the main pay-related considerations - rewarding high achievers and differentiating between those who do and those who do not achieve; relating pay to market rates; motivating staff at or near scale maxima
• organisational change issues - fostering culture change; widening the range of skills available
• main features of schemes - which staff are covered; types of pay structures and their industrial relations context; extent of line management discretion.

The Study concludes that performance pay is, in part, being used as a way of boosting the pay of staff whose skills are in demand. The question is whether this can be achieved without knock-on effects elsewhere. This seems to be the reason why some companies have decided to stop consolidating performance pay into salary. Another factor is that, with low inflation, significant salary increases are expensive. Lump sum payments have greater visibility and impact as well as being cheaper and can provide an effective incentive without building in upward drift and thus higher pay costs in the longer term.

The company practice section of this Study consists of six case studies including organisations in the telecommunications, finance, utility and public sectors.