In today’s scenario, with rising costs and caution in the air, companies are looking at performance oriented work cultures, and pay.

In “A Consultant's Report on Compensation Issues,” leading compensation expert Robert E. Sibson outlines ten essential elements that every good “pay for performance” system should include.

An online performance management system goes a long way in helping you implement a “pay for performance” culture. Read about Nexstep eHR Performance Management Solution.

1. Performance culture 
In a performance culture salary for individuals is based solely on performance. Salary levels or increases are never, therefore, based on seniority, education, attendance, attitude or loyalty.

2. Performance salary increases must be distinguishable
Pay for performance increases must be distinguished from pay increases for any other reason, for example, cost of living increases.  

If pay for performance is to be effective, it must be clear to employees when they are being rewarded for improved performance by a salary increase over and above any general, across the board increase based on wage inflation in the market.

3. Performance appraisal must be effective 
A company cannot reward productive performance unless there is a way to measure changes in performance.

There must, therefore, be a performance appraisal system that can clearly and reliably identify the performance level of each worker. The information should be recorded and used as a factor in determining performance pay increases.

The first step in setting up a performance appraisal system is to develop a common definition of performance; a definition that is related purely to personal productivity and work excellence. In addition, a system should be worked out that will get highly valid performance ratings.

4. Management must have authority to make salary performance increases 
Because the manager is in the best position to determine when an employee is deserving of a salary increase based on performance, that manager should be given the authority to make salary-reward-for-performance increase decisions.

5. Controls cannot prevent salary performance increases 
Pay for performance increases should never be restricted by control devices. A critical connection exists between performance increases and improvement in productivity. If an employee knows they can do no better than a specific level of increase, they may not continue to improve their productivity once that level is reached.

6. There must be minimum increase amounts for performance increases
Companies should set minimum pay for performance increase levels. You can decide this based on your industry norms.

7. Pay spread must match performance spread 
Companies should gather information about the performance spread in all job levels and link pay for performance to that performance spread. The pay spread (salary plus bonus) between outstanding work and acceptable work should match the difference between the output of outstanding performers and the output of performance that is acceptable only.

It is an automated performance management system which can make it possible for you to analyse the performance spread, so you can plan the pay spread.

8. There must be effective salary management for low performers
Salary levels and salary increases for marginal performers must also be considered. Managing pay for the marginal worker is not easy. This itself needs planning and must be factored in the pay for performance plan.

9. Monitoring and auditing increases must be effective 
In order to have an effective pay for performance program, an online performance management system is useful to provide information regarding the performance of each individual.

10. Open communications and employee acceptance are required
A pay for performance system requires the company to have open communication with employees about the system. In return, the system demands that employees have confidence that the company actually does reward for performance.

Source: www.hrtools.com

Note: Nexstep e HR offers an effective performance management system which helps you implement a pay for performance culture.