1. CONTINGENT PAY
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2. CONTINGENT PAY DEFINED
Individual contingent pay relates financial rewards to the performance, competence, contribution or skill of individual employees.
It provides an answer to the two fundamental reward management questions:
1. What do we value?
2. What are we prepared to pay for?
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3. DISTINCTION BETWEEN PERFORMANCE AND CONTRIBUTION
A distinction can be made between performance (what a person achieves) and contribution (the impact made by that person on the performance of the team and the organization).
The level of contribution will depend on the competence, knowledge, skill and motivation of individuals, the opportunities they have to apply their knowledge and skills, and the use they make of the leadership, support and guidance they receive.
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4. ARGUMENT FOR CONTIGENT PAY
Those who contribute more should be paid more.
It is right and proper to recognize achievement with a financial and therefore tangible reward.
This is preferable to paying people just for ‘being there’, as happens in a service-related system.
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5. ARGUMENT FOR CONTIGENT PAY
Those who contribute more should be paid more. It is right and proper to recognize achievement with a financial and therefore tangible reward.
This is preferable to paying people just for ‘being there’, as happens in a service-related system.
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6. RATIONALE FOR CONTINGENT PAY
To recognize and reward better performance.
To attract and retain high-quality people.
To improve organizational performance.
To focus attention on key results and values.
To deliver a message about the importance of performance.
To motivate people.
To influence behaviour.
To support cultural change.
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7. ARGUMENTS AGAINST CONTINGENT PAY
Not an effective motivator (amounts usually too small).
Money alone will not produce sustained motivation.
Cannot be assumed that all people will be motivated equally by money.
Financial rewards may motivate those that get them but are likely to demotivate those who don’t.
Can cause dissatisfaction if they seem to operate unfairly or inequitably.
Depend on accurate methods of measurement, which might not be available.
Rely on managerial judgement, which could be partial, inconsistent or ill-informed.
People cannot necessarily control their own performance.
Can be prejudicial to teamwork and quality.
Requirements for success exacting.
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8. CRITERIA FOR CONTINGENT PAY
Individuals and teams should have a ‘clear line of sight’ between what they do and the reward they will receive for doing it as modelled below (source E E Lawler).
The reward must be worth having.
Fair and consistent means are available for measuring or assessing performance, competence, contribution or skill.
People must be able to influence their performance by changing their behaviour and developing their competences and skills.
The reward should follow as closely as possible the accomplishment that generated it.
Effort
Performance
Results
Measures
Pay out
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9. TYPES OF CONTINGENT PAY
Type of scheme
Main features
Performance-related pay
Pay increases related to the achievement of agreed results defined as targets or outcomes.
Scope provided for consolidated pay progression within brackets or for cash bonuses.
Progression often governed by performance ratings using a formula (a pay matrix).
Competence-related pay
Pay increases related to the level of competence people achieve in carrying out their roles.
Scope provided for consolidated increases within brackets or within a zone in a broad-banded structure.
Progression may be governed by ratings and a matrix but can be related to more general assessments of competence development.
Contribution-related pay
Pay increases related to both the outcomes of work and the inputs provided by individuals in the shape of their levels of competence.
Progression may be governed by ratings and a matrix but can be related to more general assessments of contribution.
Skill-based pay
Pay increases linked directly to increases in skill – the application of a wider range or higher level of skills to different tasks.
Often associated with shop-floor workers or sales staff on spot rates.
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10. PERFORMANCE-RELATED PAY MODEL
Pay related to the achievement of agreed results (targets or outcomes)
Agreed
outcomes
(targets)
Performance
measures
Performance
Rating
Formula
Performance
pay
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11. PRP PAY MATRIX
Percentage pay increase according to performance rating and position in pay range (compa-ratio)
Rating
Position in pay range
80%–90%
91%–100%
101%–110%
111%–120%
Excellent
12%
10% 8% 6%
Very effective 4%
Effective 3%
Developing
Ineligible
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12. COMPETENCE-RELATED PAY MODEL
Pay related to the level of competence achieved
Agreed
competence
levels
Competence
level
definitions
Competence
(evidence of
level)
Rating or
assessment
Formula or
methodology
Competence-
related
pay
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13. CONTRIBUTION-RELATED PAY
Outcomes
What results have
been achieved
Contribution
The part played by
someone in achieving
a team or
organizational goal
Inputs
How the results
have been
achieved
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14. CONTRIBUTION-RELATED PAY MODEL (1)
Pay related to the both outcomes (results) and inputs (level of competence) achieved
Agreed
outcomes
(results)
Performance
measures
Performance
(results
achieved)
Rating or
assessment
Formula or
methodology
Contribution
pay
Agreed
competence
levels
Competence
level
definitions
Competence
(evidence of
level)
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15. This resource is part of a range offered free to academics and/or students using Armstrong’s Handbook of Human Resource Management Practice, 11th edition, as part of their course. For more academic resources and other FREE material, please visit and then click on Academic Resources.

16. CONTRIBUTION PAY MATRIX
Percentage pay increase according to performance rating and competence assessment
Performance rating
Competence assessment
Developing – does not yet meet all competence standards
Fully competent – meets all competence standards
Highly competent – exceeds most competence standards
Exceptional 8%
10%
Very effective 6% 7%
Effective 4% 55
Developing 3
Ineligible
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17. CONTRIBUTION PAY: SEPARATE OUTPUT AND COMPETENCE CRITERIA FOR BONUS AND CONSOLIDATED PAY INCREASES
Salary
Competence
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18. Consolidated increases related to competence
CONSOLIDATED INCREASES RELATED TO COMPETENCE UP TO REFERENCE POINT; CASH BONUSES PAID ABOVE REFERENCE POINT FOR SPECIAL ACHIEVEMENTS
90%
Recruitment
Consolidated increases related to competence
100%
Reference point
Fully competent – aligned to market rate A
Bonuses for exceptional performance – successive bonuses consolidated B
110% C
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19. CONTRIBUTION MATRIX FOR BASE PAY INCREASES AND BONUSES
Position in range
High – expert
Bonus % 1 2 3 6 8
Base pay %
Mid – competent market rate 4
Low – learning
Base pay% 7
Unsatisfactory
Satisfactory
Good
Excellent
Outstanding
Competency assessment
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20. CONTRIBUTION THRESHOLD IN A PAY RANGE
Contribution increments
Threshold
Competence increments
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21. CONTRIBUTION PAY IN A LARGE CAR DEALER
Sales margin
Sales revenue
Outputs
Commission
Product mix
Call/conversion rates
Activity rates
Teamwork
Customer ratings
Throughputs
Bonus
Market/product knowledge
Sales/customer service skills
Planning/organizing skills
Past performance
Inputs
Base pay rise
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22. CONTRIBUTION PAY IN A CONSUMER PRODUCTS MANUFACTURER
Objectives
Competencies
Values
Vision and Strategy
Performance Review
Interim
Review
Reward and Recognition
Career Management
Training and Development
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23. CONTRIBUTION PAY IN A MANUFACTURING COMPANY
New Salary
Market Worth
Personal Value
Capabilities
Required
Personal
Capabilities
Job Family
Comparisons
Business
Plan
Performance
Review
Performance
Objectives
Objectives
Agreement
Performance
Bonus
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24. CONTRIBUTION PAY AT AN INVESTMENT BANK
Developing and
learning range
Effective
range
Discretionary
range
Salary scale – three ranges
 movement from developing and learning range depends on accreditation
 movement into/within discretionary range depends on ‘continued superior performance’
 market midpoint within effective range; exact position depends on bank’s performance
 ranges determined by market data and drawn as wide as possible (maximum up to 2.5 times minimum)
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25. This resource is part of a range offered free to academics and/or students using Armstrong’s Handbook of Human Resource Management Practice, 11th edition, as part of their course. For more academic resources and other FREE material, please visit and then click on Academic Resources.

26. PAY FOR PERFORMANCE VS PAY FOR CONTRIBUTION
Feature Pay for performance Pay for contribution
Philosophy
Measurement
Design
Timescales
Pay linkage
Formulae, systems
Pay for results –
the what
Uniform across
organization
Immediate past
performance
Fixed, formula,
matrix
Processes
Pay both for results and
how they are achieved
Diverse approaches
to fit different needs
Mix of past review
and future development
More flexible linkage
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27. FACTORS AFFECTING CHOICE
Traditional public sector organizations hostile to other forms of contingent pay
Service-related pay
Clear quantified targets available – performance-oriented
Performance-related pay
Competence-oriented (frameworks exist), competence measurable
Competence-related pay
Belief that results matter but that competence is also a key factor
Contribution-related pay
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28. CONTRIBUTION-RELATED PAY: CRITERIA FOR SUCCESS
Cultural/strategic fit
Clear aims
Understanding and agreement by all concerned – communication, involvement
Processes for measuring performance, and agreeing objectives
Well-researched competency framework
Well-defined role profile
Well-established performance management processes
Processes for planning, conducting and monitoring pay reviews
Processes for evaluating impact
Processes for training managers and staff in skills required
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29. INTRODUCING CONTRIBUTION PAY
Analyse culture, strategy and processes
Set out aims
Communicate aims to staff and involve them in development
Decide on performance measures and assessment processes
Develop competency framework
Define role profiles
Develop performance management processes
Define methods of conducting pay reviews
Determine methods of evaluation
Prepare and implement training programmes
COMMUNICATE – INVOLVE – TRAIN
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