1. Categories of pay system
Pay setting, composition and progression
Categories of pay system
Person
Age
Seniority/experience
Qualifications
Competence
Behaviour/traits
Attitudes
Knowledge
Skills
Performance
Individual
Commission
Piecework
Individual performance-related pay/merit bonus
Group
Profit-sharing
Gain-sharing
Team bonuses

2. The pros and cons of performance pay
Arguments for:
It is right that those who perform better receive higher rewards than those who perform less well.
Linking pay to performance improves motivation and hence performance.
Performance-linked pay can send strong messages about what behaviour is expected.

3. The pros and cons of performance pay
Arguments against:
Pay is not a motivator.
It demotivates staff who do not benefit.
It ruptures relationships and team work.
It represents a diversion from managing staff performance properly.
It discourages risk-taking.
It undermines the intrinsic interest in the work.
Kohn (1993)

4. Operational problems The setting of appropriate performance measures.
The evaluation of performance
The linking of performance outcomes to pay

5. The performance management system
Objectives:
To communicate a shared vision
To define expectations
To ensure that employees are aware of what constitutes high performance and its achievement
To enhance motivation, engagement and commitment
To enable employees to monitor their own performance and encourage dialogue with their manager about how performance can be improved
Armstrong and Baron (2005)

6. The balanced scorecard

7. The performance management cycle
Planning the meeting at which the objectives are agreed
Tracking progress with the plan
Annual appraisal
Rating of individual performance

8. Types of performance pay progression
Through the award of additional merit-related increments on top of traditional service-based progression
Through all incremental progression being related to performance (rather than to service or competency)
Through ‘all merit’ annual pay increases where the range of increase relates to individual performance rating.

9. Competency-based pay
‘A payment system that relates salary progression or a cash bonus to the display of “competencies” by individual employees. Systems originate in the identification of competency, understood as the key attributes and behaviours of employees that underlie good performance in a particular organisation or job.’
Heery and Noon (2001)

10. Competence or competency?
Competence refers to the areas of work in which an employee is competent (measurable skills).
Competency is a wider concept and refers to the behaviours that underpin competent performance (ie an assessment of the employee’s attitudes and behaviour).
Woodruff (1991)

11. The advantages of competency-based pay
It focuses attention on the need for improved competence.
It encourages employees to develop competence.
It facilitates lateral career moves.
It encourages staff to take an interest in their own career development.
It helps to integrate role and generic competences with organisational core competences.
Armstrong 2001

12. The disadvantages of competency-based pay
Two levels of competence are identified in the occupational psychology literature – trait-based (linked to individual personality) and not trait-based.
Most managers are unable to distinguish between these two levels.
Managers lack the skills to evaluate complex issues like human behaviour, and there is a risk of gender and ethnic stereotyping.

13. Skills-based pay
‘Skills-based pay is an input-based payment system in which employees receive increases in pay for undergoing training and adding to their range or depth of skills.’ Heery and Noon (2001) Thompson and Milsome (2001) concluded that skills-based pay was rare in the UK. But the 2008 CIPD Reward survey found that 38% of organisations were using it.

14. Pay for contribution
Paying for how results are achieved as well as the results themselves
Paying for skills and competencies supporting the future success of the individual, not just immediate results
Rewarding a combination of organisation, team and individual performance, rather than concentrating on the last of these
Using a wide variety of forms of reward
Taking a long-term approach, incorporating a mix of HR systems and processes
Addressing all aspects of reward strategy
Armstrong and Brown (1999)

15. Market-based comparisons
Organisations in the immediate locality
Organisations in the same industrial sector
Influential firms within the wider economy
Different comparators used for different levels of staff
IDS (2004)

16. The pros and cons of market-based pay
It can assist with employee retention, especially in tight labour markets.
It enables resources to be targeted at those most difficult to recruit and retain.
But if the market is static, there is no progression, leading to demotivation.
There are also issues around internal equity, transparency and the lack of specialised data to benchmark.

17. Compensatory payments
Location allowances (eg London allowances)
Overtime or unsocial hours premium payments
Shift premiums
On-call and call-out pay