Should We Link Performance Reviews to Pay Rises?

by Srikant Chellappa Mar 30,2016

The People Strategy Leaders Podcast

with Srikant Chellappa, CEO

One of the biggest misconceptions about performance reviews is that employees often confuse them with pay rises/appraisals etc.

It’s easy to see why this happens. Most organizations have performance reviews at the end of the annual year. Around the same time, they also usually give employees their annual pay rise/bonus. And there are some organizations which actually link performance to pay rises.

It is my belief that those two things should exist independent of each other, except for the occasional bonus.

Obviously, performance reviews are important, even if there is a lot of dissent about how they need to be carried out and when they need to be carried out. Performance reviews obviously track an employees performance over a period of time, and help them improve. And pay rises are important too. You want to give employees incentive to stay or work better. It’s a good way to motivate employees in addition to other things.

Then why is that when these two things are linked together, the opposite of good things happen? Here are two reasons why.

  • They Diminish Employee Value – Really they do. They do not add value to an employee. Rather, they make them seem disposable. If an unfortunate employee happens to get a bad review just once even, their value is seemingly diminished because that year’s performance review will not take into account all the other good performance reviews, not consider the fact that maybe the employee was struggling that year due to certain issues, be they personal or professional. Also, it undermines the very concept of team work because employees will very quickly realize that the work that they perform on their own is being judged and not the work that they do in unison with others.
  • It’s A Short Term Incentive – And one that is very shallow. It’s like dangling carrots in front of a rabbit’s nose. It seems so attractive at first, but over time, it loses its effectiveness. Moreover, what do you do when you cannot provide any more incentives or salary bumps to your top executives? It’s not as if you can tell them that they are not eligible because they’ve hit the limit despite extremely good reviews.

It seems so cut and dry. Carry out a performance review and based on that compensate the employee. But in reality, linking performance to pay rises just reinforce certain behaviours and skills over the others and penalizes certain employees unfairly.

Your argument might be that despite all of this, you still just want to reward your employees for good work and that is why you think linking pay to performance is a good idea. But it is also important to know, the rules of employee reward programs have changed.  Linking pay to performance just does not cut it anymore. And it is a fact we must realize as our workplace and the people working in it change.

Do you have any opinions about linking pay rises to performance? Then you should share your thoughts with us in the comments section!

Engagedly is a performance management software with elements of employee engagement. If you want to know more about Engagedly and how it can help your organization, you should request a demo!

Srikant Chellappa
CEO & Co-Founder of Engagedly

Srikant Chellappa is the Co-Founder and CEO at Engagedly and is a passionate entrepreneur and people leader. He is an author, producer/director of 6 feature films, a music album with his band Manchester Underground, and is the host of The People Strategy Leaders Podcast. He is currently working on his next book, Ikigai at the Workplace, which is slated for release in the fall of 2024.

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