Performance reviews and pay discussions are integral parts of managing your people, and in most organisations, the two are tightly linked.
But combining both processes (or running them simultaneously) can dilute the value of each, and instead of strengthening employee motivation and achievement, it can hinder it.
At MyHR, we are big fans of keeping your pay discussions and individual performance reviews separate.
Although this might sound counterintuitive, we find that it makes each process clearer, it’s less stressful for all parties, and it helps foster a more productive, collaborative, and motivated team. It’s also better for the long-term success of the business!
Let’s look at the main reasons why performance reviews and pay conversation processes should be kept separate.
Performance reviews work best when they are the sole focus
What are performance reviews for?
Generally speaking, performance reviews are a tool to align what each employee is working on (their goals) with the goals of their team, department, and/or the organisation overall. By assessing a person’s performance against the objectives in their review, you can evaluate their work, skills, and contribution.
Performance reviews are also a perfect opportunity to have open conversations with employees and provide timely feedback and target areas for development. If your team can see how their work today contributes to their career goals tomorrow, and be supported with a clear development plan, they’ll be more engaged at work and less likely to look for greener pastures elsewhere.
However, when you combine performance reviews with pay discussions, the money side of things tends to dominate attention, and the evaluation of employee performance (plus meaningful development discussions) can be overshadowed.
Assessing performance without all the stress and ramifications of pay allows managers to evaluate employees more accurately and objectively. Employees, too, can be more open and honest about any areas of weakness or difficulties they are having without the added fear that it might influence their chances of getting a raise.
This simplifies the process and keeps the focus on achievement and professional development.
Remuneration is about more than individual performance
Sure, your high-performing employees will expect to be rewarded accordingly, but much more than individual performance should come into a discussion about pay.
Typically, it will also be influenced by the company’s overall performance, the success of the employee’s team or department, and the value of the person’s role in meeting business goals. Then there’s your internal remuneration structures, market relativity, and other factors to consider, too.
If you link performance reviews directly to pay discussions, you risk oversimplifying the complex nature of remuneration and creating a mismatch between an employee’s expectations and the reality of how pay decisions are made.
Employees are more likely to be focussed on how their stellar performance review should result in a stellar pay rise, and be less able to take in the bigger context that you’re working within.
Research into performance-based pay has also found it has a negative effect on employee well-being and is associated with a higher workload, more stress, and less job satisfaction.
By conducting your pay and performance reviews separately, you can ensure that employees are evaluated and compensated in a fair, objective, and transparent way.
Cooperation is better than competition
As a business, it’s much easier to make progress when everyone in the team is pulling in the same direction. But when pay and performance reviews are tied together, employees can start seeing their teammates as competitors, rather than collaborators, leading to some - shall we say - counterproductive dynamics at work.
By separating pay discussions from performance reviews, employees can focus more on working together to achieve collective goals, without the added stress of feeling like they’re competing for financial rewards.
Promoting cooperation over competition also fosters a healthier, more collaborative culture across the organisation.
Performance can be affected by external factors
Let’s be real - an employee’s performance is not always a direct reflection of their ability or work ethic. External factors such as organisational changes, team dynamics, market conditions, and even personal circumstances can have a significant impact on how well they perform.
By tying pay to performance reviews, you can risk penalising employees for factors beyond their control. For example, a highly motivated and valuable member of your sales team may have had a tough quarter because a competitor adopted a loss-leading approach, or because the economy is facing headwinds - none of which are factors that they can control.
Keeping pay and performance reviews separate helps ensure your decisions about pay are holistic and take account of all the factors at play, ensuring your people are not unfairly disadvantaged by a narrow focus on performance alone.
Separating pay and performance processes lessens the effect of biases
Biases, we all have them! This is a feature of being human, and usually our biases are unconscious, whether that’s regarding gender, age, race, or personal preferences.
Biases often rear their head when performance reviews aren’t properly structured or implemented, and tying pay solely to the outcome of the review can compound the issue.
The last thing you want is employees feeling their remuneration is tied to a biased assessment of their work. They will be less trusting of the performance review process and it could easily affect their motivation.
Keeping pay discussions separate helps ensure that pay decisions are based on objective, data-driven factors, and that performance feedback is given in a manner that is less likely to be influenced by favoritism or prejudice.
How to separate performance and pay
If, like many, your organisation reviews performance and pay at the same time, how can you split the two to maximise the benefits? Here are some pointers.
Review performance continually
Performance reviews work best when they are part of a continuous process or discussion about performance, rather than limiting them to one exhaustive appraisal at the end of the year.
If you delay discussing performance with your employees until it’s time to complete a formal review, you’re missing opportunities to track performance trends in real-time and pass on timely positive feedback or work with people on fixing issues before they become major problems.
Employees get a much clearer sense of their strengths and areas for attention, and just as importantly, have time to improve and can focus their efforts on meeting objectives.
On the other hand, decisions about remuneration only need to happen at certain milestones, for example at the end of your financial year where you’re setting your budget for the year ahead.
Once you have an effective performance review system, you can then feed that data into the pay review, as well as all the other factors that influence the decision.
Include team and company-wide achievements in remuneration decisions
We know that team work makes the dream work, so instead of linking monetary rewards solely to individual performance, consider making compensation decisions based on broader team or business-wide achievements.
Team-based rewards reflect the collective efforts of a group working toward a shared goal, while also taking into account factors outside any one person’s control. For example, if the organisation has had a good year financially or has met specific milestones, distributing bonuses or pay raises evenly across the team aligns the incentives with company success.
This approach helps encourage employees to work together towards common objectives and highlights the importance of collaboration rather than individual rivalry.
Involve your employees in your performance and pay processes
If you’re making any changes to the way that you manage performance reviews or pay, communicate this to your team! Transparency is crucial in employment relationships, and this is especially important when it comes to performance and remuneration reviews.
Involve your people by working with them to develop performance metrics and ensure they understand how compensation decisions are made and what criteria will influence their pay. Encourage them to give feedback and ask questions.
This will help them see the distinction between the two processes, as well as making them feel more engaged and empowered, reducing some of the emotion surrounding reviews.
It’ll also help them understand the bigger picture around remuneration and that their pay is based on multiple factors - such as company-wide goals, financial performance, and internal salary structures - rather than just their individual performance.
This sets you up well if you’ve had a bad year, and aren’t in a position to make significant increases to remuneration - your team will have a more comprehensive understanding of the whole picture, and are less likely to be disappointed with the result.
Implement performance review software
Software and accurate data are your ally. Using data to drive both performance evaluations and compensation decisions helps ensure objectivity and fairness.
MyHR’s performance review software makes the whole process easier, from setting goals and tracking performance in real-time to involving employees in evaluations and feedback. Using performance data recorded in real time also minimises subjective judgments, and makes assessments clear and data-driven.
Similarly, when making compensation decisions, using internal and external benchmarks ensures that your pay rates are fair and equitable, and that they reflect the overall financial health of your organisation.
If you need any assistance conducting effective remuneration or performance reviews, get in touch with the MyHR team.
