Evidence from a host of recent private sector pay settlements and surveys in Ireland reveals that performance or variable pay is a popular people management practice. It has even been adjudged by the Labour Court to be a ‘condition of employment’ (LCR19684), though in 2012 the High Court held that an IFSC-based finance company had absolute discretion to award a bonus, though this discretion must be exercised ‘reasonably’ (2012 IEHC 10).

Though the deployment of financial incentives and bonuses of one type or another for the purpose of raising staff performance levels has a long and varied history, several large-scale research projects indicate that such schemes can have a substantial impact on employee performance, helping to get the best out of staff.

However, it would be naïve to assume that such schemes are trouble-free. Hence, there is much merit in taking heed of the various prescriptions in respect of ‘best practice’ in this area. That is, if the organisation is to avoid paying out sizeable bonuses that serve solely to demotivate staff!

Using the performance management system to determine pay allocations and the periodic review meeting to convey the decision remains a common yet controversial practice. As a result it is increasingly common to split the meetings (i.e. with one focusing on performance and development, and the other on performance and pay).

This split is based upon two assumptions. Firstly, it assumes that the manager cannot contemporaneously and effectively serve as a ‘coach\counsellor’ and a ‘judge’.  Secondly, the reviewee is less likely to be open, honest and self-critical should admission of a limitation on the reviewee’s part threaten to affect their pay increase. Of course, whatever route is taken for the conveyance of the pay\bonus decision, where performance-pay is in use it must be linked in some manner to the performance management system. The consistency of the performance-pay message is important and appropriate.

Salary Review ‘Best Practice’

It is common for employees to gauge how much their employer values them by how much they are paid and awarded in bonuses. That is, staff measure where they are in the hierarchy by the bonus size and how much they are paid relative to fellow employees and those doing equivalent work in other organisations. A consequence of this process is that they are likely to harbour a grievance if someone they consider an equal is paid more.  Even when substantial pay rises are on offer staff may well be disappointed at the ‘relative’ value of the ‘substantial’ bonus or pay rise. Hence, the manager is caught between organisational policy on the one hand (which may be quite arbitrary in how it allocates pay) and the employee’s interpretation of the award given on the other. To help maximise the beneficial effect of such meetings or ‘make the best of a bad lot’ the following guidelines will help:

A.  Own The Decision

The message conveyed at the salary review should be the same as that conveyed at the performance review meeting.  That is, if one tells the employee that their performance is good, then this should be reflected in the salary review or bonus award. If not, the relationship between the performance management and the performance-related pay systems needs to be examined. Should the employee be dissatisfied at the pay\bonus decision, there is a strong temptation for the manager to agree with the employee as a way of avoiding pressure and blame:

You’re right Seamus. But it’s not my fault. It’s top management who’ve decided it’s to be 2% for you this year. Actually, I told them to give you 8% but they wouldn’t listen.

As part of the management team, there is an onus on the reviewer to own the decision. Even if the reviewer dislikes or disagrees with the decision, it is part of their job to support it. In this way it is like any other decision taken by the top management or board of the organisation. One finds a way to justify it to oneself first, in the hope that one’s conviction conveys itself in some way to the employee. Should one try to deflect blame away from oneself, the employee’s worst suspicions about the way the organisation is run will be confirmed. Shortly thereafter one may find oneself knee-deep in a ‘to hell with this organisation’ type discussion, leaving both parties angry, demotivated and assessing their departure options.

So it’s advisable to deliver the message firmly, without beating about the bush and proceeding directly to the key reasons behind the decision. The more that these reasons are a repeat of what has already been discussed - either at the appraisal interview or as part of the ongoing feedback process - the better (i.e. the golden rule of appraisals: ‘no surprises’). One should also find it beneficial to ‘play the broken record’ at the salary review meeting (i.e. keep repeating the prepared reasons, rather than trying to invent new - and probably weaker - ones ‘off the cuff’).

B. Let The Employee ‘Get It Off Their Chest’

Whatever they may be, allow the employee to get their feelings ‘off their chest’. Don’t ‘shout down’ the employee or allow proceedings to disintegrate into an argument. Let the employee have his\her say, even if one doesn’t agree or can’t do anything about it. The therapeutic value of letting people talk is well established, enabling them to feel better if they have ‘said their bit’. Indeed the astute manager may even take note of anything significant that is said, to convey the importance attached to the employee’s perspective, whilst offering to pass on their views to senior management or the ‘grandparent’ (i.e.  the reviewer’s boss) in the relationship.

C. Stick To Salary

One of the most common methods of attack by the disgruntled employee at the salary review meeting is:

Mary got a bigger bonus than me. Are you saying she’s better than me?

Once again, the best response to this argument is to ‘play the broken record’. That is, reiterate the reasons behind the pay award and steer the discussion away from other staff. The meeting is about the interviewee - not other people. Refusing to discuss other employees on the grounds of confidentiality is wholly appropriate. Hence, for example, one might respond:

How would you feel if your performance and pay was being discussed at private meetings with other members of staff?

D. No False Promises

One of the most effective ways of bringing the performance management system - and management-staff relationships - into disrepute, is to fail to follow-up on commitments. So it’s important at the salary review meeting to watch out for and beware of veiled threats in the (disappointed) employee’s response. That is, be careful not to be goaded into making rash promises:

If I worked for Maguire and Murphy I’d be on 30% more at my level. What is there to keep me here if that’s all you’re going to pay? Why should I stay here?

As noted above, it is entirely appropriate to acknowledge an employee’s annoyance and to remind them that the organisation has a grievance procedure that they can avail of. However, one should also point out that there are always other organisations willing to pay more, though the extra pay and perks may have strings attached. Thereafter it is advisable to review or reiterate their situation in the organisation at present, consider their future prospects and to outline possible future scenarios, whilst being careful to emphasise that these are possible scenarios, not promises:

If you can meet all of your performance and personal development objectives for this period it will make for a much stronger case to present to top management when pay rises and promotions next arise for discussion. That’s a real possibility.

The salary review should be short and business-like. It should not be converted into a discussion of all the organisation’s (or the manager’s or employee’s) shortcomings.

To be effective, a pay for performance system has to meet very stringent conditions. For example, the Labour Court has held that there should be clarity in respect of the criteria used when making bonus payments (LCR19985). Related thereto, the consistency of the performance and pay review meeting message is important, with the bonus sum and the reasoning behind the award conveyed (both verbally and subsequently in writing) by the employee’s immediate manager. Furthermore, thanks to ongoing communication between the reviewer and reviewee, there should be ‘no surprises’ when the decision is conveyed, with adequate time taken to carefully and concretely support the pay and performance assessment.

SUMMARY CHECKLIST: How to... Manage the Bonus Meeting – Performance Pay

1. Consider splitting the meetings over time (i.e. with one focusing on performance and development and the other on performance and pay).

1. Ensure that there is consistency in the performance-pay message. A ‘good’ performance assessment should be reflected in a relatively ‘good’ pay award\bonus.

1. Own the bonus\pay rise decision – don’t ‘pass the buck’.

1. Whatever the employee’s response, let them ‘get it off their chest’.

1. Ensure that the salary\bonus review meeting keeps to the agenda (i.e. salary\bonus).

1. Outline possible future scenarios, but don’t make false promises to appease a dissatisfied employee.