Individual reviews determine contribution or performance-related pay increases or special achievement or sustained good performance bonuses if they are allowed as additions or alternatives to base pay rate increases. They also take into account the position to which performance pay progression has brought individuals in their pay ranges or curves - this may influence the size of the performance award or a decision to give a lump sum bonus rather than a pay increase.
The reviews are conducted by reference to performance reviews and/or ratings. The four main issues concerning individual reviews are timing, budgeting, guidelines for reviewing managers, and control.
Timing of Individual Reviews
As mentioned above, individual reviews can be integrated with general reviews or conducted separately. In either case they may take place at a fixed date, typically once a year, although fast-moving organizations may prefer more frequent reviews, say twice a year. The review date can be varied to suit the circumstances of the organization. This approach can be used to advantage in rapidly growing organizations but it can also be adopted in periods of high inflation or when employee turnover is excessively high. Some organizations like to hold rolling reviews for individuals based on their birthday or starting/promotion date in order to allow more attention to be given to the individual's review. But this system is more difficult to budget for and control and it is particularly hard to give individual attention to ensuring that their pay increases reflect relevant movements in market rates.
Individual Review Budget
The individual performance review budget should be expressed overall in terms of the percentage increase to the payroll that can be allowed for performance-related increases. The size of the budget will be affected by the following considerations:
- The amount the organization believes it can afford to pay on the basis of budgeted revenue, profit, and payroll costs.
- What the organization thinks it ought to do to address a discrepancy between pay practice and pay policy. For example, group compa-ratio analysis may reveal that the total of actual rates of pay is less or more than the average of reference point rates of pay. If average actual rates are too low (and this is not because of a high influx of new starters) allowance may have to be made in the budget to redress the difference in full or in part, depending on how much the organization can afford to spend. Conversely, if the average of actual pay is above the policy level, the budget may be restricted.
- The organization's policies on pay progression - the size and range of performance-related increases. These policies will have influenced the design of the pay structure, and the factors affecting their development and application. Account should clearly be taken, when budgeting, of fundamental considerations concerning how much the organization should be prepared to pay to make performance-related pay a worthwhile basis for motivating employees and awarding them according to their contribution. There is no point in having PRP unless the organization truly regards performance payments as an investment to provide for increased prosperity in the future. To skimp on them unduly in periods of temporary recession could be short-termism at its worst.
The basic budget would be set for the organization as a whole but, within that figure, departmental budgets could be flexed to reflect differences in compa-ratios or any other special circumstances.
Individual Review Guidelines
Guidelines for managers are necessary on how they should distribute their pay increase budget among their staff. The aim is to achieve as much consistency and equity as possible between departments while still allowing managers a reasonable degree of freedom to manage the distribution of rewards within their departments. The latter principle is in accordance with one of the fundamental tenets of human resource management (HRM) philosophy - that the performance and delivery of HRM is a line management responsibility. How can they exercise this responsibility if their freedom to act in one of the most important aspects of human resource management is unduly constrained?
There will, however, always have to be some limits to freedom, and managers generally prefer some guidance on how to distribute performance awards.
The guidance should start with rating practices - methods of helping managers to rate fairly and to achieve consistency in reviews and ratings.
The main guidelines on linking pay increases to ratings are described below. In each case, ultimate control would be exercised by imposing an overall budget limit on the increase in the departmental payroll arising from performance-related payments.
Average and Min/max Guidelines
These indicate the average performance award - say 5 per cent (when market movement is 4–5 per cent), with restrictions on the maximum and minimum pay increases that can be awarded, eg 3 per cent minimum and 10 per cent maximum. This is the simplest form of guideline and gives a fair degree of freedom to managers. It can work well, especially in the absence of an elaborate performance rating system.
Reward/rating Guidelines
These relate performance pay increases or bonuses, if they are given, to ratings by the use of a scale such as the one set out in Table 1.
Rating | % Increase |
|---|---|
Outstanding | 10 |
Very effective | 7–8 |
Effective | 5 |
Developing | 3 |
The guidelines would also emphasize that anyone whose performance is rated as ineffective should not be eligible for an increase and, in fact, should be going through the disciplinary procedure.
This form of guideline is more directive than the min/max approach. It can help managers to achieve a more consistent relationship between the rating and the reward but it does not achieve any control over the distribution of awards between the guideline increases.
It must also be accepted that managers can and do decide in advance what increases they want to award and adjust their ratings accordingly. It is in recognition of this phenomenon that some organizations conduct pay reviews quite separately from performance reviews and use the ratings purely as a means of indicating pay increases. The ratings can simply signal an exceptional, above average, average or below average increase or no increase at all.
The problem with this approach is ensuring that pay decisions are properly and fairly linked to performance; it is, after all, a process of paying according to performance and not according to managerial whim. It is necessary to emphasize to managers that there should be a proper read-across from their performance review and they should be required to justify their recommended pay increases on this basis.
Forced Choice Distribution Guidelines
These, as the name implies, indicate the way in which different performance ratings and awards should be distributed among employees by defining the percentage who should be rated at each level.
This distribution would produce an average award of about 5 per cent. It is based on the normal distribution and this could be challenged as being an unjustifiable assumption. It is certainly one that has attracted a lot of criticism when exposed in PRP evaluations. Intelligence may be distributed normally in large populations (although even that is not universally accepted) but there is no reason for assuming that the distribution of people according to the way in which they apply their intelligence follows the same pattern. In any case, can anyone be confident that the population of any single organization, let alone a department within that organization, conforms to this shape?
In recognition of this situation, organizations often skew their recommended distribution by increasing the proportion at higher levels on the assumption, which may or may not be correct, that they employ higher than average people. Another approach, possibly with more justification, is to avoid forcing ratings into a nil award category and simply indicate that the lowest rating category should apply to, say, 10 per cent of the population. The awards in that category can be 3 per cent for developing or below average employees while ineffective employees should get nothing. The distribution between the two categories would not be forced.
Forced distribution provides the most rigid guidelines and is the easiest to control if the objective is to achieve the greatest degree of conformity. But we cannot favour an approach which puts managers in straitjackets and ducks the issue of managing diversity, which is a challenge to which those responsible for reward management policies have to respond positively.
Performance Matrices
Performance matrices, can be used to define performance-related increases according to ratings and position in the pay range. Control can be exercised over performance review costs by analysing the distribution of ratings first (usually with the help of a computer) and then adjusting the figures in the matrix to ensure that the increase to the payroll would be within the budget. Software is available which can adopt an iterative or 'what if' approach to calculating the cost implications of different configurations of the matrix in the shape of variations in the amount and distribution of awards and/or variations in rating distributions.
Ranking
This is a form of forced distribution. Managers are asked to rank staff in comparable categories in order of merit (this approach is often associated with an old-fashioned system of merit rating which allocates points according to the assessed level of merit). The rank order is divided into groups and the percentage increase is dependent on the group in which individuals are placed. Thus someone in the top 10 per cent of the rank order might get a 10 per cent increase while someone in the next 10 per cent might get a 7 per cent increase and so on.
Pay Modelling
The use of software packages for modelling pay systems has enabled organizations such as government agencies and insurance companies with formal pay structures and performance or merit rating procedures to relate pay increases precisely to the ratings they use.
Choice of Method
The choice between these methods depends on the degree to which the organization believes that the benefits of uniformity and consistency are more important than the benefits of giving a reasonable degree of choice to line managers. It is a matter of opinion. But as we have made plain earlier, our view is that forced distribution systems, if they are operated rigidly (and if that is not the case, the process can hardly be called one of forced distribution), go too far in the direction of constraining the rightful responsibility of managers in this important area. It is better to produce guidelines on appropriate increases for different ratings which can be varied at the discretion of managers as long as (a) total increases are within the pay review budget, (b) an upper limit for increases is not exceeded unless the circumstances are exceptional, in which case the proposed increase has to be justified, and(c) the distribution of awards looks sensible overall, ie it is not skewed unreasonably in either direction.
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