The Pros and Cons of Performance-Related Pay


There are a lot of ways you can offer pay raises to your employees.

However, one of the most common questions is whether you should only offer employees more money based on their performance.

The concept of a performance-related pay system is to reward an individual based on their performance against a set of pre-agreed objectives.

While it may sound like a great way of increasing competition among the ranks, what about the jobs that aren't as easy to measure ' such as a care assistant or IT technician?

Does performance-related pay work? What are the alternatives?

To give you a better idea of deciding what's best for your business, here's a complete guide to performance-related pay.

The pros of performance-related pay

First and foremost, there's a reason why performance-related pay still remains a popular method of assessing an employee's pay.

One of the main ones being the positive impact it can have on productivity rates.

There's no arguing that dangling a carrot in front of your employees will get most of them working harder.

After all, everyone would like to earn a few more quid every month.

As a business, this naturally creates a hard-working environment, with efficiency levels going through the roof.

Performance-related pay can also have a positive effect on loyalty too, especially when pay raises are determined via a team's performance, rather than an individual's.

Establishing a financial tie to the business is a compelling reason for individuals to commit for a longer period.

In fact, according to a study by Genesis Associates, 85% of workers said they were motivated by monetary incentives.

However, this was only in the short-term, which leads me to the cons of performance-related pay.

The cons of performance-related pay

Performance-related pay might enhance productivity, efficiency and loyalty rates, but only in the short-term.

A good example of this is when a business offers their employees an annual bonus and a handful leave immediately after receiving it.

Offering more money for higher performers is only a quick-fix.

It won't take long for employees to source another job that pays more and provides a healthier working environment.

Nowadays, employees care about their well-being and want to enjoy what they do.

If they constantly feel pressured to get more sales or do a task quicker, they'll eventually break.

It can also have a damning effect on their quality of work too, with employees more inclined to prioritise quantity over quality.

There's a high-probability that performance-related pay will bring a toxic nature into your business too.

You see, if you choose to assess on an individual's performance alone, they'll start doing whatever it takes to get one over on their colleague to be recognised.

Suddenly, you'll be trying to manage a 'dog eat dog' room of people, where everyone is out for themselves.

From a management point of view, handling this kind of environment and knowing a lot of people are only there because of the financial ties is very uninspiring.  

The key to success is to operate a business where every professionals is invested in working collectively to help reach the end goal.

As I mentioned earlier, there are some industries where performance-related pay is often impossible to measure and forecast.

For example, if you're a retailer and your January sales are down this year, you can't exactly promise a set bonus or pay rise without putting your business in danger.

While trying to quantify the success of a teacher or nurse in exchange for a pay rise is almost impossible as well.

There's also a strong correlation between high risk-taking and business failure when management are working on a performance-related pay scheme.

And what about those employees who fall ill?

Mental health is an epidemic at the moment, so, are you not going to offer them the pay rise they deserve due to their absence?

This could easily contribute to the presenteesim problem, where employees feel pressured to work longer and through sickness.

Other alternatives to assessing pay raises

Instead of opting for a performance-related pay scheme, you should think about employing different ways of assessing an individual's worth.

For example:

  • If your employee has impeccable customer service skills.
  • If your employee is loyal to your company and works hard.
  • If your employee adds value to your business and demonstrates a great attitude towards their work.
  • If your employee leads by example, when they're not a manager.
  • If your employee shows progression.
  • If your employee is going to leave.

Removing the expectations of a performance-related pay scheme will allow your employees to progress naturally.

If they're not interested in learning more and working hard, then so be it.

But if they're doing everything they can to make your business a success, they deserve to be rewarded.

To remove any bias from the decisions, you can operate a nomination scheme, whereby, management and colleagues can vote for someone if they deserve a pay rise.

It's diplomatic and promotes a strong team environment.


At the end of the day, it's vital to remember that money isn't the be-all and end-all for employees.

Yes, it'll keep them happy and working super hard in the short-term.

But if you want to play the long game, you need to favour the cons over the pros and look at the bigger picture.

There are many reasons to reward a professional and several ways to do it.

Don't underestimate the power of recognition and offering the right work benefits.

Bear these things in mind and you'll create a winning work environment that's built for long-term success.

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