competency
competency
standard yet
standards
requirements
Outstanding
-----
8%
10%
Very effective
-----
6%
7%
Effective
-----
4%
5%
Developing
3%
-----
-----
Ineligible
-----
-----
-----
Percentage of pay increase
Contribution-related pay Matrix - Adapted from: Michael Armstrong, (2010).
Threshold payments
This approach is characterized by the identification within a pay band or spine of a level
or threshold of pay above which pay increases have to be justified on the grounds of
pre-identified levels of performance and competence.
Whether within a pay band in order to avert pay drifts, these assessments should be
carried out in any case, this approach could reveal to be more valuable and effective
within pay spines where pay increases below the pre-set threshold level are granted on
the basis of length of service, whilst pay increases above the threshold level are offered
only against the assessment of individual performance and competency standards. Under
this scheme, pay increases are offered to individuals only whether the assessment of
their performance and competency are considered satisfactory and most of all meeting
the pre-identified requirements.
Having recourse to this approach can reveal to be particularly effective when pay grades
are characterized by large pay spans, enabling as such managers to more accurately
control their direct reports pay progression (Armstrong, 2010).
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Variable reward schemes
Contribution-related pay increments
Threshold
Service-related pay increments
£/$/€
Spine threshold in a contribution-related pay scheme
(Source: Armstrong, 2010)
Being based on the assessment of individual contribution, that is, a combination of
competence and performance, this method to base pay determination should help
employers to let feel individuals that the pay scheme executed within the business is fair.
Notwithstanding, the scheme cannot be by any means considered as flawless in that
performance and competency will be in any case the object of the firm’s management
evaluation and assessment. This could contribute to jeopardize the overall success of the
scheme. Whether decisions made by managers would be in fact biased this would
inevitably lead to pay drifts and to employees vigorously rejecting the scheme.
2 to 2 methods
Separate consolidated increases and bonuses
This can be considered the most traditional approach in terms of linking performance
and development to fixed and variable pay. Upon assessment of individual performance
and level of competency, whether these are both considered meeting the employer
expectations, base pay increases will be offered on the basis of the individual
competency assessment, whereas a cash bonus on the basis of the assessment of the
individual output.
Table 42 – Separate consolidated increases and bonuses
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Variable reward schemes
Consolidated increases based on competency up to a reference point and then cash
payments for outstanding performance
The main feature of this approach is that it considers pay ranges as divided into two
different sections. In the first section of a pay band are included consolidated pay
increases, which are associated with the level of competency gained by individuals,
whilst in the second section of the band or grade are included the levels of cash bonuses
that can be paid to individuals performing well above the required standard (Armstrong,
2010).
The dividing point of the band is represented by the reference point, which coincides
with the range of salary offered by the employer to the fully competent employees in
each grade. This level of pay should be clearly determined keeping into due
consideration the worthiness of the role vis-à-vis the others (internal relativities) on the
one hand and the current external market rates on the other hand.
Progression throughout the first part of the pay band is based on the competency gained
by an individual, whereas the level of additional cash offered by employers to
outstanding performers exclusively on the employee output. Albeit cash bonuses need to
be re-earned to be repeated, employers can also decide to consolidate cash bonus
payments, or part of them, into base pay whether individual outstanding performance is
repeated for a pre-set number of consecutive years.
Table 43 – Consolidated increases based on competency up to a reference point and then cash
payments for outstanding performance
354
Variable reward schemes
Reward as a combination of consolidated base pay increase and bonus
This approach can be considered as a more evolved and to some degree complex version
of the matrix scheme in that the assessment of performance and competency in this
case leads both to the payment of a bonus and to an increase in the level of base pay of
the individuals concerned.
Consolidated pay and bonus payment decisions are usually made by means of a matrix
similar to that illustrated in the example below.
Rate of increase
Base pay
0% 1% 2% 2% 2%
Expert
Position
Bonus
0% 2% 3% 5% 8%
in the
Fully
Base pay
0% 2% 3% 4% 8%
pay
competent
Bonus
0% 1% 2% 3% 2%
range
Base pay
0% 2% 5% 6% 7%
Developing Bonus
0% 0% 0% 1% 3%
Competency
U
S
G
E
O
U = unsatisfactory, S = satisfactory, G = good, E = excellent, O = outstanding
Adapted from Michael Armstrong, (2010).
Employers normally offer a higher rate of consolidated base pay increases and a lower, if
any, bonus payment to employees still developing towards the reference point of the
grade, in order to enable these to progress faster in the salary range and be paid as
their colleagues as shortly as possible. The intent of this mechanism is to clearly retain
individuals during their development process.
Expert contribution, in contrast, is mainly rewarded by means of cash bonuses which,
whether outstanding performance should be sustained over a pre-identified number of
consecutive years, can also be consolidated, habitually in part, into base pay. This choice
is justified by the circumstance that employees whose level of expertise is very high are
already receiving the highest component of base pay identified for a fully competent
individual in the grade, that is, the grade reference point pay.
Holistic assessment
This method of pay determination definitely represents an overarching and at the same
time difficult, arguably the most difficult, method to execute.
According to this approach decisions about consolidated pay increases and cash bonus
payments are made considering a whole range of factors; amongst these: the direct
level of contribution made by each individual vis-à-vis their colleagues, the market rates,
the potential expressed by the individual and the need to retain the employee.
But this is not all, so wide-ranging and comprehensive is the extent of this method
insofar as including the evaluation of the contribution not only of what an individual
355
Variable reward schemes
brings to his/her team, but also of how this contribution has helped or can help other
team members to eventually develop themselves.
The assessment of all of these components has to be carried out against the level of pay
received by the team colleagues and considering the external market rates; implying
that, whether required, all of the necessary adjustments in the individual pay have to be
made.
For thorough and comprehensive this approach appears to be, it is not however immune
from problems. All of the assessment activities outlined above need to be carried out by
line managers who are in the position to observe employees’ behaviour and the way
these perform in the different circumstances. This clearly entails that managers need to
be well trained to properly assess individual behaviour and activities and that their
decisions need to be made without any type of influence, remaining therefore completely
unbiased.
The support of the HR function to help managers to objectively and appropriately assess
individual performance and competency may reveal to be paramount.
Inasmuch as when introducing and executing reward plans communication is invariably
important, the significance of clear communication when executing this type of scheme
is critical. In this case communication is important not only to outline the mechanism of
the scheme, but also to explain to each employee the reason behind the manager
decisions about his/her pay (Armstrong, 2010).
Formulating the scheme policy
In order to avert many of the likely pitfalls associated with the introduction and
execution of this scheme, reward professionals should put in writing and make available
to staff a policy clearly explaining the way the scheme is operated, administered and
implemented by the business management.
After a summation of the mechanism and characteristic of the business grade structure
outlining the way grades and pay progression are managed, the policy should clarify
employees the underpinning idea on the basis of which the scheme has been essentially
built up, the definition of contribution and what the employer exactly means by that. A
paragraph clearly stating that the main aim of the scheme is that to recognize and
reward sustained excellence, outstanding or additional performance, exceptional
personal contribution, evidence of particular success, effectiveness and merit is,
therefore, paramount. Providing one or more examples for each entry would definitely be
ideal.
In the event the scheme is operated in combination with other reward plans, it would
also be appropriate outlining the difference between these and the different aims the
scheme is intended at attaining vis-à-vis the others.
356
Variable reward schemes
Policies need to invariably contain explanation of the circumstance that, according to the
scheme mechanism, in order to individual progress towards the highest level of fixed pay
within their grade these have to perform at outstanding level for a given number of
consecutive years, stressing the fact that this is not however in antithesis with career
advancement and promotions. Policies need in fact to clearly explain that contribution-
related awards are not provided in lieu of promotions, but that the employer has
recourse to this form of rewards to recognize individuals performing beyond the average
standards. Career advancement and promotions remains a prerogative of individuals
who are prompted to carry out activities and tasks which are typical of the upper grade
profile.
A terminology section explaining the meaning of the words used in the policy, whose
interpretation may not be obvious or immediate, would definitely help individuals to
genuinely understand the mechanism of the scheme and avoid employees misreading
the policy.
Whether the term “sustained” for instance is used in the policy, it has to be explained
what it is intended by this, namely the indication of the intended number of years or
months to which it refers. The likely use of words like performance, results, output,
behaviour, etc., need to be explained as well. For the description of the words used in
the policy, reward specialists just need to refer to what and how the employer is actually
expected individuals will perform.
A brief description of the overall procedure used to assess awards eligibility and of the
process used to make decisions should also clearly be included in the policy, as well as
the definition of the panel in charge of making the award decisions.
Other important elements which need to be included in the policy concern: the frequency
of payments, an outline of the process used to eventually confer consolidated base pay
increases and a description of the appeal procedure, whether applicable.
The policy should also contain the details of the organization HR reward manager or
specialists knowledgeable about the subject and to whom employees can eventually
refer to have further explanations and elucidations.
Conclusions on contribution-related pay
Unquestionably, contribution-related pay represents a very fascinating approach to pay
determination in that according to this overarching approach pay decisions are made
taking into account both past performance and the future likely enhanced output which
should be produced by an individual thanks to his/her capability of expanding and using
new competencies.
Whether employers introducing either performance-related pay or competency-related
pay or skills-related pay may have one problem, that is, that to assess and measure
either performance, competency or skills, employers introducing contribution-related pay
are clearly prompted to face at least two big issues, namely measuring and assessing
357
Variable reward schemes
both competency and performance. This is clearly everything but a straightforward feat
to attain.
Albeit this should not deter employers to embrace this method, whether considered
suitable for their organization, extreme care and caution during the design, development
and execution phases of the scheme can definitely be considered as mandatory
prerequisites. As suggested by Armstrong (2010), the circumstance individuals are
rewarded exactly for the reason these have been recruited, namely to contribute to
organizational success, is obviously a tempting and compelling reason for employers
wanting to introduce this approach, but risks of an inevitable failure are however very
high, especially when employers have opted to have recourse to the holistic approach.
Before introducing the scheme employers should not only ensure that the appropriate
tools and methodologies are made available to the business managers in order to
effectively and properly assess both performance and competency, but also that
managers are properly trained and are truly and genuinely knowledgeable about the
mechanism of the scheme.
This approach is definitely very demanding and especially in medium- to big-sized firms
its introduction has to be managed with extra care, possibly involving managers and
employee representatives in the development of the scheme. The organization of focus
groups can also enable employers to gather employee suggestions and perceptions on
the one hand and offer managers the opportunity to explain employees the intended
mechanism of the new scheme on the other hand.
Employers wanting to embrace this approach should never be hurried into its
implementation and should always dedicate and allow the necessary time to effectively
and properly design and execute it (Armstrong, 2010).
358
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