How to reward employee performance
It’s that time of year again when all good Managers ponder the question, “Should I reward my employees’ performance with an increase in pay or through a bonus?”
The answer to this age old question lies in the answer of another, much simpler question. Do you want to reward your employees’ good performance in a way that will continue on for the rest of their career with you?
If the answer is yes, then you will want to put your entire budget into increasing their salary. The standard method for doing this is to decide upon a base increase that all employees will get, which usually reflects the current cost of living increase. Then create a continuum of increases that mirrors your performance rating scale.
For example all employees get a 2% increase, while good performers get a 4% increase and excellent performers get a 6% increase.
If however you prefer to reward good performance only in the year that it was obtained, you will want to consider spreading your budget between increases in salary and a bonus based on performance.
In this method you would decide on a standard pay increase which is linked to the cost of living increase for the year, or base the increase in pay on where the employee’s salary is in relation to the current market rate for similar roles. Then you would decide on a bonus amount that is directly related to their performance for that year.
Rewarding performance through an increase in pay is like the gift that keeps on giving. If their performance slips the following year you do not revoke the increase. Nor should you give an additional increase if their performance improves. Instead the employee will continue to receive the higher salary based on their first year’s performance. Whereas if performance is tied to bonus, if their performance drops in the second year their bonus for the second year would be negatively affected and they receive no residual reward for the first year’s good performance.
There is also the hard dollar value difference to consider. Let’s assume that Fred’s salary in 2010 is $50,000 and that his performance remains constant for the next five years. Your practise allows for an amount equal of 5% to be allotted to pay / bonus increases each year. If you tie performance to salary increases and allot the entire 5% each year to an increase in pay it will cost you $16,883 more than if you provided Fred with a 2% salary increase and a 3% bonus each year.
The question you need to answer is from an employee satisfaction and morale perspective which is the most effective method for Fred?
What would you do? Let us know your thoughts.