I used to be a great believer in linking performance appraisals with ‘performance pay’ – annual MBO type performance reviews were supposed to drive the pay awards.
Not any more. At least not for regular employees.
Many working level employees cannot see how their ‘goals’ relate to the overall organization goals and so the performance bonus is often seen as arbitrary. Instead of ‘base salary plus performance pay’ employees’ salaries should be entire, with no contingency component; salaries should equitably reflect the totality of their responsibilities and competencies, and compared for market competitiveness with total comp (salary plus bonuses) paid by others. Perhaps some sort of progression pay for the first year or two in the job is needed to allow for the initial learning curve, but any other pay increase system is misguided. Contingency pay is cynical, even fraudulent.
Extrinsic reward ‘incentives’ have been proven time and again not to motivate performance and behaviour. Instead performance rewards should reinforce intrinsic values – opportunity to utilize their best skills, have responsibility and authority for their own work, be recognized for accomplishment, given opportunity for training, career development and growth – not extrinsic bribes. So linking performance to rewards may be better done through ‘frequent evaluation and review’ rather than the annual performance review ritual followed by performance awards. Through ‘FEAR’ the manager can discover what truly motivates the employee. And it is almost certainly not pay!