8. Performance related pay

Equal pay in practice checklist 8

What is performance related pay?

Performance related pay is used by employers to reward employees on an individual and team basis. It is used in parts of both the public and private sectors where it is often perceived to be a way of giving an incentive to those at the top of their pay band or as a means of progressing employees through the pay system. Pay increases are generally linked to individual or team performance measured against targets or objective criteria. Contribution pay is a form of performance related pay.

How do you find out if there is a problem?

Performance pay systems are designed to reward individuals differently for doing the same job so inequality in payments is therefore built into the system. The difference between performance pay and automatic progression is that with individual or team reward there is an unavoidable element of discretion and subjectivity in assessing performance, and therefore a higher risk of bias. If an equal pay claim were to arise you would have to explain the difference in pay by reference to reasons that had nothing to do with sex or any other protected ground.

You can find out if there is a problem in your organisation by looking at the amount you paid in performance related pay over the past year to men and women, to people from different ethnic minority groups, to people who are disabled and not disabled, to full-time workers compared to part-time workers.

You will need to look at each grade and the distribution of performance assessments and amounts of pay within each grade. If you find that there is a tendency for people from one group to be favoured over another, then you need to find out why this happening and whether it can be objectively justified.

Organisations that use performance related pay systems sometimes incorporate it as part of a grade system and/or have 'market rate' or other progression elements as well. This means that, even for the same performance rating, rewards to people performing equal work may differ. Employees may find that type of pay system confusing and not understand how the amount they are paid is arrived at. Pay elements and awards should be broken down and each component looked at separately.

An example to illustrate the issue of performance related pay

Simon and Shilah both started work for Company E 's call centre as customer services operators. They were both placed on the same starting pay. Their annual increase was based on a fixed amount on basic pay and a performance element of a small percentage of pay depending on the assessment of a supervisor. Their supervisor was a white woman who had been trained in the performance appraisal system but, as she had so many staff to assess in a short period of time, was not as rigorous as she could have been.

Although both Simon and Shilah dealt with a similar number of callers and there was little objective data to differentiate their performance, the supervisor noticed that Simon spoke up more in team meetings and sometimes stayed late, whereas Shilah left promptly to get home to her family. Although this did not affect their performance or contribution, the supervisor perceived Simon as the better performer. Thus Simon received the higher pay award.

What lies behind the differences?

An annual appraisal usually determines the performance rating that governs the amount of performance related pay. This means that the line manager, or whoever does the appraisal, is key to ensuring pay discrimination does not occur. It is important that all those undertaking appraisals should have been trained and that they have access to advice on the performance system and on the avoidance of bias.

What else do you need to be aware of?

It is important to consider the objectives of the performance scheme and to aim for consistency in approach across the organisation as a whole. You also need to be aware of how performance payments affect employees from different protected groups doing equal work. This means that you need to monitor both the payments and the process.

Some organisations set quotas for the number of ‘outstanding’ performance awards. It may be easier for people on higher grades to achieve outstanding performance because they have more control over their work and more opportunity to ‘shine’. If there are more men than women in higher grades, and more women in lower grades – that could result in bias in the operation of the system. An alternative could be to set an ‘outstanding’ quota within each grade.

Action - what you can do to put things right

  • Look across the company at the different performance assessments and payments, and who has access to performance pay. This includes looking at each grade and the distribution of assessments and of payments within each grade.
  • Ensure the criteria for rewarding performance are clearly defined and achievable and that targets are fair across departments.
  • Look to link the performance to a quantifiable target like sales, which can be seen as objective. Softer skills like people management - which may be primarily done by women - may be harder to quantify but they should not be excluded from access to performance pay.
  • Ensure training in equal opportunities and the avoidance of bias for all involved in appraisals.
  • Limit the element of discretion in appraisal.
  • Explain the system to employees so everyone understands the system.
  • Consider asking a group of managers to review nominations together and to reach consensus on performance assessments – particularly at the highest and lowest level thereby reducing risk of individual bias and promoting consistency and fairness.

Consider whether your performance pay scheme is contributing to the problem

Organisations often have different performance schemes for different groups. It can sometimes be hard to compare the performance of different groups. How many systems do you have? Is this justifiable?

Make sure that decisions on pay are properly documented.

It makes good business sense for employees to understand why they are paid as they are, but if you should ever be challenged in an employment tribunal, documentation will be essential. Properly documented decisions will enable you to explain your reasoning. Where performance related pay is concerned this means that you will need not only records of the payments, but also of the evidence used to determine the level and amount of the payments e.g. performance assessments, records of targets achieved.

Transparency is a key feature of tackling equal pay problems.

A transparent pay system is one where employees understand not only their rate of pay but also the components of their individual pay packets. The rationale for performance related payments is often unclear, yet a transparent pay system avoids uncertainty and perceptions of unfairness and reduces the possibility of individual claims. An example of good practice would be managers keep a record of reasons for the awards they give, and that human resources or senior managers should monitor these records. The records can be used to give individual feedback as well as to defend any suggestion of gender bias.

About the Equal pay in practice checklists

Whilst every effort has been made to ensure that the advice given in this note is accurate, only the courts or tribunals can give authoritative interpretations of the law.

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