Many organizations are contemplating whether salaries should be tied to performance reviews. The foundation of those who agree with the notion lies in the motivation of employees.

Proponents of the concept insist that the approach helps to motivate employees and is a form of healthy competition within the organization. In addition, it is a way to increase accountability among individual workers and team leaders.

On the other hand, some see tying salaries to performance reviews as a gateway to a toxic work environment where employees will not only struggle to perform tasks well but fail. Opponents argue that the concept can encourage employees but only to focus on short-term goals, which, unfortunately, creates a subjective and biased view of working.

So what is the right approach? The information below offers insight into whether salaries should be tied to reviews. 

How Do Companies Tie Salaries to Reviews?

Businesses that tie salaries to reviews create a performance-based compensation system. The system sees the reward of employees for their contributions to the company. Properly implementing the concept involves creating clear performance metrics and goals that align with the employee's duties and the company's objectives.

The review process for such a setup is transparent, consistent, and based on the objectives and goals. Managers or team leaders provide regular feedback throughout the set timeline for achieving said goals. The purpose of these reviews is to provide constructive feedback to help the employee improve.

In the end, the results of the performance reviews determine bonuses, salary increases, benefits, and other forms of compensation. Those who exceed are rewarded with higher salaries, while those who underperform receive lower proportions or none. 

Benefits Of Tying Salaries To Performance Reviews

There are multiple benefits to tying performance reviews to salaries. Some of the pros include:

Employee Retention 

Employees who feel that their performance is recognized and rewarded are likelier to remain at the company. Therefore, companies can enjoy a more stable workforce and improve retention rates. 

Motivation 

Employees can be motivated to perform better when there is a chance to earn a higher income based on reviews. It can translate to better productivity, higher employee satisfaction due to salary increases, and improved work quality. 

Better Communication

Performance reviews allow employees and supervisors to be honest and open about communication. By basing salaries on checks, both parties will have more opportunities for a candid conversation where management can discover employee challenges and employees can develop a better understanding of management's expectations.

Fairness

Linking salaries and performance reviews can be a way to determine compensation reasonably. It eliminates potential biases and rewards employees based on their contributions to the company. From this perspective, reviews-based salaries are a gateway to an equitable work environment where performance and hard work are rewarded.

Clear Expectations

When management sets goals for the employee, it does two things. First, it is an extensive outline of the employee's duties in their role. Secondly, it is a list of clear expectations from management. The worker knows precisely what is expected of them so they can develop strategies to achieve said goals.

Cons Of Tying Salaries To Performance Reviews

Linking salaries and performance reviews similarly has significant shortcomings, including:

A Burden to the Administration

Surprisingly, basing salaries on performance reviews can challenge HR departments and managers. HR professionals must conduct reviews, track performance, and make salary adjustments after each timeline. It can be exhausting and time-consuming.

Subjectivity

Unfortunately, even with set goals, performance reviews can often be subjective. Different managers have different standards for measuring the achievement of goals. Therefore, subjectivity can lead to inconsistencies and create a sense of unfairness in salary decisions. Similarly, management may develop a bias that can affect the decision. 

Short-Term Focus

Linking salaries to performance may only make employees focus on short-term objectives. Therefore, they are less likely to pursue long-term initiatives that could benefit career development and the company's future success. 

Demotivation

Some employees will become demotivated and feel undervalued when they receive negative feedback during their performance review, mainly because it is tied to their salary. Demotivation translates to lower productivity due to mental stress and low morale. 

Unanticipated Issues

External factors, unexpected shifts in the industries, and even internal circumstances could affect an employee's performance within the set timeline. Unfortunately, it would mean an unfair salary adjustment if compensation is tied strictly to performance reviews. 

Alternatives To Tying Salaries To Performance Reviews

Instead of basing salaries on reviews, employers can do the following:

Market-Based Pay

It is when employers base salaries on industry standards. Employees receive pay per the going rate for similar jobs in the market. Based on this model, surveys and job postings can help HR determine the proper compensation for various positions. 

Fixed Salary Increases

Employers can also develop fixed annual or bi-annual salary increases unrelated to performance. It is an excellent way to relieve performance review-related stress on HR managers and employees. In addition, it gives employees a predictable pay increase that can assist in financial planning.

Skill-based pay

Skill-based compensation rewards workers on their skills and knowledge instead of their performance. The employee's level of expertise, determined through assessment and certification, defines the kind of bonuses and compensation they receive. Better skills mean a higher salary. 

Profit-sharing

Profit-sharing bases salaries or bonuses on the overall performance of the company. Here, managers would give employees a percentage of the company's profits as an annual or bi-annual bonus. Managers can share the profits equally among employees or base it on job level, tenure, skills, and other factors. 

Merit Pay

Finally, if employers must tie performance to salaries, they should set it to specific milestones or triumphs. Managers can reward employees for particular achievements which the employee and the supervisor can develop, with a realistic timeline. 

Final Thoughts 

Tying salaries to reviews has some benefits and shortcomings. Therefore, managers should consider their employees, industry, and the work environment they want to foster before choosing or refusing the approach.

Undecided employers would benefit from the various alternatives to basing salaries on performance reviews. The final decision should align with the organization's goals, values, and culture.

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