How do you handle performance pay if annual appraisals are dismantled?

Performance-based pay, often built into annual appraisals, is an ingrained problem because of the assumption that it’s a good idea. The decades of social and behavioural science that insist annual appraisals are a bad idea is equalled by science showing performance and incentivised pay to be counterproductive.

As with annual appraisals, we need to consider a dramatically different approach to that of the status quo. Thankfully, this is finally being recognised in the corporate arena. With books like Daniel Pink’s Drive: The Surprising Truth About What Motivates Us, challenging the long-held assumption that we are motivated by money, and becoming a New York Times and Wall Street Journal bestseller in the process.

What to do?

Firstly, anything that affects how people are paid is a very sensitive area. We recommend only tackling this issue once people have digested the need for change.

Once ready to consider a change, the primary step is to separate remuneration from the other functions of the annual appraisals whilst your organisation decides on a better way forward. This way, you will end up with a stand-alone functionality for evaluating pay. Once you have this stand-alone function, it is clear to everyone what that is being used for. Currently, the standard multi-purpose appraisal is weakened with pay evaluation being in the mix: for example, you can’t expect open conversation at the same time as a pay evaluation.

“No controlled study has ever found a long-term enhancement in the quality of people’s work as a result of any kind of reward or incentive program. The bottom line is that any approach that offers a reward for better performance is destined to be ineffective.”

Alfie Kohn, Harvard Business Review