Should we link Salary Administration and Performance Management?

Leaders dislike conducting performance development and review (PDR) discussions almost as much as their direct reports dislike the prospect of being ‘appraised’.

Yet in theory, there is no real need for this tension. 

Decoupling salary administration from performance management can provide clarity and focus to each process.

The PDR should be a positive, future-focused discussion for the benefit of everyone.

Where the PDR often comes unstuck is in its seemingly unavoidable association with remuneration. One of the first questions that arises is, “How will this PDR discussion affect my CPI increase, salary rise or bonus?”

Let’s try to unpack this conundrum by examining the nature and decision-making purpose of both the salary administration process and the PDR process.

Salary Administration

Salary administration is a current and backward-looking activity. 

Salary reviews look at your current rate of pay and then look back at your performance over the previous 12 months.

Any increase in your salary is done in recognition of past performance, not future performance.

It might well be hoped that the new salary you are offered is in some way motivating for you to continue with the positive aspects of your work in the future, but there are no guarantees.

Even more importantly, the pot of money that is available to pay you an increase is influenced by a range of factors, many of which have nothing to do with your performance.

The most vivid example of this problem occurred during the COVID pandemic. Many leaders in organisations worked incredibly hard during this period and did great work under considerable duress.

But when it came to salary review time, organisations were not able to offer pay rises; in fact, many workers had their wages reduced, because the organisation was in dire financial circumstances. The link between the volume and quality of the work and the resulting salary was non-existent. 

Another consideration is the requirement to distribute the finite pot of money available for salaries across many workers.

Will it be a blanket CPI increase for everyone, or will we differentiate the increases based on the achievement of pre-determined key result areas?

Performance Development and Review

PDR is a current and forward-looking activity.

In contrast to salary administration, past performance is almost irrelevant to the PDR process.

The priority often centres around, “How is this person performing today and what can we do to create an environment that enables them to grow and perform better in the future?” 

Many factors will be influencing the individual’s performance, including workplace relationships, availability of resources, appropriate levels of feedback, clarity on their role, personal health, pressures at home and many more.

One factor that is unlikely to be overly influential is the person’s salary.

Money is likely to be a hygiene factor rather than a positive motivator of performance. We won’t work without being paid, but our discretionary effort, our commitment and our relationships are unlikely to change over the longer term based on the annual pay rise being 1 per cent higher or lower.

With this understanding, the PDR discussion can be much more positive, including questions like - “How are you going?” “What is helping or hindering you in your day-to-day work?” “What can I do to support you more?” “In what areas would you like to develop further?”

The other significant way in which organisations can decouple the salary discussion from the PDR discussion is in their frequency.

Typically, decisions on salary reviews are taken annually, around the budget review period. Ideally, PDR discussions should happen much more frequently with a blend of both formal documented discussions and more informal nudges to ensure everyone is aligned, given feedback and feeling supported.

With increased frequency, the PDR is less threatening, more likely to be a two-way discussion, and can be delivered in short, sharp bursts.

Separating the two

Professional development and review conversations can be highly rewarding and valuable to both the leader and their direct report.

Given that so many aspects of the salary administration conversation are outside of the leader’s control, they can often be strained and uncomfortable.

Perhaps it’s time to stop sending mixed messages and put some space between the two conversations.