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performance-related paya PAY system where part of an employee's pay is based on his or her performance. It is based on the principle, common to all PAYMENT BY RESULTS, that the opportunity to increase pay will act as an incentive to employees to work harder or more productively. At its simplest, performance-related pay may take the form of an annual cash bonus based on a simple subjective assessment of employee performance over the previous year. Most large organizations take a more systematic approach and attempt to base performance pay on more objective criteria. One approach, often used with clerical staff, is to observe employee behaviour, e.g. the number of telephone calls answered within a specified time period. A more common approach is based on systematic PERFORMANCE APPRAISAL. Typically a set of objectives will be agreed between the employee and the manager: the employee's achievement of these will be reviewed a year later, and an assessment made of his or her performance. Often this is expressed on a scale ranging from ‘very good’ to ‘very unsatisfactory’ (or similar) known as a merit rating. The performance pay is attached to the merit rating. The resulting payment may be an annual bonus, a percentage addition to monthly salary, or an extra increment. This payment may be made in addition to an annual cost of living pay increase or in place of it. Those deemed to be performing badly may be denied not just the performance supplement but also a cost of living increase.
The use of performance pay has been increasing in recent years, especially in the public sector (see CITIZENS'CHARTER) and particularly amongst white-collar and managerial employees. In most cases, however, it forms a relatively small portion of total pay. It has been associated with moves towards limiting the involvement of trade unions in pay determination, and is often introduced hand in hand with PERSONAL CONTRACTS. It is often criticized on the ground that good performers do not need financial incentives whilst financial penalties demotivate rather than incentivize poor performers. In any case poor performance may be due to factors other than lack of commitment or ability in individual employees. A further problem with performance pay systems is their tendency to encourage DISCRIMINATION against female employees and those from ethnic minorities.