by Lua Leggett

Contribution-related pay

This provides a basis for making pay decisions that are related to assessments of both outcomes of the work carried out by individuals and also inputs, in terms of the personal levels of competence that have influenced these outcomes. This is sometimes seen as taking the best of performance-related pay and competency-related pay.

Giving credit where credit is due is a very rewarding habit to form. Its rewards are inestimable.

Loretta Young (American Actress, 1913-2000)

It focuses on what the employee is there to do: to contribute their skill and efforts to the achievement of a purpose. Contribution-related pay is an holistic approach, taking account of all aspects of a person’s performance in accordance with the formula ‘performance means both behaviours and results’.

Behaviours emanate from the performer and transform performance from an abstract idea into action. Behaviours are outcomes in their own right – the product of mental, emotional and physical effort applied to tasks - and can be judged apart from the actual results themselves.

Contribution-related pay takes account of both past successes and future potential.

Contribution pay model example:

Basic approaches

There are several basic approaches to deciding contribution awards:

  1. Matrix formula

Pay awards are governed by assessments of performance and competency; the amount is determined by a pay matrix and is somewhat mechanistic.

  1. Separate consolidated increases and bonuses

Output is the only factor that governs cash bonuses, but competency is the major component in determining base pay, on the grounds that the latter is paid for what people are capable of doing while the former rewards them for what they achieve.

  1. Relate consolidated increases to competence up to a reference point and then pay cash bonuses for exceptional performance. This is a version of the second approach, its main features being
  • A ‘reference point’ rate of pay is determined within each grade, band or level that includes jobs of broadly equal size
  • The reference point is defined as the rate of pay for a person in a job who is highly competent, in other words, fully competent in all aspects of the job and therefore achieving high levels of performance
  • The reference point takes account of both internal relativities and market rates
  • The level of comparison for market rates is in accordance with the pay policy of the organisation – this might be set above the median (for example, in the upper quartile) to ensure that the required high-quality staff can be attracted and retained
  • The reference point is the maximum level of consolidated pay a high performer can expect to attain
  • A minimum level of pay for each grade is determined and progression to the reference point depends upon achieving defined levels of competence; there may be three or four levels
  • There is scope to reward those who perform exceptionally well with a re-earnable cash bonus, which could be consolidated if the level of exceptional performance is sustained over two to three years, up to a maximum level defined for the grade.
  1. Rewards as either consolidated increases or bonuses

In this approach, performers can earn a mix of base pay increase and bonus, which varies according to their position in the pay range. However, in the example shown below all outstanding performers receive a payment of ten per cent of their base pay.

Position in range High – expert Bonus 0% 2% 3% 6% 8%
Base pay 0% 1% 2% 2% 2%
Mid – competent market rate Bonus 0% 1% 2% 4% 6%
Base pay 0% 2% 3% 4% 4%
Low – learning Bonus 0% 0% 0% 1% 2%
Base pay 0% 3% 6% 7% 8%
      U S G E O

Competency assessment:

U = unsatisfactory, S = satisfactory, G = good, E = excellent, O = outstanding

With this type of system in place, line managers will not have to pass on the difficult message to outstanding individuals who are high in their pay range that they would be getting a smaller increase, in spite of their contribution (as can typically happen in a performance-related system).

Here, the higher up the range individuals are, the greater the proportion of their increase that is payable as a bonus. So those high in the range, assessed as outstanding individuals, get eight per cent as bonus and two per cent as base pay, while individuals assessed as outstanding who are low in the range and below market rates get an eight per cent addition to base pay and a two per cent bonus. This is much more flexible and therefore much easier for line managers to communicate. The reward is the same, but it attends to market rate analysis, while anomalies of start date, term in the role and experience are all reflected in the pay model.

Readiness for contribution pay

There are ten simple questions you can ask to test your readiness for contribution pay:

  1. Is it believed that contribution pay will benefit the organisation in the sense of enhancing its ability to achieve strategic goals?
  2. Are there valid and reliable means of measuring performance or contribution?
  3. Is there a competency framework and are there methods of assessing levels of competence objectively (or could such a framework be readily developed)?
  4. Are there effective performance management processes, which line managers believe in and carry out conscientiously?
  5. Are line managers willing to assess contribution and are they capable of doing so?
  6. Are line managers capable of making and communicating contribution pay decisions?
  7. Is the HR function capable of providing advice and guidance to line managers in managing contribution pay?
  8. Can procedures be developed to ensure fairness and consistency in assessments and pay decisions?
  9. Are employees and trade unions willing to accept the scheme?
  10. Do employees trust management to deliver the deal fairly and objectively?