i

Armstrong's
Handbook of Reward
Management Practice

ii

THIS PAGE IS INTENTIONALLY LEFT BLANK

iii

fourth edition

Armstrong's
Handbook of Reward
Management Practice
Improving performance
through reward
Michael Armstrong

iv

Publishers note
Every possible effort has been made to ensure that the information contained in this book
is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage
occasioned to any person acting, or refraining from action, as a result of the material in this
publication can be accepted by the editor, the publisher or any of the authors.

First published in 2005 as A Handbook of Employee Reward Management Practice by Kogan Page
Limited
Second edition, 2007
Third edition published in 2010 as Armstrongs Handbook of Reward Management Practice
Fourth edition, 2012
Apart from any fair dealing for the purposes of research or private study, or criticism or review, as
permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the
publishers, or in the case of reprographic reproduction in accordance with the terms and licences
issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the
publishers at the undermentioned addresses:
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United Kingdom
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Michael Armstrong, 2005, 2007, 2010, 2012

The right of Michael Armstrong to be identified as the author of this work has been asserted by him in
accordance with the Copyright, Designs and Patents Act 1988.
ISBN
978 0 7494 6647 3
E-ISBN 978 0 7494 6648 0
British Library Cataloguing-in-Publication Data
A CIP record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Armstrong, Michael, 1928
Armstrongs handbook of reward management practice : improving performance through
reward / Michael Armstrong. -- 4th ed.
p. cm.
Includes index.
ISBN 978-0-7494-6647-3 ISBN 978-0-7494-6648-0 1. Incentives in industry.
2. Employee motivation. 3. Compensation management. I. Title.
HF5549.5.I5A668 2012
658.3125dc23
2012019244
Typeset by Graphicraft Limited, Hong Kong
Printed and bound in India by Replika Press Pvt Ltd

Co n t e n t s

Introduction

Pa r t o n e Essentials of reward and performance

management
01

An overview of reward management

Introduction 6
Reward management defined 6
Aims of reward management 6
Reward philosophy 7
Guiding principles 7
The reward system 9
Reward systems in action 13
Contextual factors affecting reward 15
Developments in reward management 19
References 21

02

Performance management

23

Introduction 24
Characteristics of performance management 24
Principles of performance management 25
The performance management cycle 26
Performance and development agreements 27
Performance planning 27
Managing performance throughout the year 28
Reviewing performance 28
Assessing performance 29
Recording the performance agreement and review 33
Web-enabled performance management 36
Performance management as a rewarding process 36
Impact of performance management on performance 36
Line managers and performance management 40
Case studies 41
References 45

vi

Contents

03

Performance and reward

47

Introduction 47
The meaning of performance 48
Influences on performance 49
How does reward impact on performance? 50
Impact of reward on organizational performance 51
References 51

04

Motivation and reward

53

Introduction 54
The process of motivation 54
Types of motivation 54
Instrumentality theory 55
Reinforcement theory 56
Content (needs) theory 56
Process theory 59
How motivation theories affect reward management 63
References 64

05 Engagement and reward

67

Introduction 67
Why engagement is important 71
The factors that influence engagement 71
Enhancing engagement 71
Developing engagement policies through reward 73
Conclusion 74
References 74

06 Talent management and reward

77

Introduction 77
Talent management 78
The contribution of reward and performance management to talent
management 78
References 80

07

Financial rewards

81

Introduction 82
Incentives and rewards 83
The theoretical framework 84
The role of money 84
Views about the importance of pay 85

Contents

Research on the effectiveness of financial rewards 88

Arguments for and against financial rewards 92
Criteria for effectiveness 94
References 97

08 Non-financial rewards

99

Introduction 99
The significance of non-financial rewards 100
Types of non-financial rewards 100
Individual extrinsic rewards 101
Individual intrinsic rewards 102
Collective extrinsic rewards 103
Collective intrinsic rewards 103
References 105

09 Total rewards

107

Introduction 108
Total rewards defined 108
The elements of total rewards 109
The significance of total rewards 110
Benefits of total rewards 110
Models of total rewards 110
Introducing total rewards 113
Total rewards in practice 119
Conclusion 124
References 124

10

International reward

127

Introduction 127
The international scene 128
International reward strategy 129
Guiding principles for international reward 131
Rewards for expatriates 132
References 136

11 The ethical approach to reward and performance

management 137
Introduction 138
Ethical decisions in reward and performance management 138
Why is an ethical approach desirable? 138
Fairness 139
Treating people justly 139

vii

viii

Contents

Resolving ethical dilemmas 142

The ethical role of reward professionals 145
An ethical code of practice for reward and performance management 146
References 146

12 Strategic reward

149

Introduction 149
Strategic reward defined 150
The characteristics of strategic reward 150
Critical evaluation of the concept of strategic reward 150
Reward strategy 152
Case studies 157
References 159

pa r t t wo Base pay management

13

Introduction to base pay management

161
163

Introduction 164
Base pay 164
Base pay management 164
Factors affecting pay levels the conceptual framework 165
Pay determination within organizations 170
Summary of factors affecting pay levels 172
Managing pay 172
Base pay management and performance 172
References 173

14

Job evaluation

175

Introduction 176
Job evaluation defined 176
Aims of job evaluation 176
Achieving the aims 177
Formal job evaluation 177
Informal job evaluation 177
Analytical job evaluation schemes 178
Non-analytical schemes 182
Market pricing 184
Levelling 185
Job analysis for job evaluation 187
Computer-aided job evaluation 188
Choice of approach to job evaluation 190
Developing a point-factor job evaluation scheme 193

Contents

Implement job evaluation 198

Ensuring that the scheme is unbiased 199
References 201

15

Market rate analysis

203

Introduction 204
Aims of market analysis 204
The concept of a market rate 204
Job matching 205
Use of benchmark jobs 206
Sources of market data 206
Interpreting and presenting market rate data 209
Using survey data 209

16

Grade and pay structures

213

Introduction 214
Grade structures 214
Pay structures 215
Guiding principles for grade and pay structures 215
Multi-graded structures 216
Broad-graded structures 219
Broad-banded structures 221
Career-family structures 227
Job-family structures 231
Combined career-/job-family and broad-banded structures 233
Pay spines 233
Unstructured pay systems 235
Spot rates 235
Individual job grades 236
Choice of grade and pay structures 236
Developing a grade and pay structure 239
Career-family structure design 244
Minimizing bias in grade and pay structure design 245
References 246

17 Equal pay

247

Introduction 247
Reasons for unequal pay 248
The Equality Act 2010 250
Defending an equal pay claim 253
Achieving equal pay 255
Risk assessment 256
References 257

ix

Contents

pa r t t h r e e Rewarding and recognizing

performance
18

Merit pay

259

261

Introduction 261
Characteristics of merit pay 262
Method of operation 263
Performance-related pay 264
Competency-related pay 267
Contribution-related pay 269
Overall conclusions on merit pay 272
Developing merit pay schemes 272
References 276

19

Bonus schemes

277

Introduction 277
Bonus schemes defined 278
Aims of bonus schemes 278
Rationale for bonus schemes 279
Criteria for a bonus scheme 280
Types of scheme 281
Designing a bonus scheme 281
Introducing a bonus scheme 285
Earn-back pay 285
Bonus schemes and performance 286
References 287

20 Team pay

289

Introduction 289
Team pay defined 290
Aim of team pay 290
Rationale for team pay 291
How team pay works 291
Requirements for team pay 292
Advantages and disadvantages of team pay 293
Developing team pay 294
NHS case study 294
References 296

xi

21

Rewarding for business performance

297

Introduction 297
Types of schemes 298
Aims 298
Profit-sharing 298
Share ownership schemes 300
Save-as-you-earn schemes 300
Gain-sharing 300
References 302

22

Recognition

303

Introduction 303
Recognition schemes defined 304
Benefits of recognition schemes 304
Principles of recognition 304
Types of recognition 305
Examples of non-cash awards 306
Designing a recognition scheme 307
Examples of recognition schemes 307

pa r t fo u r Rewarding special groups

23 Executive reward

311

313

Introduction 314
Executive pay levels 314
Factors affecting the level and nature of executive rewards 315
Why has executive pay grown so much? 316
Corporate governance and executive remuneration 318
The elements of executive remuneration 320
References 324

24

Rewarding sales and customer service staff

Introduction 327
Rewarding sales representatives 327
Rewarding customer service staff 333
References 336

327

xii

Contents

25

Rewarding knowledge workers

337

Introduction 337
What motivates knowledge workers? 338
Approaches to rewarding knowledge workers 338
References 341

26

Rewarding manual workers

343

Introduction 344
Factors affecting the pay of manual workers 344
Time rates 345
Pay structures 345
Incentive schemes for manual workers 346
Payment by results schemes 348
Collective schemes 351
Summary of schemes 352
Single status and harmonization 352
References 355

pa r t f i v e Employee benefits
27 Employee pensions and benefits

357

359

Introduction 359
Rationale for employee benefits 360
Employee benefit strategies and policies 360
Types of benefit 360
Incidence of benefits 366
Choice of benefits 366
Administering employee benefits 366
Total reward statements 367
References 368

28

Flexible benefits

369

Introduction 369
Reasons for introducing flexible benefits 369
Types of flexible benefits schemes 370
Introducing flexible benefits 373
References 375

Contents

pa r t s i x The practice of reward management

29 Evidence-based reward management

379

Introduction 379
Evidence-based management 380
Evidence-based reward management 380
Reviewing reward 382
Measuring reward 384
Evaluating reward 387
Conclusions 390
References 390

30

Developing reward systems

391

Introduction 391
The task of developing and implementing reward systems 392
Objective setting 392
The process of development and implementation 393
The development and implementation programme 396
Advice from practitioners (e-reward) 396
References 401

31

Managing reward systems

403

Introduction 404
Reward policies 404
Controlling reward 407
Monitoring and evaluating reward policies and practices 408
Conducting pay reviews 410
General reviews 410
Individual reviews 411
Reward procedures 414
The use of computers in reward management 415
Communicating to employees 418
References 419

32

Managing reward risk

421

Introduction 421
Risk management 422
Reward management risks 422
The risk management process 425
References 426

377

xiii

xiv

Contents

33

Responsibility for reward

427

Introduction 427
The role of the reward professional 427
Role of line managers 429
Using reward consultants 431
References 432
Index 433

Introduction

his handbook provides guidance on how to use reward processes to improve

organizational, team and individual performance while catering for the needs
of employees. Reward is defined as the recognition of the contribution or achievement of individuals or groups by a financial payment or some form of non-financial
recognition.
The book is evidence-based in that it makes use of the practical lessons learned
from academic research projects but also refers to the considerable number of surveys
and case studies conducted or produced by organizations such as e-reward and the
Chartered Institute of Personnel and Development (CIPD).
The theme of the book is that reward delivers performance. It is in line with
the main message of the performance and reward professional map produced by the
CIPD. This spells out that those involved in reward management are there to build
a high-performance culture by delivering programmes that recognize and reward
critical skills, capabilities, experience and performance, and ensure that reward
systems are market-based, equitable and cost effective.
American and some British companies refer to compensation or compensation
and benefits rather than reward. The objection to compensation is that it implies
that people need to be recompensed for the unpalatable necessity of having to work
for a living. The term is not therefore used in this book.

Plan of the book

The book consists of the following parts:
Part One Essentials of reward and performance management
This part is designed to give a general introduction to reward and performance
management. In it, reward and performance management systems are described,
an analysis is made of how reward impacts on performance, the elements of
total rewards financial and non-financial rewards are considered, as are the
special features of international reward policy and practice. Importantly, a new
chapter deals with the ethical approach to reward and performance management
and the part is completed with a review of the contribution of strategic reward,
which takes account of each aspect of reward considered earlier.

Introduction

Part Two Base pay management

This part covers the fundamental process of base pay management, which
involves deciding on pay levels, fixing rates of pay and developing and
operating grade and pay structures. The first chapter in the part examines
amongst other things the factors that affect pay levels. Subsequent chapters
are concerned with job evaluation, market rate analysis and the features and
design of grade and pay structures. The part ends with a chapter dealing with
the important subject of equal pay.
Part Three Rewarding and recognizing performance
In this part individual merit pay and bonus schemes are described. The part also
covers rewards based on team or organizational performance and recognition
schemes.
Part Four Rewarding special groups
Consideration is given in this part to the reward requirements of the special
groups of people who are employed in organizations executives and
directors, sales and customer service staff, knowledge workers and manual
workers. Reward practices may differ between these groups and the result
may be a degree of segmentation in the reward system.
Part Five Employee benefits
This part focuses on policies and practices in the provision of pensions and
benefits and the flexible benefit schemes that allow an element of choice to
employees.
Part Six The practice of reward management
The practice of reward management as described in this part covers the use of
an evidence-based approach to the review and evaluation of reward systems,
the development and management of reward systems, managing reward risk,
and the allocation of responsibility for reward.

Part one
Essentials of reward
and performance
management

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01
An overview of
reward management

K e y co n c e p t s a n d t e r m s

Base pay management

Reward philosophy

Contingent pay

Reward system

Evidence-based reward management

Segmentation

Guiding principles

Strategic reward

Integrated reward management

Total remuneration

Performance management

Total rewards

Reward management

L e a r n i n g o u tcom e s
On completing this chapter you should be able to define these key concepts.
You should also know about:

The meaning of reward management

The aims of reward management
Reward philosophy
The reward system
The contextual factors affecting reward
Effective reward management

Essentials of Reward and Performance Management

Introduction
This chapter is about the essentials of reward management the process of ensuring
that people are rewarded fairly for the work they do and for contributing to the
achievement of the organizations purpose and aims. Reward management provides
answers to two fundamental questions: 1) What do we value? and 2) What are we
prepared to pay for?
The focus is on the aims and philosophy of reward management and the nature
of a reward system. But because reward is very much about performance, the chapter
should be read in conjunction with the next two chapters so that the full picture of
reward and performance management can be obtained.

Reward management defined

Reward management deals with the strategies, policies and processes required to
ensure that the value of people and the contribution they make to achieving organ
izational, departmental and team goals is recognized and rewarded. It is about the
design, implementation and maintenance of reward systems (interrelated reward
processes, practices and procedures) which aim to satisfy the needs of both the
organization and its stakeholders and to operate fairly, equitably and consistently.
These needs will particularly include the improvement of performance (reward and
performance issues are examined in Chapter 2).
But it should be emphasized that reward management is not just about pay
and employee benefits. It is equally concerned with non-financial rewards such as
recognition, learning and development opportunities and increased job responsibility.
The aims of reward management are set out below. As discussed later, reward
management processes are based on a philosophy which may be expressed in the
form of guiding principles. They function through the reward system within the
context of the organization.

Aims of reward management

The aims of reward management are to:

support the achievement of business goals by developing a performance

culture and stimulating high performance;
define what is important in terms of behaviours and outcomes;
align reward practices with employee needs;
reward people according to the value they create;
attract and retain the high-quality people the organization needs;
motivate and win the engagement of employees;
add value through the introduction of effective but affordable reward practices.

An Overview of Reward Management

But Ghoshal and Bartlett (1995) reminded us that reward management is essentially
about adding value to people. It is not just about attaching value to them.

Reward philosophy
Reward philosophy consists of the set of values and beliefs that influence reward
strategy and the design and operation of the reward system. An organizations reward
philosophy may be defined and set out in the form of guiding principles. But it
may be implicit all organizations have a reward philosophy which governs reward
practice even if they do not articulate it. And it may be just a crude understanding of
what is done, such as offering competitive rates of pay or paying for performance.
Reward philosophies are concerned with the ways in which people are paid,
the levels of payment, the extent to which pay should be related to performance,
the scale of employee benefits and the adoption of total reward policies which
provide for both financial and non-financial rewards. They also cover the degree
to which reward practices are ethical in the sense that they are fair, equitable and
transparent. The following is an example of a reward philosophy produced by
Colt Telecom:
Colt believes that talented and motivated people make a difference; talented people
put us ahead of the competition and deliver the results on which the success of Colt
is built. Colt seeks to offer a compensation and benefits package that rewards people
for their contribution to the success of the company and ensures that external market
competitiveness and internal relativities are taken into account.

Guiding principles
Guiding principles specify the approach an organization intends to use in managing
reward. Reward guiding principles may be concerned with such matters as:

developing reward policies and practices which support the achievement of

business goals;
providing rewards which help to develop a high-performance culture and
attract, retain and motivate staff;
maintaining competitive rates of pay;
rewarding people according to their contribution;
recognizing the value of all staff who are making an effective contribution,
not just the exceptional performers;
allowing a reasonable degree of flexibility in the operation of reward
processes and in the choice of benefits by employees;
devolving more responsibility for reward decisions to line managers.

Guiding principles are often agreed by top management with advice from company
reward specialists or external consultants. But they will be more acceptable if members

Essentials of Reward and Performance Management

of the organization are involved in their definition. Guiding principles can then be
communicated to everyone to increase understanding of what underpins reward
policies and practices. However, employees will suspend their judgement of the
principles until they experience how they are applied. What matters to them is
not the principles themselves but the pay practices emanating from them and the
messages about the employment deal that they get as a consequence. It is the reality
that is important, not the rhetoric.
The following are some examples of guiding principles.
BT
business linkage;
clarity and transparency;
market competitiveness;
performance differentiation;
choice and flexibility;
equal pay.
Tesco
We will provide an innovative reward package that is valued by our staff
and communicated brilliantly to reinforce the benefits of working for Tesco.
Reward investment will be linked to company performance so that staff
share in the success they create and, by going the extra mile, receive
above-average reward compared to local competitors.
All parts of the total reward investment will add value to the business and
reinforce our core purpose, goals and values.
Civil Service
1 Meet business need and be affordable.

Business, operational and workforce needs are the drivers for a reward
strategy.
Business cases outline benefits, risks and costs and justify investment.
Reward arguments need to be sustainable.
2 Reflect nature of work.

Recognize and reflect workforce groups identified by function and skills

utilized (eg operational, corporate or policy decisions).
Organizations employing similar workforce groups in similar markets
are encouraged to consider similar reward arrangements.
3 Recognize performance.

Reward reflects the continuing value and the sustained contribution of

an employee and their performance in a given position.
Value and performance rewarded reflect how jobholders contribute to
their organization, impact delivery and meet Professional Government
(PSG) requirements.

An Overview of Reward Management

4 Manage total reward.

Reward includes all aspects of the employee deal; tangible and

intangible elements of what is offered.
Total reward is tailored and promoted to attract, engage and retain the
right talent as well as providing personal choice and flexibility.
Employers/employees need to develop a full understanding and
appreciation of the value of the total reward package.
5 Manage all cash.
Total cash comprises base pay and variable pay.
Base pay reflects job challenge and individuals competence in the job.
Variable pay reflects performance delivered against agreed objectives.
Face the market.
Reward levels, generally and for specific skills, aligned with agreed
market positioning to attract, motivate and retain the right talent.
Reward competitiveness covers each element of total reward (eg base
pay, pensions, leave) and the overall deal.
6 Support equal pay.

Eliminate direct and indirect reward discrimination and reduce any

unjustified gender pay gaps.
Operate reward systems that are perceived by staff to be reasonable and
transparent.
Reward systems and structures evaluated and kept up to date to ensure
that they continue to meet the requirements of legislation.
Diageo
Performance: rewards are developed that reflect team and individual
achievements.
Market: rewards reflect the market in which an employee is based, whether
that be geographical or functional, and compare favourably with those of
competitors.
Communication: Diageo aims to explain to everyone the components and
value of their reward package, the criteria that affect it, and how they can
influence it.
Effectiveness: the company seeks best practice and ensures its benefits
programmes remain effective for the business and our employees.

The reward system

A reward system consists of the interrelated processes and practices which combine to
ensure that reward management is carried out effectively to the benefit of the organ
ization and the people who work there. It consists of six major elements:

10

Essentials of Reward and Performance Management

1 base pay management;

2 contingent pay;
3 employee benefits;
4 non-financial rewards;
5 performance management;
6 total rewards.

These elements are interconnected and contain various sub-elements as set out
in Figure 1.1. They flow from the business and reward strategies as influenced
by the organizations context and combine to achieve performance and reward
objectives.

F i g u r e 1.1 The reward system

Non-nancial
rewards
Job
evaluation

Market
rate analysis

Business/HR
strategies

Reward
philosophy

Grade and
pay structure

Reward
strategy/policy

Base pay
management

Context

Total
remuneration

Contingent
pay

Pension
and benets

Allowances

Performance
management

The main elements are described on the next page.

Total reward

Achieve aims:
Performance
Dene/
influence
behaviour
Attract and
retain
Motivate and
engage
Add value

An Overview of Reward Management

Business strategy
The starting point of the reward system is the business strategy of the organization.
This identifies the business drivers and sets out the business goals. The drivers are
unique to any organization but will often include items such as high performance,
profitability, productivity, innovation, customer service, quality, price/cost leadership
and the need to satisfy stakeholders shareholders and employees.

Reward strategy and policy

The reward strategy flows from an analysis of the business drivers. The question is:
How can these be supported by reward in order to achieve the goals of the business?
The strategy will define longer-term intentions in such areas as pay structures, merit
pay and other forms of contingent pay, employee benefits, steps to increase engagement and commitment, and adopting a total rewards approach. The strategy will be
influenced by the reward philosophy of the organization and by the context within
which the organization operates its internal culture, structure, operations and size
and the external economic and competitive environment.
Reward policy will cover such matters as levels of pay, achieving equal pay,
approaches to merit pay and other forms of contingent pay, the use of job evaluation
and market surveys and flexing benefits.

Base pay management

Base pay is the rate for the job. Its management involves deciding on pay levels and
developing and operating grade and pay structures as defined in Chapter 16. The
base pay management areas of job evaluation, market rate analysis, and the design
and operation of pay structures are described in Part Two.

Contingent pay
Contingent pay consists of payments which are related to performance, competency,
contribution, skill or length of service. They provide for pay progression by being added
to base pay, ie consolidated. Individual performance, competency or contributionrelated schemes are referred to as merit pay schemes in this book (see Chapter 18) in
that they are designed to provide rewards and incentives which are related to how
well individuals are carrying out their jobs. Skill-based pay (see Chapter 26) is most
often used for manual workers and aims to encourage and reward the acquisition of
additional skills and is added to the base rate for the job.
Alternatively or additionally cash bonuses may be paid to individuals as described
in Chapter 19. This is often, confusingly, described as variable pay and the payments
are not consolidated. Bonuses may also be paid based on team or organizational
performance and these are dealt with respectively in Chapters 20 and 21.

11

12

Essentials of Reward and Performance Management

Service-related pay
Pay progression in some organizations, especially in the public and voluntary sectors,
can be provided by fixed increments on a pay scale or pay spine related to time in
the job (service-related pay). There may sometimes be scope for varying the rate
of progress up the scale according to performance. Service-related pay is supported
by many public sector unions because they perceive it as being fair everyone is
treated equally. It is felt that linking pay to time in the job rather than performance
or competence avoids the partial and ill-informed judgements about people which
managers are prone to make. Some people believe that the principle of rewarding
people for loyalty through continued service is a good one. It is also easy to manage;
in fact, it does not need to be managed at all.
The arguments against service-related pay are that:

it is inequitable in the sense that an equal allocation of pay increases

according to service does not recognize the fact that some people will be
contributing more than others and should be rewarded accordingly;
it does not encourage good performance, indeed, it rewards poor performance
equally;
it is based on the assumption that performance improves with experience but
this is not automatically the case;
it can be expensive everyone may drift to the top of the scale, especially in
times of low staff turnover, but the cost of their pay is not justified by the
added value they provide.

These arguments have convinced most businesses, although some are concerned
about managing any other form of contingent-pay scheme. In the public sector any
desire to change may face strong resistance from the trade unions and there may be
uncertainty on the part of management about what exit strategy they should adopt.
They may therefore stick with the status quo, which in some cases they will prefer
because they believe it is the right thing to do or they favour an easier life.

Pensions and employee benefits

Pensions and employee benefits such as sick pay, insurance cover, company cars
and a number of other perks comprise elements of remuneration additional to the
various forms of cash pay and also include provisions for employees that are not
strictly remuneration, such as annual holidays. Flexible benefit schemes allow
employees to decide on the make-up of their benefits package within certain limits.

Allowances
Allowances are paid in addition to basic pay for special circumstances (eg living in
London) or features of employment (working unsocial hours). They may be determined
unilaterally by the organization but they are often the subject of negotiation. The
main types of allowances are location allowances, overtime payments, shift payments,
working conditions allowances, stand-by or call-out allowances (made to those who
have to be available to come in to work when required).

An Overview of Reward Management

Performance management
Performance management processes define individual performance and contribution
expectations, assess performance against those expectations, provide for regular
constructive feedback, and result in agreed plans for performance improvement,
learning and personal development. They are a means of providing non-financial
motivation and may also inform contingent pay decisions.

Non-financial rewards
Non-financial rewards do not involve any direct payments and often arise from
the work itself, for example recognition, achievement, autonomy, scope to use and
develop skills, training and career development opportunities.

Total remuneration
Total remuneration is the value of all cash payments (base pay, contingent pay and
allowances, ie total earnings) plus the pensions and benefits received by employees.

Total rewards
Total rewards are the combination of financial and non-financial rewards available
to employees.

Reward systems in action

Aegon UK
The career-family structure contains four career families.
Target rates are defined which support three performance zones providing
guidance on the pay range for different roles within the band.
Pensionable, lump-sum bonus payments are awarded on a non-consolidated
basis. An incentive scheme enables line managers to recognize and reward
outstanding contribution by individuals or teams outside the annual
pay cycle.
A variety of financial and non-financial awards is available to recognize
personal development and ongoing contribution which employees make
towards the overall effectiveness and efficiency of the company.
B&Q
The 20,000 customer advisers are paid on one of six different spot rates in
the upper quartile of similar jobs.
Pay progression is based on the acquisition and application on the shop
floor of skills and knowledge. There are four additional spot rates
beyond the established rate designed to reward excellence in the role.

13

14

Essentials of Reward and Performance Management

There is a store team bonus, based on sales, shrinkage (resulting from

losses such as theft and stocktaking errors) and customer service measures
set at store level, and a formal recognition scheme.
BT
Pay structure of 250-plus roles in 18 different job families representing
major work functions.
Broad pay ranges attached to each role are determined by reference to
market data.
All roles are benchmarked against equivalent roles and salary ranges in the
external market in order to gather competitive reward data.
Published salary ranges are attached to each generic role.
Hierarchical promotion from grade to grade is replaced by role change.
Simplified benefits package and target bonus percentage defined for
each role.
Based on benchmarking in external market.
Each role assigned to one of three benefit levels.
Three levels of bonus achievement linked to balanced scorecard.
Salary progression within a role range is predominantly via annual reviews
based on individual performance, position in range and affordability.
Other principal type of salary progression results from role change
a move between job families or within a job family.
Friends Provident
Five broad career bands for non-management staff. Three additional bands
cover everyone below executive director.
Eighteen job families with a small number of generic role profiles, based
on key skills and competency levels, in each of the five career bands.
Job-family salary ranges for each career band.
An annual salary review, with individual reviews analysed by a range of
criteria, such as gender, to help ensure fairness and equity across the
company.
Regional salary ranges, to reflect the influence of regional pay where
appropriate.
Performance management.
A discretionary non-consolidated performance bonus.
GlaxoSmithKline (GSK)
The pay structure has five bands. Each band is divided into a number of
zones. The combination of band and zone produces the grade, and there are
29 grades in total. The grades determine bonus entitlement. The pay for each
grade ranges approximately 25 per cent either side of the range mid-point.
The main method of paying for performance each year is through the
bonus scheme, but individuals are also able to progress through their grade

An Overview of Reward Management

range on the basis of performance, their behaviours, relativities with peers

and their market value.
There is a two-way performance and development planning process
whereby individuals agree their objectives with their manager and identify
development needs for the forthcoming year.
The financial recognition scheme rewards effort above normal job
requirements. There are four different levels of award.
Kent County Council
Jobs allocated to one of 35 generic job profiles organized into seven job
families.
Jobs evaluated using the Hay system and placed into one of six pay grades.
Summary band descriptions of the grades enable staff to understand why
their job falls in a particular grade.
The analytical points factor system ensures that staff are all evaluated on
a fair and equal basis.
Regular equal pay reviews are conducted.
Total Contribution Pay (TCP) rewards the how of someones
performance, as well as the results that they deliver.
Managers can recognize the contribution of their staff on an ongoing basis
with cash and non-cash awards.
A total award approach is adopted.

Contextual factors affecting reward

Reward strategies and practices are strongly influenced by the internal and external
context of the organization.

Internal context
The characteristic features of the internal context are as follows.

The organizations culture

Organizational culture consists of shared values, norms and assumptions which influence
the way people act and the way things get done. In reward management, the most
important aspects of culture that need to be taken into account are the core values of
the organization which express beliefs about what sort of behaviour is desirable. Reward
practices should fit in with and support the culture and they can help to reshape it.

Organization type
The degree to which the organization is bureaucratic will affect reward practice.
As defined by Trevor (2011), the differences between a bureaucratic organization
and a post-bureaucratic one are shown in Table 1.1.

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Essentials of Reward and Performance Management

Ta b l e 1.1 Bureaucratic and post-bureaucratic organization

Bureaucratic

Post-bureaucratic

Vertically integrated

Horizontal integration

Hierarchical

Network, not hierarchy

Rational design

Informal system

Control and order (compliance)

Focus on individual capabilities

Policies, rules and procedures

Common task

Tendencies in reward practice in a bureaucratic or a post-bureaucratic organization

are illustrated in Table 1.2.

Ta b l e 1.2 Tendencies in reward practice in a bureaucratic or

a post-bureaucratic organization
Bureaucratic

Post-bureaucratic

Multi-graded pay structure or pay spine

Broad-banded structure or spot rates

Job content determines grading and pay

Pay progression strictly governed by

performance ratings or service criteria

Grading and pay strongly related to

personal skills and competencies

Flexible approach to pay progression

Fixed range of benefits

Flexible benefits

Tight centralized control of pay

decisions

Maximum devolution of pay decisions

to line managers

The organizations business or sector

The business or sector of the organization for example manufacturing, financial
services, retail services, transport, media, public sector services, not-for-profit services
or education will govern its ethos and therefore core values. It will influence the
type of people it employs and the degree to which it is subject to turbulence and
change. All these factors will affect reward strategy and practice.

Work environment
The ways in which work is managed and carried out will influence pay structure and
the use of contingent pay. The introduction of new technology may result in consider
able changes to systems and processes. Different skills are required, new methods
of working and therefore reward are developed. The result may be an extension
of the skills base of the organization and its employees, including multiskilling.

An Overview of Reward Management

A team-working environment may encourage the introduction of team pay. Traditional

piecework pay systems in manufacturing industry may be replaced by higher fixed
pay and rewards focused on quality and employee teamwork.

People
Peoples occupations may affect their wants and needs. Bankers, entrepreneurial
directors or sales representatives will be more interested in financial incentives than,
say, people engaged in charitable work. Reward strategies and policies should take
account of the different needs of people and this may mean segmenting rewards to
meet those individual needs.

Business strategy
Where the business is going the business strategy determines where reward should
go: the reward strategy. Integrating reward and business strategies means combining
them as a whole so they contribute effectively to achieving the mission or purpose of
the organization.

Political and social climate

Organizational politics and social factors such as the way people interact will affect
how the organization functions and therefore what approach to reward management
it adopts.

External context
The following aspects of the external context may affect reward management policies.

Globalization
Globalization requires organizations to move people, ideas, products and information
around the world to meet local needs. Traditionally, discussions of international
reward strategies and practices have tended to focus on an elite of expatriate workers,
sourced from headquarters locations and rewarded in isolation from local country
staff. A more diverse and complex pattern is now emerging, requiring a much more
strategic approach as described in Chapter 10.

Rates of pay in the marketplace

The external environment exerts considerable influence on rates of pay and pay
reviews within organizations. Market or going rate levels and movements have to be
taken into account by organizations if they want their pay to be competitive. Some
organizations are affected by national agreements with trade unions.

The economy
The economy, whether it is in a boom or bust mode, will inevitably affect reward
policy and practice. A recession increases the attention organizations pay to getting
value for money and reduces the amounts that can be distributed in the form of base
and contingent pay and the scale of benefits provision.

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Essentials of Reward and Performance Management

Societal factors
Views about reward held in society at large may affect internal reward policies. For
example, the opprobrium recently leveled at fat cats in boardrooms and the bonus
culture in the City may possibly have some influence on members of remuneration
committees. Again, it may not.

UK employment legislation
The following pieces of UK legislation directly or indirectly affect pay policies and
practices:

The Equality Act 2010 provides that pay differences are allowable only if
the reason for them is not related to the sex of the job holder. Equal pay
legislation is described in Chapter 11.
The National Minimum Wage Act 1998 provides workers in the UK with
a level of pay below which their wages must not fall regardless of where they
live or work or the sector or size of company in which they work. It is not
a going rate. The government prescribes by regulation the minimum wage.
The Working Time Regulations 1998 provide, inter alia, for a limit of
48 hours on average weekly working time which an individual worker may
voluntarily agree to exceed and a minimum of four weeks paid annual leave
subject to a 13-week qualifying period.
The Data Protection Act 1998 provides inter alia that employees are entitled
to make a formal request to access information on the personal data held on
them and the uses to which this will be put.
The Transfer of Undertakings (Protection of Employment) Regulations 1981
(TUPE) provide that when a business or part of a business is transferred the
workers in that business automatically transfer into the employment of the
transferee together with their existing terms and conditions of employment
(except for pensions) intact and with their accrued periods of continuous
service.
The Financial Services Act 1986 places restrictions on the provision of
financial advice to employees. Only those who are directly authorized by one
of the regulatory organizations or professional bodies are permitted to give
detailed financial advice on investments.

The trade unions

Trade unions, especially in the public sector, influence reward practices at national
level through national pay negotiations, pronouncements on such issues as the
pay of top executives, and exerting pressure to achieve equal pay. They produce
policies and advice for their members on job evaluation (they are in favour of
analytical schemes while emphasizing the need for involvement in their design),
pay structures (they tend to be against broad-banded structures) and performancerelated pay (they are generally hostile to it, preferring traditional service-related
incremental scales).

An Overview of Reward Management

Developments in reward management

Four surveys conducted in 2010 and 2011 revealed how reward management is
changing.

e-reward
An e-reward (2010) survey asked respondents if they had made changes to any of
their key areas of reward in the last three years. The most widespread changes were
made in three areas: reward strategy; bonus and incentive plans; pensions and flexible
benefits. The most common reason for these moves was to align reward practice with
changes in business strategy so as to reflect business needs. This was followed by
three other pressures for change: cost/financial pressures, the need to match market
practice and the need to overcome weaknesses or shortfalls. Respondents were also
asked whether their reward function was under greater pressure to demonstrate the
value which they and their reward systems deliver. As many as 83 per cent said that
they were, with 24 per cent claiming that such pressure was substantial.

AON Hewitt
As reported by Brown (2011), respondents to an AON Hewitt survey in 2011 indicated
that their five top reward priorities in order of importance were:
1 Rewarding and motivating key performers.
2 Retention of key staff.
3 Ensuring pay and incentives are tied to performance.
4 Enhancing staff engagement.
5 Getting the most from total reward.

Brown noted the following changes:

From fixed pay and bonus to variable pay.
From business, business, business to business and employees.
From pay, flexible benefits to total rewards.
From reward technique/HR to reward management/line.
From act of faith to evidence-based.

CIPD
The CIPD (2011) annual reward management survey established that reward priorities for 2011 will be to ensure alignment with business strategy, to ensure reward
is market-competitive, to align pay with individual employee and business performance, to ensure reward is internally fair and cost minimized.

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Essentials of Reward and Performance Management

Hay Group
As reported by Hyland (2011), the four main themes emerging from the Hay 2011
survey were:

Increasing profile of reward.

Reward strategy all change!
The return of the employer brand.
Communicate! Communicate! Communicate!

In order of importance the reasons given by respondents for change were:

1 Link to business strategy.
2 Enhance employee engagement.
3 Minimize costs.
4 Retain talent.
5 Improve employee performance.

Reward management twelve tips

Reward people according to the value they create.

Reward people according to what the organization values and wants to pay for.

Take account of employee as well as business needs.

Best practice is preferable to best fit.

Strive to be different, even unique, when developing reward policy and practice as long
as they fit the needs of the organization and its people.

Adopt an evidence-based management approach which involves managing reward

systems on the basis of fact rather than opinion, on understanding rather than
assumptions, on grounded theory rather than dogma.

Ensure that the reward system is developed and operated in accordance with a clearly
defined set of guiding principles.

Provide for the reward system to be integrated the separate parts are mutually
supporting and contribute to achieving the overall aim of the system.

Take account of the views of stakeholders on the design and operation of the system.

Do not overcomplicate the system as a whole or any part of it.

Communicate regularly to employees on how the system functions and how it affects them.

Review and evaluate the effectiveness of the system regularly.

An Overview of Reward Management

References
Brown D (2011) Back to Reward Fundamentals, Presentation at e-reward conference,
November
Chartered Institute of Personnel and Development (2011) Annual Reward Survey, London,
CIPD
e-reward (2010) Assessing Reward Effectiveness Survey, Stockport, e-reward
Ghoshal, S and Bartlett, C A (1995) Changing the role of top management: beyond structure
to process, Harvard Business Review, JanuaryFebruary, pp 8696
Hyland, S (2011) Which Way Now for Reward, Presentation at e-reward conference,
November
Trevor, J (2011) Future Organization and Reward, Presentation at e-reward conference,
November

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23

02
Performance
management
K e y co n c e p t s a n d t e r m s

Multi-source assessment (360-degree feedback)

Objectives

Performance appraisal

Performance management

Personal development planning

SMART objectives

L e a r n i n g o u tcom e s
On completing this chapter you should be able to define these key concepts.
You should also know about:

Characteristics of performance management

Principles of performance management
The performance management cycle
Performance and development agreements
Performance planning
Managing performance throughout the year
Reviewing performance
Assessing performance
Recording the performance agreement and review
Web-enabled performance management
Performance management as a rewarding process
Line managers and performance management

24

Essentials of Reward and Performance Management

Introduction
In this chapter the focus is on performance management systems as they are applied to
individuals. It starts with a review of the characteristics and principles of performance
management and continues with descriptions of how performance management works,
how it functions as a rewarding process and how it contributes to higher performance.
The chapter is completed with a discussion of the role of front-line managers in
performance management, and with a selection of case studies.
But it should be noted that performance management is ultimately concerned
with team and organizational performance. Shields (2007) observed that: Individual
results flow into group results, which in turn contribute to organization-wide
results. But he also pointed out that collective behaviour both arises from and
shapes individual behaviour.

Characteristics of performance management

Individual performance is developed through performance management systems
which provide the framework for improving performance through the agreement of
performance expectations and the formulation and implementation of performance
improvement and personal development plans. As vehicles for feedback, recognition
and development and by providing motivation, they have a major role in a performance
and reward system. They can also inform contingent pay decisions. Pulakos and OLeary
(2011) stressed that performance management plays a critical role in enabling work
to be performed. The importance of the developmental aspect of performance management is often recognized by calling it a performance and development management
system.

The process of performance management

Individual performance management is a planned process of which the five primary
elements are agreement, measurement, feedback, positive reinforcement and dialogue.
It is concerned with measuring outcomes in the shape of delivered performance compared with expectations expressed as objectives. In this respect, it focuses on targets,
standards and performance measures or indicators. It is based on the agreement of
role requirements, objectives and performance improvement and personal development plans. It provides the setting for ongoing dialogues about performance which
involve the joint and continuing review of achievements against objectives, requirements and plans. It operates as a continuous cycle as described in the next section
of this chapter.
Performance management is concerned with both what people achieve, and how
they achieve it, ie outputs and inputs. The latter are often expressed as behavioural
competency requirements which have been set out generally in a competency framework
and specifically in role profiles. Developmental needs are identified by defining these
requirements and assessing the extent to which the expected levels of performance

Performance Management

have been meeting behavioural standards. These standards can be set out in a competency framework and in role profiles.
It is not just a top-down affair in which managers tell their subordinates what
they think about them, set objectives and institute performance improvement plans,
which is what performance appraisal used to be like. It is not something that is done
to people. As Buchner (2007) emphasized, performance management should be
something which is done for people and in partnership with them.
Performance management is continuous and flexible. It involves managers
and those whom they manage acting as partners within a framework which sets
out how they can best work together to achieve the required results. It is based
on the principle of management by contract and agreement rather than management by command. It relies on consensus and cooperation rather than control or
coercion.
Performance management focuses on future performance planning and improvement and personal development rather than on retrospective performance appraisal.
It functions as a continuous and evolutionary process, in which performance
improves over time. It provides the basis for regular and frequent dialogues between
managers and individuals about performance and development needs based on feedback and self-assessment. The emphasis is on development, although performance
management is an important part of the reward system through the provision
of feedback and recognition and the identification of opportunities for growth.
It may be associated with merit pay but its developmental aspects are much more
important.

Principles of performance management

Extensive research conducted by the CIPD (Armstrong and Baron, 1998 and 2004)
identified the following 10 principles of performance management as stated by
practitioners:

A management tool which helps managers to manage.

Driven by corporate purpose and values.

To obtain solutions that work.

Only interested in things you can do something about and get a visible
improvement.

Focus on changing behaviour rather than paperwork.

Its about how we manage people its not a system.

Performance management is what managers do: a natural process of

management.

Based on accepted principles but operates flexibly.

Focus on development, not pay.

Success depends on what the organization is and needs to be in its

performance culture.

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Essentials of Reward and Performance Management

The performance management cycle

Performance management is a natural process of management. It is not an HRM
technique or tool. As a natural process of management the performance management
cycle as shown in Figure 2.1 resembles William Demings (1986) PlanDoCheckAct
model.

F i g u r e 2.1 The performance management cycle

PLAN
Performance and development
planning performance
agreement
Role denition
Objectives
Competencies
Performance improvement
Personal development

REVIEW
Joint analysis
of performance

ACT
Performance and
development activities

Dialogue and feedback

Agree strengths
Build on strengths
Agree areas for
improvement

Carry out role

Implement performance
improvement plan
Implement personal
development plan

MONITOR
Manage performance
throughout the year
Monitor performance
Provide continuous
feedback
Provide coaching
Deal with underperformers

The processes involved during the cycle as described below are concluding performance
and development agreements, performance and personal development planning,
managing performance throughout the year, conducting performance reviews and
assessing performance. The outcomes of the planning and review activities may be
recorded on a performance management form.

Performance Management

Performance and development agreements

Performance and development agreements form the basis for development, assessment and feedback in the performance management process. Expectations are
defined in a role profile which specifies key result areas and the knowledge, skills and
abilities (KSAs) required, and sets out what has to be accomplished in the form of
objectives. The criteria for an objective can be expressed in the form of the SMART
mnemonic:
S = Specific/stretching clear, unambiguous, straightforward, understandable
and challenging.
M = Measurable quantity, quality, time, money.
A = Achievable challenging but within the reach of a competent and
committed person.
R = Relevant relevant to the objectives of the organization so that the goal of
the individual is aligned to corporate goals.
T = Time framed to be completed within an agreed timescale.
Performance agreements emerge from the analysis of role requirements and the performance review. An assessment of past performance leads to an analysis of future
requirements. The two processes can take place at the same meeting.
Agreement is also reached at this stage on how performance will be measured and
the evidence that will be used to establish levels of competence. It is important
that these measures and evidence requirements should be identified and fully agreed
now because they will be used by individuals as well as managers to monitor and
demonstrate achievements.

Performance planning
The performance planning part of the performance management sequence involves
agreement between the manager and the individual on what the latter needs to do to
achieve objectives, raise standards and improve performance.
Performance planning may include a performance improvement plan which
specifies the areas in which the individual needs to improve. The improvement plan
may be extended by a personal development plan which provides a learning action
plan for which individuals are responsible with the support of their managers and
the organization. This may include formal training but, more importantly, it will
incorporate a wider set of learning and development activities such as self-managed
learning, coaching, mentoring, project work, job enlargement and job enrichment.
If multi-source assessment, also known as 360-degree feedback, is practised in the
organization this will be used to discuss development needs. Multi-source assessment involves the assessment of and feedback on someones performance by a
number of people who may include their manager, subordinates, colleagues and even
customers.

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Essentials of Reward and Performance Management

Managing performance throughout the year

Perhaps one of the most important features of performance management is that it
is a continuous process which reflects normal good management practices of setting
direction, monitoring and measuring performance and taking action accordingly.
Performance management should not be imposed on managers as something special
they have to do. It should instead be treated as a natural function which all good
managers carry out.
This approach contrasts with that used in conventional performance appraisal
systems which were usually built around an annual event, the formal review, which
tended to dwell on the past. This was carried out at the behest of the personnel
department, often perfunctorily, and then forgotten. Managers proceeded to manage
without any further reference to the outcome of the review and the appraisal form
was buried in the personnel record system.

Reviewing performance
Although performance management is a continuous process it is still necessary to have
a formal review once or twice yearly. This provides a focal point for the consideration
of key performance and development issues. The performance review meeting is the
means through which the five primary performance management elements of agreement, measurement, feedback, positive reinforcement and dialogue can be put to good
use. It leads to the completion of the performance management cycle by informing
performance and development agreements. It involves some form of assessment as
considered in the next section of this chapter.
The review should be rooted in the reality of the individuals performance. It is
concrete, not abstract, and it allows managers and individuals to take a positive look
together at how performance can become better in the future and how any problems
in meeting performance standards and achieving objectives can be resolved. Indi
viduals should be encouraged to assess their own performance and become active
agents for change in improving their results. Managers should be encouraged to
adopt their proper enabling role: coaching and providing support and guidance.
There should be no surprises in a formal review if performance issues have been
dealt with as they arise during the year. Traditional appraisals are often no more
than an analysis of where those involved are now and where they have come from.
This static and historical approach is not what performance management is about.
The true role of performance management is to look forward to what needs to be
done by people to achieve the purpose of the job, to meet new challenges, to make
even better use of their knowledge, skills and abilities, to develop their capabilities
by establishing a self-managed learning agenda and to reach agreement on any
areas where performance needs to be improved and how that improvement should
take place. This process helps managers to enhance performance by improving their
ability to lead, guide and develop the individuals and teams for whom they are
responsible.

Performance Management

Assessing performance
Most performance management schemes include some form of assessment which is
usually carried out during or after a performance review meeting. This may be carried out by overall assessment, rating or visual assessment as described below.

Overall assessment
Overall assessment is based on a general analysis of performance under the headings
of the performance agreement. The aim is jointly to decide on future action rather
than to produce a summarized and potentially superficial judgement of individuals
by their managers. The latter are expected to reach an understanding with their team
members as a result of the analysis, which will ensure that the individuals concerned
appreciate how well or not so well they are doing. The analysis should also identify
the high flyers and those who are failing to meet acceptable standards. An overall
assessment is recorded in a narrative consisting of a written summary of views
about the level of performance achieved. This at least ensures that managers have to
collect their thoughts together and put them down on paper. But different people will
consider different aspects of performance and there will be no consistency in the
criteria used for assessment, so it is therefore necessary to have a framework for
the analysis. This could be provided on a what and how basis. The what is the
achievement of previously agreed objectives related to the headings on a role profile.
The how is behaviour in relating to competency framework headings. The results
for each what and how heading could be recorded following a joint analysis
during a review meeting
One problem with this form of assessment, and indeed any form of assessment,
is that we can recognize people at either extreme (top performers and inadequate
performers) but cannot accurately distinguish performance differences in the bulk of
people lying between those extremes. What managers can do is to tell an individual
that she has done exceptionally well and that she will therefore be included in the
talent management programme, or they can inform another individual that he has
not done very well and that they must discuss what needs to be done about it. The
others can be told that they are doing a perfectly good job and discussions can take
place on how they can build on their strengths or on any learning activity (preferably
self-directed) which might help them to do even better. Overall assessments can be
bland, superficial and overgeneralized. This is why many schemes use ratings.

Rating
Rating summarizes on a scale the views of the rater on the level of performance achieved.
A rating scale is supposed to assist in making judgements and it enables those judgements to be categorized to inform merit pay decisions or simply to produce an instant
summary for the record of how well or not so well someone is doing.
Rating scales can be defined alphabetically (a, b, c, etc), or numerically (1, 2, 3,
etc). Initials or abbreviations (ex for excellent, etc) are sometimes used in an attempt
to disguise the hierarchical nature of the scale. The alphabetical or numerical points

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Essentials of Reward and Performance Management

scale points may be described adjectivally, for example a = excellent, b = good, c =

satisfactory and d = unsatisfactory.
Alternatively, scale levels can be described verbally as in the following example:

Exceptional performance: Exceeds expectations and consistently makes an

outstanding contribution which significantly extends the impact and influence
of the role.
Well-balanced performance: Meets objectives and requirements of the role;
consistently performs in a thoroughly proficient manner.
Barely effective performance: Does not meet all objectives or role
requirements of the role; significant performance improvements are needed.
Unacceptable performance: fails to meet most objectives or requirements of
the role; shows a lack of commitment to performance improvement, or a lack
of ability which has been discussed prior to the performance review.

An example of a framework for narrative assessments is illustrated in Figure 2.2.

F i g u r e 2.2 Narrative assessment

Reviewer rating based on assessment of achievement against job requirements,
objectives and applied skills and knowledge.
Description

Tick description that best fits:

comment if appropriate

Exceptional: has demonstrated outstanding contribution in the

job through a combination of exceptional achievement against
objectives and job requirements: is recognized by others as a
role model in their job, both with respect to what they have
done and how they have gone about doing it.
Value added: has demonstrated a positive contribution that
adds sustained value, through achievements in the job and
how the individual has done it, demonstrating growth and
development in the job.
Acceptable: Undertaking the job in a satisfactory manner:
getting on with it at an acceptable level that is regarded as
satisfactory: generally meets objectives without adding
sustained additional value over the course of the year.
Underperforming: performance in the job has not met
required standards (it is expected that performance
management steps will already have been taken to deal with
performance issues).

The e-reward 2005 survey of performance management found that ratings were
used by 70 per cent of respondents. The most popular number of levels was five
(43 per cent of respondents). However, some organizations are settling for three

Performance Management

levels. There is no evidence that any single approach is superior to another, although
the greater the number of levels the more is being asked of managers in the shape of
discriminatory judgement. It does, however, seem to be preferable for level definitions
to be positive rather than negative and for them to provide as much guidance as
possible on the choice of ratings. It is equally important to ensure that level definitions
are compatible with the culture of the organization and that close attention is given
to ensuring that managers use them as consistently as possible.
The main problem with ratings is that they are largely subjective and it is difficult
to achieve consistency between the ratings given by different managers. Because the
notion of performance is often unclear, subjectivity can increase. Even if objectivity
is achieved, to sum up the total performance of a person with a single rating is
a gross oversimplification of what may be a complex set of factors influencing that
performance to do this after a detailed discussion of strengths and weaknesses
suggests that the rating will be a superficial and arbitrary judgement. To label people
as average or below average, or whatever equivalent terms are used, is both demeaning
and demotivating.
The whole performance review meeting may be dominated by the fact that it will
end with a rating, thus severely limiting the forward-looking and developmental
focus of the meeting, which is all important This is particularly the case if the rating
governs performance or contribution pay increases.
Another problem is that managers may inflate ratings to avoid confrontation with
the individuals concerned. Some organizations 8 per cent of the respondents to the
CIPD performance management survey (Armstrong and Baron, 2004) attempt to
counter this by using forced distribution, which requires raters to conform to a laiddown distribution of ratings between different levels; for example: A = 5 per cent,
B = 15 per cent, C = 60 per cent, D = 15 per cent and E = 5 per cent. This achieves
consistency of a sort but managers and staff rightly resent being forced into this type
of straitjacket.
An alternative to forced distribution is ranking. It is more common in the United
States than in the UK. Managers are required to place their staff in order from best
to worse. The problem with ranking, as with forced distribution, is that the notion
of performance may not be defined and is therefore unmeasurable. Thus in the case
of ranking it is unclear what the resulting order of employees truly represents. The
other problem with ranking is that while it may not be too difficult to sort out the
best and the worst there may be problems in ranking people in the middle.
Some organizations, mainly in the United States, have gone as far as adopting the
practice of terminating annually the employment of a proportion of the consistently
lowest performers, often 5 per cent to 10 per cent. This has been called crudely
a rank and hank system. It is claimed that this practice raises the bar, ie it is said
that it improves the overall level of performance in the business. There is no evidence
that this is the case.

Visual assessment
An alternative to rating is to use a visual method of assessment. This takes the form
of an agreement between the manager and the individual on where the latter should

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Essentials of Reward and Performance Management

F i g u r e 2.3 Visual performance assessment matrix

High

Employees placed here have

an effective behavioural style
but are not delivering well

Possible actions:
medium reward
provide feedback
coach/train to improve delivery
set milestones

Employees placed here

are top performers

Possible actions:
full recognition and high reward
challenge/stretch
fast-track career (talent
management programme)
coaching

Behavioural
style
Employees placed here
have both behavioural and
performance problems

Possible actions:
provide feedback
coach/train
set milestones
monitor
decision whether to continue or
end employment

Employees placed here

have good business results
but need to focus on style

Possible actions:
medium reward
recognize contribution
provide feedback
coach to improve style

Low
Low

Business performance

High

be placed on a matrix or grid, as illustrated in Figure 2.3. The vertical axis of the grid
in this example assesses the behavioural style adopted by the individual in carrying
out the role, ie inputs. The elements of behaviour to be assessed would be defined
in a competency framework and this would be amplified in schedules of what would
be regarded as acceptable or unacceptable behaviour for each area of competency
(an example is given in Figure 2.4). The horizontal axis measures the level of business performance, ie outputs or what the individual delivers. The assessment can
place someone anywhere in one of the four quadrants according to behavioural style
and delivery. Examples of possible actions are provided.
A picture is thus provided of the individuals overall contribution which is presented visually and as such provides a better basis for analysis and discussion than
a mechanistic rating.