Contingent Pay – right or wrong?

There is much debate on whether employers should link performance to pay. No conclusion has ever been reached. 

This type of pay is called contingent pay and is used to link performance and pay. The reality of the situation is that many people would see it as fair, and right, that a high performer is paid highest. But, there is no right or wrong answer as to whether employers should or shouldn’t link performance and pay.

If an organisation decides to link performance to pay, there has to be a rating system which will link the two aspects. This is typically done through a Performance Management System and can simply rate the performance of an employee, through a discussion, on a scale of 1 to 5. Each number will correspond to some level of bonus or pay increase. 

The problem with this approach is that the rating can be subjective and can cause problems with the validity of the outcome. It is indeed difficult to sum performance in one rating and, unfortunately, once the employee is marked as a ‘below average’ or ‘average’ employee, study show that it is difficult, or unlikely, that his/her average improves to ‘above average’. 

Different types of contingent pay

There are different types of contingent pay:

  • Performance-related pay
  • Competence-related pay
  • Contribution-related pay
  • Skill-based pay. 

Performance-related pay

This approach works on the basis of setting targets for performance. Once those targets are achieved, then the employee either gets an increase in his/her basic pay or receives a bonus based on the performance. 

The difficulty with this approach is that not all jobs can have easily quantifiable objectives. 

Competence-related pay

This approach pays the employee based on the characteristics they possess, which ultimately causes the level of their performance. To be able to measure this, employers need to identify what the key competencies of the role are. The employer needs to also find a way of measuring the competencies. Employees are then measured against these competencies and rewarded accordingly. This type of pay is usually used along other contingent pay approaches such as the skills-based pay (explained below). 

Contribution-related pay

This is concerned with the results and competence of the person. It is a mix of the performance-related pay and the competence-related pay. The benefit of this approach is that it encourages employees to seek all-round development. It looks at both past and future successes. 

Skill-based pay

Similar to the competence-related pay, this pays employees for the skills they have. The employer here also needs to identify the skills needed for the job to get done. They are usually arranged in an order of most to least important skills. The employee is then assessed against each scale. Whenever an employee moves up a skill level, the employee is rewarded accordingly. 

As mentioned above, there is no right or wrong answer to whether one links performance to pay. There is also no right or wrong pay approach that one takes. Although this type of pay can rely heavily on human judgement, the benefit of linking performance and pay is that people are also motivated by pay. Thus, they can see how they can improve themselves to improve their pay.

About the author

Maria Bartolo Zahra is Managing Director and HR Advisor at SurgeAdvisory. She has over sixteen years of human resources and business advisory experience.