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If There's No Perfect Way to Measure Employee Performance Objectively and Meaningfully, How Do You Manage "Pay For Performance Schemes?
First, it's true that it's virtually impossible to measure the VALUE of employee contributions in terms of the overall goals of the company, which is, after all, what counts. You can easily objectively measure trivial things, but you can't measure objectively, the really important things.
So, if you base salary increases or bonuses on individual performance metrics, you have a problem. It means you make important decisions on at least partially flawed information.
The solution: Forget about objectivity, and move to giving rewards based on goal achievement that is NEGOTIATED with the employee up front. First, set goals with employees. Negotiate and settle on criteria that would indicate the goal was achieved. During appraisals, then negotiate to decide what was achieved or not. It's all discussion. It's much like a contract that is negotiated.
The advantage to this is that by negotiating UP FRONT, the employee knows and has agreed to what will enable his or her pay increase, and that's IS motivational -- much more so than simply giving rewards at the end of the year, without employees knowing why they will be given, and what they will be based on.