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Is There A Downside To Linking Pay Increases To Performance Management?
Obviously, if you are going to reward employees for performance, or merit, you need to base those decisions on something. That something is usually the results of an annual performance review or appraisal. That makes sense.
However, there is a potential downside to linking pay (merit pay, pay for performance) with performance appraisals. By doing so a conflict is created between two functions -- improving performance, and deciding on increases. Improving performance relies on manager and employee working together -- in effect, being on the same side, so they can problem solve.
When appraisals are used to determine pay, the dynamic changes. Now the players aren't on the same side, as the employee tends to want a larger pay increase, while often, the manager does not, since there's always limited resources available for pay increases. The employee focuses on his or her strong points, rather than focusing on areas to improve.
An additional problem is that when money is placed on the table, people tend to be more stubborn and rigid, holding onto and arguing more intensely, about the performance appraisal results. That makes sense since, when pay is tired to employee review results, the employee reviews have additional real world significance.