Performance reviews and compensation have long gone hand in hand. One of the original purposes of annual performance reviews was to determine who got raises and how much. But over the years, more insight has been developed into the connection between pay, performance, and individual motivation.
One thing is certain: When you discuss money during the performance review, it tends to dominate the discussion. The employee often becomes fixated on how much their increase will be, and good dialogue between the manager and employee about performance gets undermined.
Ideally, when you hold a performance conversation with an employee, you should both leave the meeting with a mutual understanding of performance expectations, areas for future professional development, and how progress will be measured.
There should also be a discussion about what the organization can do to support the employee’s success in the job.
For sure, you don’t want to detract from that conversation with a debate around pay increases.
Does this mean that performance reviews should not have any influence on pay? No, that’s unrealistic. Because, in the long run, performance and pay are linked.
However, the more you can separate the two, the more successful you will be in keeping the focus on performance accountability and employee development.
Many organizations now schedule a separate conversation—often several months later—to discuss compensation. These discussions include reviewing the organization’s overall philosophy toward compensation and how positive performance might lead to future merit increases or promotions. Pay criteria should be transparent and easy to understand, and all managers must be trained to communicate them. If done well, you will avoid performance conversations marked by defensiveness and distrust.