A continued research effort around our performance review whitepaper led me back to a model we work with to describe how performance related pay fits in with performance appraisals.  The model is built from a range of standard theories - Vroom's expectancy theory, Locke's goal setting, Porter/Lawlers views on intrinsic and extrinsic rewards and others.  Diagramatically it is represented as follows



The model demonstrates the basic "line of sight" required for performance related pay to work.  If I increase my effort, then my performance should increase which lead to rewards that are aligned with my personal goals.

To achieve the link between effort and performance we need : effective goal setting for alignment, we need the opportunity to deliver that performance (e.g. the external market allows it) and the ability (often where training plays a part).  We also need to be sure that our role is clear - we don't want to be doing the wrong thing!

That performance is then rewarded - either through a feeling of a job well done, or other intrinsic rewards or through extrinsic rewards such as pay and bonuses.  That reinforcement (think Pavlov's dogs) makes us want to do it again!  Finally those rewards need to be linked to something we are seeking - our personal goals.

When put like this it leaves me a little cold and has a large company imposing managerialistic processes feel about it.  But, if you are implementing performance related pay it forms a very useful checklist and model to have in mind as to why and how you link the sections on the performance appraisal form with the pay and bonus and of course why you are doing performance appraisals at all.

Brendan