Introduction
Pay is a key factor affecting relationships at work. The 
level and distribution of pay and benefits can have a 
considerable effect on the efficiency of any organization, 
and on the morale and productivity of the workforce. It is 
therefore vital that organizations develop pay systems that 
are appropriate for them, that provide value for money, and 
that reward workers fairly for the work they perform. Pay 
systems are methods of rewarding people for their 
contribution to the organization. Ideally, systems should 
be clear and simple to follow so that workers can easily 
know how they are affected. In considering rewards it 
should be borne in mind that pay and financial benefits are 
not the only motivator for worker performance. Other 
important motivators for individuals may include job 
security, the intrinsic satisfaction in the job itself, 
recognition that they are doing their job well, and 
suitable training to enable them to develop potential.

What are pay systems?
Key Points: -
	Pay systems provide the foundation for financial 
reward systems
	There are basic rate systems, where the worker 
receives a fixed rate per hour/week/month with no 
additional payment
	There are systems related in whole or part to 
individual or group performance or profit
	There are systems based in part on the worker 
gaining and using additional skills or competencies
Pay systems provide the bases on which an organization 
rewards workers for their individual contribution, skill 
and performance.

Pay structures
Pay structures are different - they are used to determine 
specific pay rates for particular jobs, usually based on 
the nature of the job, its content and requirements. A pay 
structure provides the framework within which the 
organization places the pay rates for its various jobs or 
groups of jobs. 
Pay systems fall into two main categories: 
	Those where pay does not vary in relation to 
achievements or performance, (basic rate systems), and 
	Those where pay, or part pay, does vary in relation 
to results/profits/performance (including the acquisition 
of skills). 

There are also systems where pay, and any enhancement, is 
related to the gaining of extra skills or competencies that 
can allow a worker to carry out a wider range of work, or 
work at a higher level, and provide opportunities for 
greater job satisfaction.

The selection of an organization’s pay system is often 
determined by negotiations between management and worker 
representatives. In theory these negotiations can be kept 
quite separate from negotiations over payment structures 
and levels or amounts of pay; but in practice negotiations 
often embrace all pay-related issues.

Selecting and installing a pay system
Key Points: -
	Accept that there will inevitably be a cost 
involved.
	Avoid most potential problems with a systematic, 
well-timed and carefully planned approach.
	Involve the workforce, or its representatives, as 
much as possible, perhaps through a joint working party.
	Re-examine the reasons for change and take advice 
both inside and outside the organization. Obtain expert 
help if needed.
	Don't just discard the existing system - take stock 
through discussions to enable the organization to keep the 
good and change the less good.
	Identify what the new system is required to do - 
how does it relate to the organization’s overall objectives?
	Look at the possible new systems and consider which 
might best suit the particular organization, with or 
without alteration.
	Changes to pay make people anxious, and so the new 
system should be kept simple and agreed with the workforce 
and their representatives.
	Prepare the way carefully with briefings to the 
workforce and management. Look out for any changes to 
differentials and relativities. Document the system and if 
possible run it for a trial period.
	Build in as much time as possible for proper 
discussion and consultation.
	Make arrangements for maintenance, monitoring and 
evaluation. Review the system regularly to ensure it is 
performing as required.
	Be careful the system does not directly or 
indirectly discriminate between men and women.

Performance-related pay
Performance pay schemes cover the various methods of 
linking pay to a measure of individual, group or 
organizational performance. They all share the idea that 
where a worker can vary output according to effort the 
prospect of increased pay will lead to greater performance.

What are the most common types of performance pay?
It is difficult to clearly distinguish one type of 
performance related pay. They can be defined as:
Piecework: 
A price is paid for each unit of output. This is the oldest 
form of performance pay and is still used in some local 
government direct service organizations (DSOs) 
Payment by results: 
Bonus earnings depend on measured qualities or values of 
output for individuals or groups, usually based on work 
studied time units; this covers a range of bonus schemes 
and still forms the main method of performance pay for 
manual workers 
Organization-wide incentives:
Bonus earnings or pay levels based on measured quantities 
or values for the whole establishment; this is frequently 
the basis of contract price or tender-led schemes in local 
government DSOs 
Merit pay:
Bonus earnings or pay levels usually based on general 
assessment of an employee's contributions to performance; 
this is an earlier, less structured form of IPRP (see 
below) 
Individual performance related pay (IPRP): 
Bonus earnings or pay levels based on the assessment or 
appraisal of an employee's (or team's) performance against 
previously set objectives, usually part of a performance 
management system. This is a fairly recent development, 
particularly in the public sector and has grown sharply in 
use since the 1980s 
What are the main steps in creating performance related pay 
systems?
	Setting objectives. 
	Appraising results.
	Linking achievements to pay. 

Where output cannot be measured, the sensible solution 
seems not to pay any bonus; however just because some jobs 
are difficult to measure, doesn't mean that good 
performance shouldn't be rewarded. This problem has 
generally been tackled by providing a lieu bonus based on 
average bonus earnings to those employees - very often 
skilled maintenance staff and supervisors - whose work is 
difficult to measure.

In most systems for manual workers the pay packet is in 
fact made up of a number of components, usually including a 
fixed basic payment, a variable bonus paid on output of 
acceptable quality and a fall back provision. Bonus 
payments are usually paid weekly or monthly.

In IPRP systems for white-collar workers the pay packet 
includes a fixed salary element, where progress through a 
range may be according to performance, and/or a variable 
bonus paid out for achieving set objectives. Variable bonus 
payments are usually unconsolidated and may be paid 
monthly, half yearly or yearly.

Advantages:
	It provides a direct incentive for employees to 
achieve defined work targets. 
	The contribution an employee makes is recognized 
with a tangible reward. 
	A performance culture can be developed with its 
introduction. 
	Line managers can derive assistance from a 
corporate framework for setting goals. It should improve 
individual productivity and performance. 
	Employees are more likely to focus on what they 
need to do to improve if this is directly linked to pay.
	A good PRP system will reward the best performers.
	It is an effective way of dealing with poor 
performance.
	Establishing a means of rewarding high performance 
can assist in retaining the most industrious staff.

Disadvantages:
	It reduces pay equity and can make an authority 
liable to costly equal pay challenges if not operated 
fairly.
	The appraisal process can be affected detrimentally 
because of the focus on financial reward rather than 
developmental needs.
	Employees can be de-motivated if the goals set are 
too hard to achieve.
	Too much of the process relies on the quality of 
judgment made by a line manager.
	Co-operation and teamwork can be hindered.
	As reward made for short-term quantifiable goal it 
can be too narrowly focused.
	There is a danger that employees can expect an 
additional payout year on year. In a low inflation climate 
the rewards might not appear to be that great.

Competency-based pay:
Competencies are the knowledge-skills and the attitude 
needed by any individual employee to carry out their job 
effectively. These can be incorporated into a pay system to 
reward individuals who positively contribute to the overall 
values and objectives of an organization. This is 
competency based pay: rewarding the way people work, not 
just recognizing what they can deliver.

How can the right competencies be defined?
Most competency based pay systems are determined by 
performance indicators. Typically, the competencies needed 
to drive progression are quantified by senior managers 
through employee interviews, surveys and job analysis. The 
following competencies are relevant here:

	core competencies that apply to any job within the 
organization and reflect the organization’s core values 
	the technical skills and expertise that are 
necessary to carry out the job 
	competencies relating to a specific job category 
e.g. ‘leadership' for senior managers 
	competencies that define the contribution an 
employee makes to their role including: 
	communication 
	teamwork and motivation 
	coaching 
	knowledge and experience 
	service delivery 
	liaison and networking 
	investigation analysis 
	initiative and problem solving 
	planning and organizing resources 
	decision making process and outcomes 
	teamwork and motivation 
	knowledge and experience 
	liaison and networking 
	initiative and problem solving 
	decision making process and outcomes

Advantage: 
	Employees can develop their careers horizontally on 
the basis of their experience and competence. Pay 
progression and career development can be achieved without 
the need for individual promotion 

Disadvantage: 
	It can be difficult to manage the expectations of 
employees, particularly new recruits, who may be under the 
delusion that they can automatically move to a much higher 
salary simply by doing their job satisfactorily. In fact, 
they actually need to develop their competencies. In 
managing the process, effective communication between line 
managers and staff needs to be put into place

Contribution pay:
Contribution pay is a relatively new concept. It combines 
elements of both performance and competency based pay 
schemes by recognizing employee achievements and 
competencies.

How does it differ from performance pay? 
Contribution pay is not a direct incentive for achieving a 
defined set of targets. Instead it is similar to a 
competence based pay reward system, emphasizing what type 
of development is needed by employees to enhance corporate 
success.



Advantages: 
	It positively recognizes a commonly held assumption 
that individuals who apply higher levels of skill and 
contribute more should receive higher financial 
remuneration than those that do not.
	Organizational improvement can be achieved through 
constructively motivating people by encouraging them to 
achieve higher levels of performance and skill.
	Employees are motivated through the recognition of 
their achievements, not by the attainment of a few narrowly 
focused set targets.
	An appraisal system that is based on agreeing 
expectations based on results and competence combined with 
an agreed joint plan for achievement is a powerful 
motivating factor in its own right, irrespective of the pay 
aspect.
	It is a good method for communicating the strategic 
vision of an authority through the definition of expected 
performance, competence, priorities and values expected. 
This will be especially effective if individual objectives 
and competencies are aligned to corporate objectives and 
core competencies.

Disadvantages:
	Contribution pay is a relatively new concept that 
has been developed principally by the pay experts Duncan 
Brown and Michael Armstrong. As a relatively small number 
of organizations have put this into practice, there is only 
limited empirical evidence of its effectiveness.
	It is likely to be far more complex to manage a 
contribution pay system than either IPRP or competency pays 
because of because mangers have to simultaneously assess 
both outputs and inputs.
	The process is more likely to look at the 
contribution being made on an individual basis, which can 
in turn undermine co-operation and teamwork.
	It raises the expectation amongst individuals that 
if they achieve a set of targets and improve their skills 
and competencies each year there will be a continual pay 
out. This might be difficult to guarantee in a climate of 
sustained low inflation.
	As contribution pay is based on individual 
assessment it is prone to the capability of all line 
managers to perform this task objectively and effectively.
Market-based pay:
Market-based pay links salary levels, and progression 
through the scales, to those available in the market. It is 
often used in conjunction with a performance pay matrix, 
which allows faster progression from the bottom of the 
scale to the market rate, which will be the mid-point. 
Progression then slows, regardless of the performance of 
the worker, as they are deemed to be earning above the 
market rate for their job. It is rarely used as a scheme in 
isolation, but may be part of a reward strategy 
incorporating several performance elements.

Team-based pay:
While team-based pay has been around for some time in the 
shape of departmental or group bonus systems it has taken 
on more importance with the increased interest in team 
working.

 In team-based pay systems the payments reflect the 
measurable goals of the team. Team working may be most 
effective in situations involving high task interdependence 
and creativity, although it can be difficult to define the 
team, the goals, and the appropriate reward. Schemes can be 
divisive if they are not open and transparent. Goals should 
not be shifted once agreed - they need to be achievable. 

The aim of team-based pay is to strengthen the team through 
incentives - building a coherent, mutually supportive group 
of people with a high level of involvement. The team 
achievements are recognized and rewarded. Peer group 
pressure can also be helpful in raising the performance of 
the whole team. 

As with any other pay system, involvement of the workers 
who will be affected is crucial in the design of the 
scheme. They must be involved particularly in the way 
objectives are set, how performance is measured, and the 
basis on which team rewards are distributed.

Advantages:
	It positively encourages team working and co-
operative behavior.
	It constructively motivates people to achieve 
higher levels of performance and skill on a team basis.
	It is an effective way to clarify goals and 
priorities within a team.
	It is an effective way of cascading objectives 
defined by senior management throughout the subordinate 
teams.
	It can be usefully deployed in a period of intense 
organizational change as it can emphasize the necessity for 
effective team dynamics in flatter organizational 
structures.
	It can help to bring about a change in cultural 
attitude particularly with the introduction of customer 
focused working practices.
	It encourages flexible working and multi-skilling.
	It provides a good incentive for a team of 
employees to improve their performance.
	It encourages individual team members to tackle 
poor performers.
	It is an effective way of enabling employees to 
work collectively in self directed teams.

Disadvantages:
	Although some organizations extol its virtues, it 
is sometimes difficult to define the scope and boundaries 
of the team, and to identify clear and meaningful targets 
that genuinely reflect group effort.
	As it does not differentiate between high and low 
performers this could cause resentment within the teams.
	It will only be effective if the team is well 
managed and positively committed to organizational 
improvement. A team, for example, might not need the 
incentive of extra financial inducement anyway.
	It is difficult to objectively discuss with 
individual employees what impact their behavior is having 
on other employees.
	There is a danger that peer pressure will intensify 
causing an oppressive and de-motivating atmosphere.
	It is difficult to satisfy the development of 
methods to measure performance and a fair means of 
measuring team performance.
	There could be an organizational problem of 
uncooperative behavior being shifted from individuals in 
teams to the relationship between teams.
	Organizational flexibility could be inhibited 
because people in cohesive, high performing and well-
rewarded teams might be unwilling to move when needed. This 
could lead to difficulties in reassigning work between 
teams or breaking up of teams in response to future 
organizational requirements.
	There is a danger that the team can get into a 
downward spiral with output being maintained at the level 
of the lowest common denominator. This will lead to members 
of a less successful team getting less money and the 
increased possibility of the team being unable to retain 
its best staff.
Modernizing pay and rewards strategies:
Pay structures can speak volumes – not only in their 
implications of values, equality and worth to employees and 
the community they serve, but to the performance of the 
authority itself. Getting a structure to reflect this is a 
challenge local authorities face on an ongoing basis. It 
requires commitment from senior managers, members and human 
resources.

What are the benefits? 
A modern and strategic pay and rewards system can:

	Lift motivation and drive service improvement if 
people are rewarded properly for their contributions.
	Increase the efficiency of the day to day running 
of your pay and rewards system.
	Prevent discrimination and ensure that all staff is 
paid fairly, thereby eliminating any liability to big equal 
pay claims.
	Become a powerful method of innovating change and 
improvement when pay systems are no longer used solely as 
an administrative tool.
	Help cost/performance calculations to be accurately 
estimated thereby enabling authorities to inform residents 
and central government of the actual efficiency of the 
council’s operations - and also provide the chance to 
identify and act on specific under-performing areas.

Making it work:
Effective pay and rewards systems need commitment and 
action from senior managers, members and human resources. 
Councils need to recognize that this is a potentially 
costly process, especially given the need to deal with 
equal pay. Changes can be introduced in a step-by-step 
approach to help control costs.

The following checklists are designed to help establish who 
exactly should be doing what.

Senior managers and members should:
	Commit to pay equality and ensure that the council 
develops and promotes an equal pay policy.
	Commit to developing an effective performance 
management system that integrates individual, team and 
organizational performance objectives.
	Ensure that pay data is fully integrated into the 
council’s performance management system so that the 
council’s efficiency can be properly assessed through 
cost/performance calculations.
	Staff needs to see a link between their pay and 
rewards and their efforts towards service improvement – 
this culture change should become a strategic corporate 
objective.

Human resources teams should:
	Demonstrate the strategic impact of new pay systems 
to senior management.
	Develop proposals for a new pay structure.
	Assess the adequacy of personnel and payroll data.
	Carry out a risk assessment and ensure that they 
can manage the whole project.
	Carry out an equality impact assessment of the 
proposals.
	Complete the process of the local pay review.
	Implement the new structure.
	Organize regular equal pay audits after 
implementation.
	Ensure that training is available for all staff on 
equality and diversity issues.
	Ensure special training is available for line 
managers who have been given new performance management 
responsibilities.
	Communicate pay change and their importance to 
staff, and encourage their feedback.
	Develop their performance management skills so they 
can handle appraisals, manage underperformance and give 
staff work-life balance and development opportunities.
	Manage their teams well so that employees remain 
motivated and always want to give their best.

Summary
Pay administration is a management tool that enables you to 
control personnel cost, increase employee morale, and 
reduce work force turnover. A formal pay system provides a 
means of rewarding individuals for their contributions to 
the success of your firm, while making sure that your 
organization receives a fair return on its investment in 
employee pay. 
This publication provides time-tested concepts for 
determining competitive pay levels and for maintaining fair 
pay relationships among the jobs comprising a small company.

Who Needs a Pay Administration Plan?
Pay administration may just be a fancy term for something 
you are already doing but haven't bothered to name. Or, 
perhaps your organization has not been paying employees 
according to any system, but waiting until unrest shows up 
to make pay adjustments—using payroll dollars to put out 
fires so to speak.

A formal pay plan, one that lets employees know where they 
stand and where they can go as far as take home dollars are 
concerned, won't solve all your employee relation problems. 
It will, however, remove one of those areas of doubt and 
rumour that may keep your work force anxious and unhappy—
and less loyal and more mobile than you'd like them to be. 
What's in it for you? Let's face it, in business—
particularly small business—it's good people who can make 
the difference between go and no go. Many people like a 
mystery, but not when it's about how their pay is set. 
Employees under a pay plan they know and understand can see 
that it's equitable (fair) and equable (uniform) - that pay 
isn't set by whim. They know what to expect and what they 
can hope to shoot for. In the long run such a plan can help 
you:


recruit employees; 
keep employees; 
motivate employees; 
it can help build a solid foundation for a successful 
business. 
Developing and Installing the Plan
A formal pay plan doesn't have to cost you a lot of time 
and money. Formal doesn't mean complex. In fact, the more 
elaborate the plan is, the more difficult it is to put into 
practice, communicate, and carry out.

The foremost concern in setting up a formal pay 
administration plan is to get the acceptance, 
understanding, and support of your management and 
supervisory employees. A well-defined, thoroughly-
discussed, and properly-understood plan is a prerequisite 
for success.

The steps in setting up a pay plan are:


define the jobs; 
evaluate the jobs; 
price the jobs; 
install the plan; 
communicate the plan to employees; 
appraise employee performance under the plan. 
Defining the Jobs
Unless you know each job's specifications and requirements, 
you can't compare them for pay purposes. It's no surprise, 
therefore, that the initial step in installing a formal 
plan is preparing a job description for each position.

You may be able to write these descriptions yourself, since 
in many small businesses the owner-manager at one time or 
another has worked at just about every job. However, the 
best and easiest way to put together such job information 
is simply to ask employees to describe their jobs. 
Supervisors should be asked to review these descriptions.

Your best bet here is to prepare a simple form to be filled 
out by the employee (or someone interviewing the employee). 
This is the time to begin explaining to employees what you 
are doing. They need to know that their help is needed to 
develop the pay plan - that you are not trying to find out 
how well they are doing their jobs - just what they do. The 
form should contain the following categories:


job title; 
reporting relationship; 
specifications; 
primary function (What is the main responsibility of the 
job?). 
Main Duties - (List main duties in order of importance and 
estimate the percentage of time spent on each.)

Other Duties - (List of duties not performed on a regular 
basis.)

Job Requirements


formal education or training required; 
experience or background required; 
technical/administrative complexity; 
responsibility for dollar results; 
responsibility for supervision; 
unusual working conditions. 
It will probably take some time to prepare job descriptions 
from the information you get from your employees, but what 
you learn may have other uses besides comparing jobs for 
pay purposes. For one thing, you may discover that some 
employees are not doing what you thought they were, or what 
they were hired to do. You may find you want to make some 
changes in their work routines. The information may also be 
useful for:


hiring, training and developing employees; 
realigning duties in the organization; 
comparing job data for salary surveys; 
assuring compliance with various employment practice and 
pay rate laws; 
evaluating job performance based on assigned duties. 
Evaluating the Jobs
Nobody knows a scientific, precise way of deciding exactly 
how much a particular job is worth to a company. Human 
judgment is the only way to put a dollar value on work. A 
good job evaluation method for firms with 100 or fewer 
employees is simple-ranking. It's a guess, too, but a 
pretty well controlled guess.

Under the simple-ranking system, job descriptions are 
compared against each other. They are ranked according to 
difficulty and responsibility. Using your judgment, you end 
up with an array of jobs that show the relative value of 
each position to the company.

After you have ranked the job descriptions by value to the 
firm, the next step is to group jobs that are similar in 
scope and responsibility into the same pay grade. Then you 
arrange these groups in a series of pay levels from the 
highest to lowest. The number of pay levels depends on the 
total number of jobs and types of work in your 
organization, but for a company with 100 or fewer jobs, 10 
or 12 pay levels is usually about right.

Pricing the Jobs
So far in establishing a pay system, you've had to look 
only inside the company itself. To put a dollar value on 
each of your pay levels, you should look outside at the 
going rates for similar work in your area. Since you have 
ranked and grouped jobs in pay levels, you won't have to 
survey each job. Survey those in each level that are 
easiest to describe and are most common in local industry. 
Do try, however, to survey those jobs that have more than 
one level, for example, junior and senior typists.

A survey of who's paying how much for what in your locality 
is the best way of finding out how much you ought to pay 
for each of your jobs. You probably have neither the time 
nor the money to spend on making such a survey yourself. 
That shouldn't be a problem; you should be able to get all 
the data you need from sources such as your local chamber 
of commerce, major firms located in your area, or from such 
national sources as Human Resources Development Canada. If 
you belong to a trade association, you may be able to get 
its help to find out what the going rate is for one or more 
jobs in each pay level.

In studying pay in your area and applying what you learn to 
your own jobs, make sure you compare job descriptions, not 
just job titles. Job titles can be misleading; there can be 
great differences between what one organization and another 
call their jobs. One firm's janitor may be somebody else's 
environmental control engineer. After you are satisfied 
that you are comparing apples and apples, you can compute 
an average rate (the averages in the publications are 
purely arbitrary) for each job and enter it on a worksheet 
as follows:


Pay Level Position Average Rate 
1 Clerk-Typist $574 
2 Stenographer $635 
3 Payroll Clerk $687 
4 Secretary $723 
5 Accounting Clerk $741 
6 Computer Operator $815 
  (and so on) 

You may need to adjust the average rates somewhat to keep a 
sufficient difference between pay levels to separate them. 
The going rates you find for each pay level can then become 
the midpoints of your pay level ranges. (You can, of 
course, set your company's ability to pay, the length of 
your work week, and the type and value of your company's 
benefit programs.)

Typically, the minimum rate in a level is 85 percent of the 
midpoint rate, and the maximum rate is 115 percent of the 
midpoint. With the arrangement, a new employee can increase 
his or her earnings by 35 percent without a job change, 
thus having performance incentives even if he or she is not 
promoted.

You now have a pay range for each position in your 
organization. It will resemble the following example:



Pay Range Minimum Midpoint Maximum 
1 $490 $575 $660 
2 $530 $625 $720 
3 $580 $685 $785 
4 $615 $725 $835 
5 $690 $815 $935 
   (and so on) 

Such a pay range will enable you to tell where your 
employees' pay and pay potential stand in relation to the 
market rates for their kinds of work. It should show you at 
a glance where you need to make changes to achieve rates 
that are fair within your organization and pay that's 
competitive with similar businesses in your community.

In general, with a planned pay structure you should be able 
to tie individual rates of pay to job performance and 
contribution to company goals. It should also provide 
enough flexibility to handle special situations.

Installing the Plan
At this point you have the general plan, but you don't of 
course, pay in general. You must pay each employee 
individually. You must now consider how the plan will be 
administered to provide for individual pay increases.

In administering the pay increase feature of the plan, you 
can use several approaches:


merit increases, granted to recognize performance and 
contribution; 
promotion increases for employees assigned to different 
jobs in higher pay levels; 
progression to minimum for employees who are below the 
minimum or hiring rate for the pay level; 
probationary increases of newer employees who have attained 
the necessary skills and experience to function 
effectively; 
tenure increases for time with the company; 
general increases, granted employees to maintain real 
earnings as economic factors require and to keep pay 
competitive. 
These approaches are the most common, but there are many 
variations. Most annual increases are made for cost of 
living, tenure, or employment market reasons. Obviously, 
you might use several, all, or combinations of the various 
increase methods.

You may find that a form for documenting salary increases 
and recording the reasons for them can be quite useful. You 
will probably find that records such as these are useful 
references for pay administration purposes.

Telling Employees about the Plan
After you have set your pay administration plan into place, 
you have to consider how to tell employees about it. If 
setting up a good program is number one in importance, a 
close number two is explaining that plan to employees.

How to tell them is your decision. Some of the more 
successful methods include personal letters to each 
employee and meetings to explain the plan and answer 
questions.

However you tell employees, you must clearly, honestly, and 
openly explain the way the plan works. This is a prime 
opportunity for you to build goodwill and good relations 
with your employees. Be sure your supervisors understand 
and can explain the plan to their people. Explaining the 
plan to new employees is also essential, and it's a good 
idea to review the plan periodically with all employees.

Employee Performance Appraisal
The majority of employees in the Canadian labour force are 
under merit increase pay system, though most of their pay 
increases result from other factors. This approach involves 
periodic review and appraisal of how well employees perform 
their assigned duties. An effective employee appraisal plan:


achieves better two-way communications between the manager 
and the employee; 
relates pay to work performance and results; 
provides a standardized approach to evaluating performance; 
helps employees see how they can improve by helping them 
understand job responsibilities and expectations; 
sets targets for employees to aim towards. 
Such a performance review helps not only the employee whose 
work is being appraised, but also helps the manager doing 
the appraising to gain insight into the organization. An 
open exchange between employee and manager can show the 
manager where improvements in equipment, procedures, or 
other factors might improve employee performance. Try to 
foster a climate in which employees can discuss progress 
and problems informally at any time throughout the year.

Again, to get the best results it's a good idea to use a 
form for appraisal. A typical form includes such job 
performance factors as:


results achieved; 
quality of performance; 
volume of work; 
effectiveness in working with others in firm; 
effectiveness in dealing with customers, suppliers, etc; 
initiative; 
job knowledge; 
dependability. 
You can design your own form, using examples you can find 
in books on personnel administration, if necessary. Your 
forms should be tailored to the jobs and should follow from 
your job analyses.

How Can the Plan Help You?
The best pay plan in the world for employees won't be of 
any use if it doesn't help your business. What's in it for 
you?

Again, the answer is getting, keeping and encouraging good 
employees. Your pay plan will help you:


Recruit—The pay ranges will provide competitive hiring 
rates for attracting high calibre employees. 
Retain—The performance appraisal plan and pay increase 
feature will encourage performance plus growth and 
development within your organization. 
Motivate— The pay plan will provide something to shoot for 
to keep employees interested in and enthusiastic about 
their present assignments and also provide the incentive to 
seek greater opportunity within your company. 
Having capable employees who are interested and 
enthusiastic will help you win the battle for business 
survival and growth.

Updating the Plan
To keep your pay administration plan in tune with the 
times, you should review it at least annually. Make 
adjustments where necessary and don't forget to retrain 
supervisory personnel. This isn't the kind of plan that can 
be set up and then forgotten.

During your annual review, ask yourself if the plan is 
working for you. That's the most important question. Are 
you getting the kind of employees you want or are you just 
making do? What's the turnover rate? Do employees seem to 
care about the business? In the last analysis, it's not how 
elegant the plan is or how beautiful the forms and 
administration. What matters is how the plan helps you to 
achieve the objectives of your business.

Source: U.S. Small Business Administration 
Prepared by: Saskatchewan Regional Economic and Co-
operative Development