Performance management, salary reviews, desired behavior of leaders and employees and reward and recognition mechanisms are all very much connected and very much over-lapping with each other. Making changes to any one of these areas without considering how the other areas will be impacted would be foolish. People will always adjust their behaviors and efforts to ensure the best personal outcome for themselves. It is up to the company to ensure that these interlinking areas are in harmony with each other in order to reward and drive towards desired behavior and outcomes.
The resource I have here ties a specific overall individual performance review score to a specific range of possible merit increases. Management demand to have a fixed and structured approach for this is easily recognized, but it is also true that more than one aspect should be factored into selecting overall increases for employees. Some additional factors could include what is the budget for increases that year? How did the company perform in the last year (overall)? What is the labor market like at that time – are some jobs in high demand and do you risk retention issues if you do NOT ensure good compensation packages that compare well to the local market?
I would caution anyone to consider unintended outcomes when attempting to standardize and establish rigid structures for considering individual performance and linking that in a fixed way to increase percentages. Be careful what you specify and indirectly require from managers and employees. Your intentions may be good: to reward your best performers for their contributions and to ensure those with lesser performance improve or leave the company. You may end up with people for example not sharing information or not collaborating with others if doing so could hurt their own income potential.
One approach to tying the performance review process directly to the merit increase process is attached here. This example does not take into account some of the considerations highlighted above when it comes to selecting the actual increase percentage and I chose to share this resource anyway, because it does happen that HR is asked for a process like the attached on a regular basis and I want to make an example available to you if you find yourself in that situation. I do suggest you consider ways to incorporate the other aspects as outlined above when you finalize your proposal to implement a more structured approach to tie performance management to compensation review.
Performance Review process linked to Merit Increases resource link.
My main advice is to think it through carefully to ensure your good intentions have the best chance of being reinforced by your performance management and salary (or compensation) review processes. And I would also add that you should remain flexible in working with your documented process. Be ready and willing to adjust and update it as you gather input about how successful your process is in driving desired outcomes – results and behavior that you and the executives would like to see in your pool of employees.