Should pay increases be tied to performance review outcomes? The debate is ongoing, and HR leaders must weigh both sides carefully. While pay-for-performance systems provide structure, they can also create challenges that undermine fairness and motivation.
Supporters of pay-for-performance argue that reviews linked to compensation drive accountability. When employees know raises are linked to their results, they have a stronger incentive to meet goals. Managers benefit from a clear framework for rewarding impact, and HR teams gain consistency across the organization.
Another advantage is recognition. Raises tied to reviews allow high performers to feel seen and rewarded for their contributions. They also help organizations allocate limited resources in a disciplined way, ensuring that funds are distributed in line with measurable impact.
Yet linking pay too closely to reviews comes with drawbacks. Reviews are never perfectly objective, and bias can distort outcomes. As discussed in Just Be Honest With Feedback, if employees distrust the process, they will distrust pay decisions as well.
Reviews that compress complex performance into a single score risk demotivating employees. Many solid contributors fall into the middle of rating scales. When raises are based only on scores, employees may feel undervalued even if their work is essential. 5 Elements of Good Feedback highlights how growth is best driven by coaching, not ratings alone.
Timing is another challenge. Annual raises may not reflect current contributions, a point reinforced in Keep Looking Forward. Employees who made significant progress late in the year may feel overlooked.
To balance these issues, many companies use a blended approach. Calibrating ratings across teams ensures fairness before raises are decided. Salary bands help tie pay to the market while leaving room for performance-based movement within the range. Spot bonuses or equity refreshes allow organizations to recognize contributions outside the annual cycle.
These practices create flexibility. Instead of a rigid link between reviews and raises, pay decisions reflect both structured evaluation and ongoing contributions.
Technology can make these practices sustainable. WorkStory turns continuous feedback into fair summaries, allowing managers to focus on coaching during reviews while still providing evidence for compensation conversations.
Read Performance Review and Merit Increases for related context, or explore Performance Review Rating Scales for a closer look at how evaluation frameworks influence compensation.
