How Does Pay for Performance Sit with Pay Transparency?

Great performers are vital to organisations both in the short and long term. And when we lose them, or they are demotivated, this can cause huge issues.

How often as HR and Reward people are we told that we need to do something on package, and mostly on pay, to keep someone, even if that is outside of pay ranges, or we need to ensure a bonus is paid?

Quite aside of the issue that we don't have bottomless pockets, we are the keepers of fairness for the organisation and very conscious of 'he who shouts loudest' or 'he who his boss likes or rates most' rather than objective criteria to determine the value of an employee to an organisation.

Throwing money at top performers in order to keep them carries its own risks. Robust pay frameworks are key building blocks for equal pay and fair pay. Increasing pay transparency will shine a light on departures from them, however well intentioned. Not every organisation operates in geographies with formal pay transparency legislation, but all employing in the UK are bound by Equal Pay legislation. And there is increasing expectation, especially from younger employees, of clarity and fairness in pay and reward.

So in a climate of increasing transparency, how can we build pay frameworks which help us to retain and motivate those vital employees without falling foul of legislation and expectation?

Let's start with what do we mean by great performers? Those employees who constantly drive improvement or keep vital processes running smoothly. The ones who can always be depended on, and the ones who have a knack for working out what needs to happen to solve a problem. And when we have them, the last thing we want to do is lose them to a competitor to become their top performer instead.

We aren't necessarily starting from scratch. Identifying top performers as part of the performance management cycle has been a long-standing practice for many organisations globally. For example, Aon surveys each year and reports in their Salary Increase and Turnover Study that about three quarters of organisations identify top performers in their performance management cycle. However, fewer organisations identify high potentials or critical roles during this process — and the needle hasn't moved much in the past four years. Those organisations that do identify high potential and critical roles know that it's a continuous process and regularly needs review and update.

With a spotlight on pay transparency both internally from employees and externally from regulators, now is a good opportunity for organisations to review their performance management process, ensuring the right groups of employees are being identified for merit-based pay increases and other rewards as well as promotion opportunities. This should lay the foundation to then review, make improvements or better document the pay decisions that follow this performance management process.

Aon's data suggests that most organisations find promotions and base pay increases more effective than bonuses for rewarding top performers.

• 83% of organisations think promotions are an effective tool in managing top performers.
• 78% of organisations consider merit increases to base pay an effective tool in managing top performers.
• 63% of organisations report variable pay/bonus as an effective tool for top performers.

So those numbers clearly say that base pay increases are more effective than bonus plans. So why would that be? It could be the lack of certainty on what their efforts would result in on bonus plans, especially if there is an organisation underpin or something that is not just about their own performance. Perhaps they are - and I hesitate to say it - just not transparent

Transparency is all about driving fairness. So what would that look like when we are thinking about pay-for-performance practices?

Fundamentally, everyone needs to understand why employees at similar levels may receive different pay. Market demand, specialized skills and sector-specific constraints often lead to higher base pay for certain roles. Being transparent about these factors and using objective guidelines can help manage employee expectations and foster trust in pay decisions. Paying fairly does not simply mean paying one rate across the board but ensuring all pay decisions are consistently linked to clear, objective and robust standards.

And do organisations have those? Many do not.

So where should we start in getting to a place where we pay for performance and pay transparency can exist in harmony or are at least compliant.

So we know that from June 2026, the EU Pay Transparency Directive will allow employees to request information from their employers about the criteria used to determine pay and career progression, which must be objective and gender neutral. With increased scrutiny on how employee performance is assessed and rewarded, employers need to clarify the specific criteria that link individual outcomes to pay decisions. Organisations without a robust, transparent and fair process for evaluating performance throughout their organisation risk exposing themselves to potential claims under the directive.

As an example, in supporting a client in a previous pay review process, we built into the pay review tool the ability to link the performance rating to the pay review via an agreed set of principles. This provided a robust framework and reporting process for the organisation.

Just 19% of organisations feel ready to meet pay transparency requirements, according to Aon's 2025 Global Pay Transparency Study. This signals broad uncertainty about whether current pay-for-performance models offer enough clarity and fairness. All organisations should examine their performance management process to ensure it is thorough, well-documented internally and communicated clearly to employees. Emerging pay transparency legislation is not prescriptive in what a performance management process should look like. It's therefore the organisation's responsibility to establish a well-reasoned, holistic approach they can defend.

These are questions that our clients at Reward Heads regularly ask us. So where would we start?

• Clearly define which skills and competencies are valued. These should be part of the performance management process. Engage employees in this process to ensure transparency and give them insight into how they are being evaluated and rewarded.
• Establish clear KPIs. And monitor them consistently throughout the year so there are no surprises. Transparency involves communicating both how data is collected and used and the rationale for metric selection. Regular calibration of KPIs, similar to methods used for performance ratings and pay decisions, can support consistency and reduce bias across teams and departments.
• Tie everything together - make sure individuals can understand how their performance drives that of the overall organisation, especially if they feel a small cog in a big wheel
• Ensure managers really understand it. This helps mitigate biases and demonstrate compliance, positioning organisations to respond confidently to both regulatory demands and employee inquiries in an increasingly transparent environment. There is still work to be done to formalise processes and ensure proper managerial training during performance management. A sizeable chunk in our experience lack confidence in their ability to assess individual performance and the majority say inconsistent manager evaluations are a major challenge. Communications are invariably an area of opportunity in reward.
• Ensure processes and decisions are well documented. This is essential for all aspects of performance management and pay. Clear, auditable records detailing the criteria and processes for evaluating performance and awarding pay are vital. This includes performance ratings, promotion decisions and incentive awards that are consistently linked to transparent, objective and gender-neutral standards. Organisations in highly regulated sectors, such as financial services, often require stricter documentation. Their pay structures include incentives and variable pay tied to performance. With increased regulatory and stakeholder scrutiny on pay equity, frequent reviews and transparent communication are vital.
• Embed transparency. Regularly review and update pay strategies to reflect changes in the importance of roles and skills. Ensure that all performance ratings, promotion decisions, and incentive awards are consistently linked to transparent, objective and gender-neutral standards.
• Use other parts of the Total Reward package to reward - don't rely on base pay as that means the budget gets swallowed up before you can even get to PRP. We talk about Total Reward a lot and the increasing importance of elements that are not on the payslip - development, sense of purpose or belonging, wellbeing, feeling supported.

We would love to help you to drive performance in a way that is also fair and transparent. Please reach out on rewardsolutions@rewardheads.co.ukor to any of the team directly.