Personal performance pay

What it means

Personal performance pay is a variable part of wages through which an employer reflects the results, quality of work, independence or attitude of a particular employee. It is usually paid monthly alongside the basic pay component, and its amount may change according to the assessment for the previous period.

The decisive question is whether it is guaranteed or discretionary. If the pay statement, employment contract or collective agreement sets it as a fixed amount without conditions, the employee is entitled to it and the employer cannot cut it unilaterally. If awarding it and its amount depend on a manager's decision under clear criteria, it is a discretionary component.

Personal performance pay is part of wages, so it is subject to income tax and contributions and counts when calculating average earnings, for example for holiday pay. It differs from one-off bonuses and rewards, which are tied to a specific result or event.

How it works in practice

When setting it up we recommend describing the rules in an internal pay policy: who decides, on what criteria, within what range and how often it is reviewed. Clear rules protect the company against objections and give employees a sense of what they can influence.

The amount is best based on regular employee appraisal with measurable goals. If a manager cuts it without explanation, the employee sees it as a punishment and motivation drops. If everyone gets the same regardless of performance, it loses its point and becomes a hidden part of base pay.

On the payroll side, make sure the payroll inputs contain the current amount at the cut-off date. Changes after payroll has been processed mean correcting payments, contributions and tax advances. For a guaranteed component every change is made in writing, usually through a new pay statement.

What to watch out for

Mind the wording in contracts and pay statements. If personal pay is stated as a fixed amount without conditions, it becomes guaranteed and can be reduced only by agreement. Companies often find this out when revenue falls, they want to cut payroll costs and discover they cannot without employees' consent.

Personal performance pay must respect the principle of equal treatment and the rules on pay transparency. Differences between employees in the same role must be explainable by objective criteria, not by sex, age or other protected characteristics. In a dispute the burden of proof lies partly with the employer.