Get pay progression right to retain top talent

Implementing a transparent performance framework that focuses on adding value to the company is a better way to retain staff and build trust.

Pay progression isn't just about increasing salaries - it's about creating a transparent framework that shows employees exactly what is expected of them to reach their salary goals.

When implemented effectively, it becomes a powerful tool for retention, engagement and building trust.

However, many organisations still rely on outdated models that frustrate employees and fail to deliver the intended results.

Here’s how to implement a more effective strategy.

Pay for performance isn't working

For decades, organisations have relied on annual performance ratings to determine pay increases.

The flawed reasoning goes: excellent performance deserves excellent pay increases.

However, if you were to ask employees what they think of when they hear the term ‘performance management’, a common response is “It’s about managing under-performance”.

After all, if someone is an exceptional performer, why do you need to ‘manage’ their performance?

So, if employees don’t trust the process, then why do we keep doing it?

And more importantly, why do we continue to link it to pay?

Some of the most common reasons this approach fails are:

Annual reviews: These meetings are supposed to focus on the last 12 months, but commonly, key things get forgotten. Despite being a consistently high-performing employee, one year could be particularly difficult. Through no fault of their own, this then reflects poorly on their appraisal and results in lower pay progression.
Lack of training for line managers: High performing employees often get given management or leadership responsibilities. But just because they’re good at their job, it doesn’t mean they’re good at leading people. Despite this, very few organisations give formal leadership training to employees. Even fewer provide support on how to approach performance management and pay conversations. In fact, last year’s Global Salary Planning Survey by 3R Strategy found that 67% offer nothing at all.
Forced distribution: When employees hear about their performance rating at the end of the year, they’re often confused because it’s not what they expected and seems unfair. Despite this, there’s no time to make adjustments - and yet this will impact their pay.

The risk of automatic progression

The alternative approach some organisations take is automatic step-based progression, where employees receive predictable increases each year.

This presents its own challenges.

This system creates significant affordability risks as payroll costs increase regardless of business performance.

It can also lead to complacency, as employees know they'll receive pay increases without needing to develop new skills or take on additional responsibilities.

When everyone progresses at the same rate regardless of contribution, your highest performers quickly recognise the inequity and look elsewhere for recognition.

A better approach: merit-based progression

The solution lies in removing the link between pay and performance.

Instead of asking "How did this person perform against objectives?", shift to asking "How does this person add value to our organisation?"

This can address some of the common sources of frustration around pay progression:

Skills and competencies development

Pay progression should reflect growth in capabilities that add value to your organisation.

When employees master new skills, take on more complex responsibilities, or develop expertise that benefits the business, we should recognise this increased value.

A clearly defined competency framework provides both managers and employees with transparency about what skills matter at different levels and how developing those skills connects to pay progression.

Total contribution

Rather than reducing performance to a single rating, evaluate the broader contribution an employee makes.

This includes not just what they deliver but how they deliver it - their impact on team culture, their support of colleagues, their alignment with organisational values, and their ability to solve problems.

This more holistic approach recognises that value comes in many forms, allowing you to reward employees who contribute significantly even when traditional performance metrics might not capture their full impact.

Separating performance conversations from pay decisions

This approach doesn't mean abandoning performance management altogether.

Rather, it creates a healthy separation between performance discussions and pay decisions.

When these conversations aren't directly linked, both become more effective.

Performance conversations can focus genuinely on development, feedback and improvement without the shadow of compensation implications hanging over them.

Managers can have more honest discussions about areas for growth, and employees can acknowledge challenges without fear of financial consequences.

Meanwhile, pay progression discussions can consider the full spectrum of how an employee adds value - their growing capabilities, their alignment with organisational needs, and their overall contribution - rather than reducing everything to a single performance rating.

How this approach improves retention

Implementing a competency and contribution-based pay progression model can address some of the common sources of frustration around pay.

When employees understand how their pay is determined and see a clear path for progression, they're more likely to invest in developing skills that benefit both themselves and the organisation.

By recognising various forms of contribution rather than focusing narrowly on performance metrics, you validate different types of value-add.

This creates an inclusive environment where employees feel appreciated and a sense of belonging.

This approach aligns with what employees increasingly want: transparency, fairness and recognition for their unique contributions.

When people feel their growth is acknowledged through meaningful pay progression, they're far less susceptible to recruitment calls offering marginal salary increases.

Most importantly, by rewarding the talent that has the strongest impact on your organisation, you send a message that they’re valued, leading to higher levels of engagement and the desire to stay with the organisation that comes with it.

Implementing the change

Transitioning to this model doesn't mean abandoning performance management altogether.

Regular conversations about goals, development and achievements remain essential - but they can become more honest and productive when not directly tied to pay outcomes.

Start by developing clear definitions of what contribution looks like at different levels within your organisation.

Create transparent frameworks that show employees how developing their skills connects to pay progression.

Then, train managers to have more nuanced conversations about value and contribution rather than reducing performance to simplistic ratings.