A performance appraisal and reward system can be a win-win for you and your team. You get more work out of your staff, and they get more rewards for working harder. These incentives are not the same as regular raises and merit pay. A good performance appraisal and reward system encourages employees to work on company goals.


A performance appraisal and reward system gives recognition or cash awards to employees who advance your business's goals. A good system sets clear standards for winning. The bar should be high enough to challenge your team but not so high that it's unattainable.

Appraising and Rewarding Performance: The Definition

A performance appraisal and reward system gives recognition or rewards to employees whose work advances your business goals. That's what makes the system different from regular raises or merit pay.

Annual raises help employees stay ahead of inflation. They're often combined with merit increases for good performance, but the difference in pay between average and superior employees usually isn't large. Raises are an incentive to keep doing good work but not to do exceptional work.

What to Reward?   

An incentive system is only effective if it rewards the right things. A good system ties the rewards and recognition into one or more of your business goals, such as:

  • Boosting sales revenue
  • Increasing productivity
  • Improving quality of work and eliminating defects
  • Following safety protocols
  • Perfect attendance
  • Coming up with cost-saving ideas

You can offer different rewards for meeting different benchmarks. The goals for your performance appraisal and reward system need to be concrete and measurable. Employees need to know for what they are shooting, and they need to see that the reward winners really earned it.

Talk to Your Team

A common joke in workplace comedies is to have the clueless boss hand out rewards that nobody wants. To avoid being that person, ask your employees what they really want. Better benefits? Training? Stock options? Dinner at the best local restaurant? Recognition in front of their colleagues?

Once you have the team's feedback, start to work on designing the program. One key question is whether to reward team performance, individual performance or both. Group rewards motivate everyone to work as a team, but they don't differentiate between exceptional members and those who just coast.

  • If your competition has a performance appraisal and reward system, your program should be at least as generous.

  • The system should have different levels of awards. Superstar performance should get better rewards or recognition than merely above-average work.

  • Being inclusive is better than being competitive. If, say, only one person on your sales force can win anything each month, your second-tier salespeople may just give up and stop trying.

How to Reward Employees

The next step is to decide just what rewards you're going to offer. The two big categories are cash incentives and recognition awards. There are several ways to reward with money:

  • Incentive pay separate from the regular pay-raise cycle: This can be a strong motivator provided that the bar isn't set so high that employees can't achieve it. You want to challenge them, not frustrate them.

  • Bonuses: These may only motivate employees in the short term, though.

  • Profit sharing: Give employees a percentage of the profits at the end of the year.

  • Stock options: This only works if your company is a corporation, but it's becoming more common for employees outside the C-suite.

Recognizing the Team

Recognition awards can have a cash value, such as a day at the spa or a dinner out. They are, however, never actual cash. Recognizing an employee or a team's performance can actually be a more effective motivator than money.

  • Recognition programs may have regular events, such as a monthly breakfast where you announce the winners in front of their colleagues.

  • Informal recognition gives employees privileges such as working from home, coming in late or taking a long lunch break.

  • Empowering employees is another type of recognition. Give them more authority, more training or a greater choice of assignments.

  • Symbolic recognition such as an inscribed coffee mug can also be effective.

Unlike monetary rewards, it costs very little to run a recognition program. If you're a small startup, employees will probably accept that symbolic recognition is all the company can afford. If you're a thriving company, running recognition programs on the cheap will not impress your staff.