Too often, managers and employees see performance management and pay for performance as time-consuming administrative tasks rather than strategic drivers of business success. These programs often are criticized for inconsistency and perceived unfairness. HR teams invest significant effort in designing and tracking performance, yet business leaders don’t always see the value.
The truth is, performance management and pay for performance aren’t just HR initiatives; they’re business priorities that shape how work gets done and how success is rewarded. At the same time, they touch something deeply personal: an individual’s career and growth.
When designed and delivered effectively, performance management and pay for performance create clarity, connection and motivation for employees while driving results for the organization. That combination of business impact and personal relevance is what makes them so critical.
Today, the stakes are higher: Organizations face accelerating change, the considerable impact of AI reshaping work and talent strategies, rising employee expectations and relentless pressure to deliver results. Outdated systems can’t keep pace. Revamping performance management and pay for performance is no longer optional; it’s essential for driving results and retaining top talent.
The opportunity is clear. Nearly 50% of organizations believe productivity could improve by at least 10% if performance management were optimized, according to WTW’s 2025 Virtual Focus Groups. That’s not just incremental improvement — it’s a strategic advantage.
Here are five decisive steps to move beyond programs and create purpose-driven strategies that inspire employees and power business success.
01
Alignment is more than cascading goals; it’s creating communication, clarity and connection to the organization’s strategy at every level. While 66% of organizations aim to align individual’s objectives with business priorities , only half believe they succeed in differentiating and rewarding high performance.
To close the gap between intention and impact, organizations can:
02
Fairness, transparency and recognition aren’t perks; they’re expectations. 54% of organizations have changed or are considering changes to rating scales to improve clarity and differentiation. But scale changes alone won’t solve systemic challenges.
The five-point scale is still the most common, but it often doesn’t clearly separate top performers from the rest. Organizations told us they face real hurdles including tight budgets, limited flexibility and less freedom for managers to use pay to motivate their teams. Add to that the growing global push for pay transparency, equity and standardization, and it’s easy to see why managers feel constrained.
These challenges mean managers have less say in pay decisions and more pressure to stick to rigid rating calibrations, making it harder to truly reward strong performance.
To fix this, companies need simpler, more transparent approaches that build trust and give managers the tools to remove complexity and empower them to make meaningful decisions. Clarifying and communicating the organization’s pay for performance philosophy is essential for a positive employee experience. The design should prioritize simplicity so that manager time is spent coaching and developing employees, not navigating processes and forms.
03
Skills are the currency of growth. 54% of organizations now integrate skills into performance discussions, and 78% link them to career development.
This shift acknowledges that skills play a critical role in:
Embedding skills into performance management delivers a more complete view of contribution and potential. It also meets the evolving needs of today’s workforce by enhancing the employee experience and creating career growth opportunities that strengthen engagement and retention.
04
It’s a familiar saying: People don’t leave jobs; they leave managers. And it rings true. Our focus groups highlighted manager capability as a major challenge for many organizations. Only 20% of participants said their managers are effective coaches.
Why does that matter? Because great performance management depends on managers who can have honest, productive conversations, give clear feedback and inspire their teams. And these skills don’t happen by chance. They require focused training and development. When organizations invest in building these capabilities, it is a win-win: Performance improves, and managers gain valuable experience and career growth.
05
AI is reshaping performance management and pay for performance. 37% of organizations already use it for performance management, and adoption is accelerating.
Why the interest? AI can make processes faster and smarter — from setting goals and delivering feedback to calibration and predictive analytics. But adoption in pay for performance is slower and for good reason. Organizations are weighing concerns like pay sensitivity, the need for human oversight and the limits of current technology.
These challenges are manageable. In fact, some organizations already are piloting AI-driven solutions to improve efficiency, reduce bias and support data-driven decisions. As AI evolves, its role will grow, freeing managers and HR teams to focus on more strategic work.
One thing won’t change: Technology alone isn’t enough. Human judgment is critical to ensure fairness and trust. Organizations that combine AI innovation with thoughtful governance will lead the way.
Performance management and pay for performance are no longer administrative tasks — they’re strategic levers for growth. Organizations that embrace this moment can unlock new levels of clarity, motivation and impact. The future belongs to those ready to reimagine what’s possible.
