Performance pay can fit a transparent pay structure when the employer defines what performance means, how it is measured, how ratings affect pay and how decisions are reviewed. Performance should not function as an open-ended justification for different salaries. The criteria should be job-related, objective, gender neutral and consistently applied, with calibration and documentation strong enough to explain why comparable workers received different outcomes. Directive (EU) 2023/970 does not ban performance-related pay or prescribe a merit matrix, but Articles 4 and 6 make the objectivity and transparency of the underlying pay structure and progression criteria important.
Jurisdiction: European Union
Performance Pay Should Operate Through Defined Rules
Performance-related pay is easier to defend when it operates inside a structured compensation framework. The employer should define which performance factors matter, how they are measured, who evaluates them and how the resulting rating affects salary or variable compensation. A manager should not be able to award materially different increases to comparable workers without reference to the same decision framework. The pay structure may use a merit matrix, increase guidelines or another documented method, but the important point is that performance pay should be governed by rules rather than treated as an unrestricted exception to the salary structure.
The Performance Criteria Need to Be Job-Related and Gender Neutral
A performance factor should reflect the work rather than subjective impressions unrelated to job requirements. Measures can include delivery against agreed objectives, quality, productivity, customer outcomes, technical proficiency or leadership behaviours where those factors are relevant to the role. Employers should review criteria for hidden bias and avoid vague standards that are difficult to evidence. Terms such as executive presence, culture fit or attitude can produce inconsistent outcomes if they are not defined. The stronger approach is to describe observable expectations and apply them consistently across workers performing comparable work.
Salary-Band Position Can Affect the Size of a Performance Increase
Many employers combine performance results with an employee's position in the salary range. A high-performing worker near the minimum may receive a different base-pay increase from an equally rated worker near the maximum because the structure is also managing range position. That can be a legitimate design choice, but the rule should be documented and applied consistently. If range position affects the award, employees and decision-makers should understand the principle. Otherwise two workers with the same performance rating may receive different increases without an obvious explanation, creating unnecessary transparency and employee-relations problems.
Calibration Helps Reduce Manager-to-Manager Inconsistency
Performance systems can become uneven when one manager uses the top rating frequently while another almost never does. Calibration gives the organisation a way to test whether similar evidence is producing similar ratings and pay outcomes. A useful calibration process focuses on the quality of evidence rather than forcing a predetermined rating distribution. Compensation teams can review proposed increases alongside performance ratings, salary-band position and comparable-worker data. Repeated differences by team, sex or manager can indicate that the performance framework is being applied inconsistently even if the written policy appears neutral.
Performance Pay Does Not Replace Equal-Pay Analysis
An employer should not assume that any pay difference is justified merely because performance is mentioned. The organisation needs evidence showing that performance was actually assessed, that the criteria were relevant, that the rating was supported and that the pay consequence followed the documented rule. If workers performing the same work or work of equal value have different pay, performance can be part of the explanation only where the distinction is objective and consistently applied. A label such as merit increase is not sufficient by itself to demonstrate that the underlying difference is defensible.
Articles 4 and 6 Emphasise Objective Pay Structures and Criteria
Directive (EU) 2023/970 requires pay structures that support equal pay for equal work or work of equal value and requires criteria used to determine pay, pay levels and pay progression to be objective and gender neutral. Those requirements do not prescribe a particular performance-management system or merit-increase percentage. They do, however, make opaque performance discretion harder to defend. Employers should therefore connect performance criteria, rating processes, increase rules and salary-band governance so the relationship between performance and pay can be understood and reviewed.
Document Both the Rule and the Individual Decision
A defensible system needs two levels of documentation. First, the employer should preserve the policy explaining performance factors, rating scales, calibration and pay consequences. Second, it should retain enough evidence to explain the individual decision, including the rating, supporting evidence, approved increase and any exception. This allows later review of whether the rule was applied consistently. Employers should also analyse performance-pay outcomes over time because a neutral-looking process can still generate persistent differences if one group receives lower ratings, smaller increases or fewer exceptions than comparable workers.
Frequently Asked Questions
Can performance justify different pay within the same salary band?
Potentially, where performance is genuinely relevant, measured through objective gender-neutral criteria and applied consistently. The employer should be able to evidence both the performance assessment and the resulting pay decision.
Does the EU Pay Transparency Directive ban merit pay?
No. It does not prescribe or prohibit a merit-pay model. The pay structure and pay-setting or progression criteria must nevertheless be objective, gender neutral and capable of supporting equal-pay analysis.
Should performance increases depend on salary-band position?
They can, if that is part of a documented and consistently applied compensation rule. Employers should explain how range position and performance interact rather than leaving the relationship to manager discretion.
Related Guides
Official Sources
Requirements and practices differ by jurisdiction and organisation. Check current local law, official guidance and professional advice for a specific situation.