How can performance ratings influence compensation decisions while maintaining fairness?

• A. By randomly adjusting salaries without ratings.
• B. Through policy-based linking of ratings to pay or bonuses, calibrated across teams to prevent bias and ensure consistency with standards.
• C. By using ratings only for promotions but not pay.
• D. By ignoring calibration to save time.

Answer: (B)

Performance ratings influence compensation when they are tied to a formal pay policy that translates performance into pay actions, such as merit increases or bonuses. This approach ensures decisions are based on documented performance and stay within budget and policy guidelines. Calibrating ratings across teams further ensures fairness by aligning rating standards, preventing local biases, and making sure similar performance yields similar reward regardless of where a person works. It also helps maintain consistency with organizational standards and legal defensibility, since the same scale and criteria are applied everywhere.

Random salary changes lack accountability and fairness. Using ratings only for promotions ignores how performance should impact total compensation. Ignoring calibration can lead to inconsistent, biased outcomes and undermine trust in the process.