IT is not hard to see the benefits of your pay being linked to performance when you read about the sort of bonus being promised to Alan Cook, managing director of the Post Office. He will pick up about £1m in extra pay if he successfully closes some 14,300 regional post offices across Britain over the next few years.

Cook, whose annual salary is £250,000, will get an 80% bonus each year if the closure programme is successfully completed by 2011 and the Post Office is brought back into profit.

But while bonuses of this scale are rare – even in the top echelons of industry – there is a developing trend in Britain to link financial rewards to performance by individuals, teams and even whole workforces.

Recently it was revealed that all nine executives of the Environment Agency, including chief executive and Labour peer Baroness Young of Old Scone, were paid bonuses (described as performance-related pay or PRP) of up to £24,000 each after being judged to have met 42 of the 49 performance targets set by the government.

But does linking salaries and one-off bonus payments to individual or team performance actually work? Do employees perform better? And are they happy to have their pay regulated in this way?

PRP is a controversial and sensitive subject. This summer, strike action by 30,000 administrative staff on Britain’s rail network was narrowly averted when Network Rail agreed to review its controversial performance pay mechanism.

In the education sector, too, the idea of performance-related pay has been met with stiff resistance. Three years ago the Institute of Education in London warned that there was scant evidence that paying teachers performance bonuses improved results or attracted more people into teaching.

Peter Dalton, professor at the Centre for Economic Performance at the London School of Economics, explains: “Market theories do not necessarily work in the public sector. A bricklayer may lay more bricks if paid a bonus. But this does not apply to teachers who are highly motivated professionals already working to maximum capacity.”

However, a study to be published this month suggests that the growing numbers of British workers receiving PRP enjoy greater job satisfaction overall.

Colin Green of Lancaster University and John Heywood from the Universities of Wisconsin and Birmingham based their findings on a detailed look at the most recent British Household Panel Survey – a yearly nation-wide survey started 16 years ago.

Their study examines profit sharing, performance pay and bonuses and concludes that profit sharing and bonuses tend to increase job satisfaction. In addition, having performance-re-lated pay increases workers’ satisfaction with both their wage packets and their job security.

Green said: “Our research has shown that performance pay, as well as improving levels of satisfaction, can also improve attitudes towards job security.

Performance-related pay would be expected to have a negative effect on job security, in so far as it is indicative of a culture of monitoring of work effort.”

But linking pay to productivity, said Green, may also increase job security as bonuses will fluctuate with the company’s performance, reducing the need for firms to lay off workers in periods of weak performance.

The 65,000-strong workforce at Lloyds TSB, one of Britain’s top four high-street banks, can expect additional financial rewards if they perform well – and the linking of performance with pay hasn’t damaged their view of the company.

Tim Fevyer, head of rewards, compensation and benefits for the group, said that in a recent anonymous survey 84% of the bank’s employees saw the organisation as a positive place to work.

At Lloyds TSB the way an individual is paid is a mixture of a rate for their ongoing performance, which reflects what they are worth in the overall market-place, and their competence over time – together with their shorter-term performance, which is assessed against targets agreed with their line manager. Line managers also agree how they can help individuals to attain and exceed these targets.

This addresses one of the fears about performance-related rewards – anxiety that you are being thrust into direct competition with your colleagues. At Lloyds TSB and other organisations you are competing against your own self-defined objectives.

At Happy, a City of London computer-training company that has won awards for the quality of its working environment, performance-related bonuses are awarded to the entire workforce of 45.

Henry Stewart, founder and chief executive, said: “We pay a bonus to all our staff at the end of the year – depending on how we’ve performed. It’s not an individual thing, but it is about how we perform as a team. Last year was a good year – so everyone got a 10% bonus on top of their salaries.”

Until now at Happy, performance pay has been related exclusively to team performance. The company is now recruiting a sales person for its online learning division. For the first time in Happy’s 17-year history one of the team will work on a commission basis – the most time-honoured way of linking performance to pay.

“It’s an experiment and we are a little nervous about it,” said Stewart. “He or she will be the only person we’ve ever had working this way.”

With PRP now spreading across Britain’s companies it is an experiment that many are going through.

Explore Career

• Graduate

• Senior Executive

• Recruiter Forum

• Top 50 Women

• Best 100 Companies

• Careers in

Times Recommends

• Inspirational leadership
• How to get a new job
• The reluctant CEO