Rethinking Pay for Performance in the Era of Pay Transparency

Rethinking Pay for Performance in the Era of Pay Transparency
September 18, 2025 10 mins

Rethinking Pay for Performance in the Era of Pay Transparency

Rethinking Pay for Performance in the Era of Pay Transparency

As pay transparency regulations increase, companies must update their pay-for-performance strategies and ensure performance management and compensation are clear, fair and well-documented.

Key Takeaways
  1. Only 19% of global companies feel prepared for pay transparency — and those who aren’t ready risk issues with compliance, fair pay and trust.
  2. Rather than completely overhauling your pay-for-performance process, focus on strict documentation, regular reviews, clear KPIs, manager training and transparency.
  3. Unlocking the full value of pay for performance requires expert guidance and reliable data to design transparent, business-driven reward strategies.

As pay transparency moves from an emerging trend to a regulatory reality, organizations face a crucial turning point in how they approach pay for performance and performance management processes. The spotlight is now on whether current compensation practices truly reward top talent or simply follow long-standing conventions.

Adapting to new legislation, evolving job roles and changing skill demands requires a strategic perspective on performance management. Organizations must seize this moment to accurately identify high-potential employees, high performers and critical roles, ensuring the right processes are in place to support fair and effective recognition.

How Have Pay for Performance Trends Changed in Recent Years? 

Identifying top performers as part of the performance management cycle has been a long-standing practice for the thousands of organizations globally that Aon surveys each year in our Salary Increase and Turnover Study. About three out of four companies identify top performers in their performance management cycle. However, fewer companies identify high potentials or critical roles during this process — and the needle hasn’t moved much in the past four years as shown in the table below.

Performance Management Practices

Year % of Companies Identifying Top Performers % of Companies Identifying High Potentials % of Companies Identifying Critical Talent/Key Roles 
 
 2021  79%  67%  74%
 2022  77%  62%  69%
 2023  77%  61%  68%
 2024  77%  60%  68%
 2025  77%  59%  67%

Source: Aon’s Salary Increase and Turnover Study, 2021-2025

 

With a spotlight on pay transparency both internally from employees and externally from regulators, now is a good opportunity for organizations to review their performance management process. Ensure the right groups of employees are being identified for merit-based pay increases and other rewards as well as promotion opportunities. This should lay the foundation to then review, make improvements or better document the pay decisions that follow this performance management process.

Rewarding Top Performers

Most organizations find promotions and base pay increases more effective than bonuses for rewarding top performers.

  • 83%

    of organizations think promotions are an effective tool in managing top performers.

  • 78%

    of organizations consider merit increases to base pay an effective tool in managing top performers.

  • 63%

    of organizations report variable pay/bonus as an effective tool for top performers.

    Source: Aon’s Salary Increase and Turnover Study, 2025

“These findings present an interesting perspective: Organizations indicate that promotions or base pay increases are ultimately more effective than bonus programs, which are traditionally designed to reward top performance,” says Belinda Armenta, a Partner in Aon’s Talent Solutions practice in Asia Pacific. “One conclusion we can draw is that variable pay or bonus programs often lack sufficient transparency for high performers, which ultimately limits their effectiveness and creates potential fairness concerns.”

Applying fairness to pay-for-performance practices also requires an understanding of why employees at similar levels may receive different compensation. Market demand, specialized skills and industry-specific constraints often lead to higher base pay for certain roles. Being transparent about these factors and using objective guidelines can help manage employee expectations and foster trust in pay decisions. Paying fairly does not simply mean paying one rate across the board but ensuring all pay decisions are consistently linked to clear, objective and robust standards.

61%

of firms currently have a well-established and embedded formalized performance management process across the country.

Source: Aon’s 2025 Performance Management Flash Study

Key Questions to Consider

  1. Think about what groups of talent you are identifying in the performance management process. Should you expand beyond the traditional definition of high performers? 
  2. What type of compensation vehicles (e.g., short or long-term incentives, merit-based increases, promotions) are most effective in rewarding different groups, particularly in light of pay transparency requirements? 
  3. Are you providing opportunities for career growth and development? What is the experience for certain groups identified in the performance management process versus all employees?

Ensuring Pay-for-Performance Processes are Compliant with Pay Transparency

Starting in June of 2026, the EU Pay Transparency Directive will allow employees to request information from their employers about the criteria used to determine pay and career progression, which must be objective and gender neutral. With increased scrutiny on how employee performance is assessed and rewarded, employers need to clarify the specific criteria that link individual outcomes to compensation decisions. Companies without a robust, transparent and fair process for evaluating performance throughout their organization risk exposing themselves to potential litigation under the directive. 

Just 19% of organizations feel ready to meet pay transparency requirements, according to Aon's 2025 Global Pay Transparency Study. This signals broad uncertainty about whether current pay-for-performance models offer enough clarity and fairness. All companies should examine their performance management process to ensure it is thorough, well-documented internally and communicated clearly to employees. Emerging pay transparency legislation is not prescriptive in what a performance management process should look like. It’s therefore the company’s responsibility to establish a well-reasoned, holistic approach they can defend.

Pay for Performance Best Practices

  • Clearly define valued skills and competencies. These should be part of the performance management process. Engage employees in this process to ensure transparency and give them insight into how they are being evaluated and rewarded. 
  • Ensure proper documentation practices. This is essential for all aspects of performance management and compensation. Clear, auditable records detailing the criteria and processes for evaluating performance and awarding pay are vital. This includes performance ratings, promotion decisions and incentive awards that are consistently linked to transparent, objective and gender-neutral standards. Companies in highly regulated sectors, such as financial services, often require stricter documentation. Their compensation structures include incentives and variable pay tied to performance. With increased regulatory and stakeholder scrutiny on pay equity, frequent reviews and transparent communication are vital. 
  • Conduct comprehensive manager training. This helps mitigate biases and demonstrate compliance, positioning organizations to respond confidently to both regulatory demands and employee inquiries in an increasingly transparent environment. There is still work to be done to formalize processes and ensure proper managerial training during performance management. Aon’s flash study of performance management practices among around 30 large technology companies finds that 21% lack confidence in their ability to assess individual performance. A further 79% say inconsistent manager evaluations are a major challenge. 
  • Establish clear KPIs. Monitor them consistently throughout the year. "Managing the entire process from setting objectives and KPIs to monitoring performance and linking these to pay decisions is crucial,” says Bruno Rocquemont, Partner & Head of Talent Data Solutions in Europe, the Middle East and Africa. Transparency involves communicating both how data is collected and used and the rationale for metric selection. Regular calibration of KPIs, similar to methods used for performance ratings and compensation decisions, can support consistency and reduce bias across teams and departments. 
  • Embed transparency. Regularly review and update compensation strategies to reflect changes in the importance of roles and skills. Ensure that all performance ratings, promotion decisions, and incentive awards are consistently linked to transparent, objective and gender-neutral standards. 

How Industry Pay Practices Should Evolve for Pay Transparency Regulations 

Industry  Current Practices Evolving Practices
Financial Institutions Discretionary short and long-term incentive programs and less structured compensation Documented and explainable pay differences, use of market reference points and performance scorecards
Technology Competitive base pay, performance incentives, equity and non-monetary benefits Balance market competitiveness, fairness and regulatory compliance with innovative compensation design
Life Sciences Flexible, competitive pay, broad salary bands, performance-based increases and equity compensation 
 
 Develop a global total rewards strategy, address skill shortages, AI integration and generational differences
Retail and E-commerce Localized pay levels, geographic adjustments, focus on base pay and high turnover Maintain steady pay increases and emphasize short-term incentives for managers and support staff
Manufacturing  Varied pay practices, complex incentive plans, minimal transparency and limited pay equity focus 
 
 Standardized pay frameworks, transparent communication, easy-to-understand incentive plans and regular pay equity analyses 

Supporting Employees Through Total Rewards to Boost Firm-Wide Performance  

While strengthening pay-for-performance systems in light of pay transparency is vital, it’s also important to focus on the role of total rewards in boosting the performance of the entire organization. "People often don't see how their performance drives business growth,” says Selma Lalji, a Leader in the Global Human Sustainability Practice in North America. “Clarifying this link is crucial for aligning individual efforts with organizational goals and driving meaningful change."

Thinking about holistic total rewards can also free up the merit salary increase pool to reward certain talent groups identified in the performance management process while still rewarding all talent groups through other rewards. Emphasizing sustainable, long-term employee performance can be achieved by cultivating a culture that prioritizes psychological safety and fosters belonging. Practical examples include regular one-on-one meetings, transparent performance discussions and clearly articulated connections between individual contributions and business objectives.

Employees are increasingly looking for support that goes beyond just financial rewards. Aon’s 2025 Employee Sentiment Survey highlights a strong and growing desire for wellbeing services among employees. Eighty percent of respondents consider health and wellbeing benefits important aspects of their workplace experience, but only 21% have access to emotional wellbeing services. Furthermore, 49% of those surveyed believe employers should take an active role in supporting emotional wellbeing, making it the top expectation for workplace support.

Learn how Aon supports organizations with the design, development and communication of total rewards. Contact us.

Aon’s Thought Leaders: 

Belinda Armenta 
Partner, Talent Solutions, Asia Pacific 
 
Ephraim Edelman  
Partner and Head of Data Solutions, Talent Solutions, North America 
 
Jeremy Gaylord  
Partner, Career and Rewards Advisory, North America 
 
Simon Haines  
Partner, Head of Talent Analytics, Europe, the Middle East and Africa 
 
Adithi Jagannathan  
Human Capital Solutions Advisory Partner, United Kingdom 
 
Selma Lalji  
Leader, Global Human Sustainability Practice, North America 
 
Ernest Paskey  
Head of Workforce Transformation and Analytics, Talent Solutions, North America 
 
James Pilkington  
Head of Technology Data Solutions, Talent Solutions, Europe, the Middle East and Africa 
 
Bruno Rocquemont  
Partner & Head of Data Solutions, Talent Solutions, Europe, the Middle East and Africa 
 
Martin Wainwright  
Head of Financial Services Data Solutions, Europe, the Middle East and Africa 
 
Sabiha Vorajee  
Director, Talent Solutions, United Kingdom, Europe, the Middle East and Africa 

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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