In an individual manner commensurate with their contribution and market value, as simply and clearly as possible. It is not complicated, and making it complicated is how we end up in cultural negative feedback loops. The standard performance assessment does more harm than good, and we absolutely should not use it.
"The merit rating nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, [and] nourishes rivalry and politics. It leaves people bitter, crushed, bruised, battered, desolate, despondent, dejected, feeling inferior, some even depressed, unfit for work for weeks after receipt of rating, unable to comprehend why they are inferior. It is unfair, as it ascribes to the people in a group differences that may be caused totally by the system that they work in.
The idea of a merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good.
The effect is exactly the opposite of what the words promise. Everyone propels himself forward, or tries to, for his own good, on his own life preserver. The organization is the loser. The merit rating rewards people that conform to the system. It does not reward attempts to improve the system."
In short, the method by which you determine fair pay is very much irrelevant — so long as it does not involve the detrimental practice of performance appraisals. The main focus of both you as a manager and your employees should be on the system of work, not on the individual. Deal with the individual's fair compensation simply and clearly, and discard all by-products, as they are unproductive.
Some external resources:
https://www.psychologytoday.com/blog/wired-success/201211/wh...
http://www.theatlantic.com/business/archive/2014/01/the-case...
http://www.washingtonpost.com/blogs/on-leadership/wp/2014/01...
http://www.amazon.com/Abolishing-Performance-Appraisals-Back...
And finally, Deming's own brilliant opinions:
http://blog.deming.org/2013/02/the-idea-of-performance-ratin...
"The merit rating nourishes short-term performance, annihilates long-term planning, builds fear, demolishes teamwork, [and] nourishes rivalry and politics. It leaves people bitter, crushed, bruised, battered, desolate, despondent, dejected, feeling inferior, some even depressed, unfit for work for weeks after receipt of rating, unable to comprehend why they are inferior. It is unfair, as it ascribes to the people in a group differences that may be caused totally by the system that they work in.
The idea of a merit rating is alluring. The sound of the words captivates the imagination: pay for what you get; get what you pay for; motivate people to do their best, for their own good.
The effect is exactly the opposite of what the words promise. Everyone propels himself forward, or tries to, for his own good, on his own life preserver. The organization is the loser. The merit rating rewards people that conform to the system. It does not reward attempts to improve the system."
-- W. Edwards Deming
And even more in depth: http://blog.deming.org/2012/10/dr-deming-called-for-the-elim...
In short, the method by which you determine fair pay is very much irrelevant — so long as it does not involve the detrimental practice of performance appraisals. The main focus of both you as a manager and your employees should be on the system of work, not on the individual. Deal with the individual's fair compensation simply and clearly, and discard all by-products, as they are unproductive.