University staff must accept performance-related pay in return for a rise, according to the outgoing president of Universities UK.
Sir Howard Newby, vice-chancellor of the University of Southampton and incoming chief executive of the Higher Education Funding Council for England, said: "Ministers are becoming more serious (about pay) but they want any resources to be given on a something-for-something basis - for example, a change in the reward structure of the profession. Ministers are concerned that mediocre performance could be rewarded equally with excellent performance.
"At the national and local levels, we will have to get round the table to discuss whether performance as measured by appraisal can be linked to reward. We need to make sure the system is not abused. There would have to be safeguards built in; a system for appeals and redress. We need to do this if we are to make a serious step change in rewards for university staff."
UUK has identified an annual £900 million funding gap in higher education. An extra £195 million a year is needed for the recruitment and retention of staff, with an extra £280 million a year for ensuring that men and women are paid equally for work of equal value.
Sir Howard said that no strings should be attached to the bill for ending sex discrimination, which would benefit non-academic staff most, but that ministers wanted something in return for raising overall pay.
The government has already promised an extra £300 million over three years for pay but it is unclear whether this will be swallowed by reforming the pay structures.
The funding council will allocate the cash to institutions that demonstrate they have "annual performance reviews of all staff... with rewards connected to the performance of individuals including, where appropriate, their contribution to teams".
Sir Howard said: "We have £300 million on account and it's important the sector demonstrates that it has begun to deal with and tackle some of the issues Bett raised."
The Bett report, published in May 1999, recommended that "academic pay should be linked to job size, with progression determined by length of service, relevant qualifications and additional responsibilities, merit and achievement".
It also called for two pay spines - for academics and non-academics - which would be benchmarked against each other, and for institutions to have the flexibility to respond to market factors in shortage subject areas.
A spokesperson for the Association of University Teachers said: "We would be willing to have a constructive engagement with government about this but we would want to level the playing field first. All staff should receive an improvement in pay and conditions. There should be a genuine system of clear and open promotion and a review of pay grades. School teachers have performance-related pay and they also have a system of national pay review."
But Tom Wilson, head of the universities department at lecturers' union Natfhe, said: "It would be disastrous to link appraisal to pay. Appraisal is meant to be an open and honest discussion of a person's strengths and weaknesses, to identify training needs. When you link appraisal to pay, it becomes imbued with a separate set of values. If there is a problem with someone's performance, then the head of department should offer them help and support, assess their capabilities and identify training needs, or deploy them elsewhere."
Brian Towers, professor of industrial relations at Nottingham Trent University's business school, said: "Performance-related pay is explosive and would leave the sector in turmoil.
"People agree with the principle that the harder you work, the more you get paid. The problem is that systems get corrupted and favouritism emerges... Success in working environments depends on teamwork. Performance-related pay is an individual exercise so it has the potential to interrupt teamwork and destroy it. If we are going to have performance-related pay, let's do it on a departmental basis where people police themselves.
"There is enough evidence to make the government pause. The research outcomes are clear. Performance-related pay is often a mistake and to rush into it is quite wrong. Its introduction seems to be more about power and screwing down the universities rather than liberating them. In policy terms, (performance-related pay) would be a serious error."