Pay increments worth a total of about £1 million will be withheld by Northamptonshire County Council after far more staff performed well than managers expected.
The increments are only paid every other year and are earned by employees receiving exceptional or highly effective ratings in their appraisals.
After working hard in 2015 / 2016 a total of 61 per cent of council staff hit the challenging targets, boosting standards across the local authority.
But it has emerged that County Hall bosses forecast far fewer staff would be up to the task and only budgeted for 25 per cent hitting the mark. As a result, the council has confirmed it will award the pay rise to no-one.
An internal email to staff from chief executive Paul Blantern says: "While it is very positive that so many employees have been rated by their managers so highly, the figure is too high when you compare it to the performance of the council as a whole. In effect this is saying that two out of three employees are rated as highly effective or exceptional."
Mr Blantern said the award would be "arguably not fair to those employees who have genuinely been rated as Doing Your Job Well."
The council said it considered ways in which it could realign the ratings, but concluded "we could not to do so in an equitable manner."
Mr Blantern said "We fully understand how disappointed you will be with this decision, but the reality is that we need to have a pay reward system which not only awards excellent service but, critically, is also sustainable and financially viable."
The chief executive went on to say it was unfortunate that the ratings were not financially viable and "all managers have to take some responsibility for this."
He also added that honouring the award could lead to five per cent of staff across all departments being made redundant or four days mandatory unpaid leave across the whole council.
Mr Blantern said: "As regrettable as the decision is not to pay increments, we genuinely believe that this is the preferable option."
The newsletter email ends on a separate subject of looking to the future.
Mr Blantern says: "My very warmest and sincere thanks to you all for continuing to work through what is the hardest year of our austerity budget.
"Let’s all pull together and work on implementing all of the above throughout the next five months, the good behaviours developed now will prove invaluable in the future to us as an organisation, to each of us as individuals and to the county."
The issue now means the two unions are in formal dispute with Northamptonshire County Council, who both expressed incredulity at the reversal given staff's hard work over 12 months.
Kev Standishday of Northants County Unison said: "You'd think having a highly effective workforce would be something to celebrate.
"On the back of the recent damning report into NCC’s mishandling of their finances, the auditor claimed they were the worst of 28 council’s. After the well-publicised £45 million spent on consultants and agency staff, it seems hard-working centrally-employed staff are paying the price for the administrations poor management."
The GMB union pointed out that the “highly effective” performance would appear to be a good outcome when the council had to save £65 million this financial year and effective employees had already saved £51 million seven months into the financial year.
Rachelle Wilkins, GMB regional officer - who branded the decision potentially unlawful - said many staff facing a charge of £48 per month to park at the new Project Angel council offices had already allocated their increment pay to cover the future cost.
She said: “This is yet another nail in the coffin for our hardworking public sector workers in the council. Northamptonshire have not contacted me to discuss this matter, they have just gone ahead with this to make further cost savings.
"My members are now completely demoralised by their unfair decision. Any goodwill that had been generously given will now be withdrawn."