The Pros and Cons of Tying Compensation to Performance Reviews

At Reviewsnap, we've seen firsthand the benefits delivered by a pay-for-performance structure that closely ties compensation to the performance review process. However, this isn't the right approach for every employer or every company culture.

 

Like most human capital challenges, tying compensation to performance reviews has its share of pros and cons. Here are a few of the most critical:

The Pros:

1.     It takes the “mystery” out of pay increases.—Employees often complain that raises and reviews are based on intangibles (how well their manager likes them, office politics, etc.) and not applied consistently. By tying reviews to compensation, performance clearly becomes the determining factor in compensation. The stronger the performance, the better the raise. But this approach demands that managers measure performance as accurately and objectively as possible, basing their reviews on concrete performance metrics and pre-communicated goals. If they don’t, it undermines the entire intent of pay for performance.

2.     It attracts top talent.—Research continues to show that top performers still cite pay as a main motivator. As Kerry Chou, Senior Practice Leader of Compensation at WorldatWork, noted during the company’s Total Rewards 2013 Conference and Exhibition, a recent WorldatWork survey revealed that better pay is the number one reason key people leave one employer for another.

3.     It can make administration easier.—With performance reviews tied directly to compensation, many employers find it improves the efficiency of integrating pay increase information into their payroll systems and generating follow-on reports. When compensation isn’t tied to the review process, HR or payroll staff members often have to take special steps to manually enter increases into the payroll system.

The Cons:

1.     Objective reviews aren’t easy to provide.—In order for pay for performance to work effectively, employees must be “rated” in some way but the rating must be objective and evenly applied. This simply doesn't work for all company cultures. For these companies, pay for performance can actually be counter-productive and introduce an air of unhealthy competition among employees who need to collaborate. In short, if the review process is perceived to be unfair, highly valued qualities such as trust, cooperation and teamwork can go right out the window.

2.     If the process isn’t clear, it can be confusing to employees.—Under pay for performance, a manager needs to be crystal clear in communicating precisely what is driving compensation. Is it goals, for example, or competencies? Let’s say a company's review process is based primarily on competencies but this isn’t clearly understood by an employee. She works hard all year to achieve specific performance goals and exceed targets. When she receives a lower-than-expected raise (because her communication with key team members has been consistently poor, for instance), it’s no wonder that she’ll go away disappointed, demotivated and confused. Bottom line, employees need to know how exactly they’ll be judged and what will drive their dollars.

3.     Compensation can overshadow the importance of reviews.—When a salary discussion comes on the heels of a performance review, it can be difficult for the employee to focus on the feedback he’s been given. Helpful critiques (both positive and negative) and guidance are eclipsed by the amount or lack of pay increase. Some employers overcome this by separating the review and the compensation discussion by several months. Others hold compensation discussions just once annually, while they hold several performance reviews throughout the year. If multiple performance reviews are held, employees must understand that compensation changes are based on the entire year’s worth of reviews—not just the most recent one.

At the end of the day, each employer must decide the compensation and performance review strategies that best fit its culture. Whatever your final choices are, remember they’ll form bedrock of how your employees feel about working for you—and how dedicated they’ll be to giving you their best efforts day after day.

Communicate your strategies and expectations clearly. Give your people well-defined guidelines. And empower your managers to reward top performers appropriately. These are the keys to compensation and performance success.

Heed These 5 Performance Management Realities—Before It’s Too Late!

Previously, we wrote about the pressing need to solve the performance management puzzle that baffles so many of our organizations.

As we noted in that post, Deloitte’s 2013 Human Capital Trends report addresses the issue in a section called, “The Performance Management Puzzle,” which offers a number of insights into exactly what’s vexing most employers (changing performance pressures, stagnating measurement and evaluation processes, evolving but unproven technologies, and the quality of the training and tools given to managers, to name just a few).

To “solve” performance management, we not only need to address each piece of the puzzle but we also must come to terms with a new set of realities. Progressive employers have already begun to accept these truths but many more employers need to follow suit if they want to keep top talent from slipping away.

Here are five of the most critical new realities that, once embraced, will help us all solve the performance management puzzle:

1.     The traditional performance management model has always been broken for many employers. This is compellingly illustrated in the Deloitte report: “Many companies continue to rely on traditional performance management processes .... Year after year, managers follow a well-worn routine: Fill out goal forms, track progress, fill out more forms, conduct a formal annual assessment, and then fill out more forms.” Indeed, this is the approach some employers have taken from the start but it was never what the traditional model of performance management intended. Annual reviews were meant to be more substantive than the rote formula of “fill out forms, track, assess, then repeat.” This formula is no way to motivate and engage people. As the Deloitte report’s authors point out, “Creating tight alignment between the work of the individual and the organization’s objectives promotes greater context, commitment, and pride in accomplishment.” This tight alignment and the intended outcomes have always been part of the traditional performance management model. But they demand a high level of interaction, communication and collaboration between managers and their direct reports—higher than many are providing—no matter what “model” you use.

2.     Annual reviews aren’t enough. No matter what performance management model you use, our businesses and our people move too quickly these days for annual reviews to serve them well. Performance goals and targets (for both individuals and teams) are now linked to shorter-term projects and other strategic deadlines as opposed to the fiscal year. Therefore, our people need more immediate, frequent and ongoing feedback. As a result, a growing number of employers are supplementing their annual reviews with more frequent, informal meetings. Managers and direct reports get together more often to discuss goals, track progress and strategize on performance adjustments when necessary. Many still hold annual reviews but these meetings are used primarily to address development and career pathing issues—and to discuss compensation (annual pay raises, bonuses, etc.). Bottom line, meeting only once a year to discuss performance is a dying practice.

3.     Technology is compulsory. No matter what a company’s review process is, technology-based solutions are a necessary component of a successful performance management process—especially when you factor in the tight timeframes many managers are dealing with and the widespread push to base reviews on metrics and hard data. Dedicated performance management software and systems help to keep the review process, managers and employees on track and working as efficiently as possible.

4.    Companies need to work from the bottom up to keep employees engaged. Companies should have employees either help with or initiate the review processes and be an active participant in establishing some of their performance goals and targets. This goes a long way toward keeping people engaged in their work. If your organization uses a top-down approach—placing accountability only on your managers—employees have precious little incentive to take ownership of their goals or become involved in their own development.

5.     We can’t look at the box for a “completed picture” of the performance management puzzle. There are no blueprints or reference materials because performance management isn’t a cookie-cutter issue. Yes, we’re all shooting for the same result—to fairly evaluate, compensate and motivate employee performance. But the puzzle pieces that fit together and work effectively will be somewhat unique to our organizations. Some will be served well by social tools, some won’t (at least not yet). Some will find great value in “crowdsourced” reviews, others will encounter problems. And so on, and so on, with each component. If you’d like some guidance on your particular challenges and options, Reviewsnap is just one of several highly respected performance management companies that will be happy to discuss solutions that might suit your company’s needs.

At it’s core, performance management is about helping your people deliver their best day in and day out. It’s about employee development. Organizations that treat annual reviews as a mere formality are simply going to lose out—and lose talent—to those that focus on improving engagement through the review process.

We’d love to know what your experiences have been and the lessons your organization has learned in addressing its performance management challenges.

Share your stories here on our blog or email us at info@reviewsnap.com and we’ll compile them for a future post or report.

It’s Time To Solve the Performance Management Puzzle

Performance management ain’t easy. At least not for most of us.

As Deloitte’s 2013 Human Capital Trends report noted, “… 58 percent of HR leaders gave their performance management process a ‘C’ grade or worse.” In fact, the report itself contains an entire section called, “The Performance Management Puzzle.

Puzzle—as in riddle. Enigma. Challenge. Problem.

It’s a fair comparison. After all, the performance management process encompasses a complex chain of moving parts including organizational goals and targets, individual goals and targets, manager/employee relationships, team relationships, evaluation tools, perceptions, judgment and communication, among others. Just thinking about all of these components and how to piece them together effectively is enough to make your head hurt.

As daunting as it might seem, we all need to solve the performance management puzzle—and the sooner the better because the future of our companies depends upon it. That’s no exaggeration. It’s the simple truth. Organizational performance is a direct result people performance. So the time to solve this particular puzzle is now.

But (you knew there’d be a “but” in here somewhere, didn’t you?) we need to proceed judiciously. The performance management puzzle can’t be “solved” all at once. The only way to raise that “C grade or worse” to something more respectable is to address one piece of the puzzle at a time:

·      The tools, systems and software we use.

·      The processes we have in place.

·      The comprehensiveness of our reviews—and our reviewers.

·      The training we provide to managers and supervisors.

·      The uniform and fair application of measurements and standards.

·      The effectiveness of our communication.

And so on.

As the Deloitte report noted, “the pressure for performance will likely increase as business decisions become more complex and challenging.” In other words, the need to improve performance management is only going to grow more urgent. So we’d better start bumping up our grades in quick fashion.

In our next post, we’ll push the puzzle metaphor just a little further and touch on some of the new realities of piecing together a strong performance management solution.

Mirror, Mirror: Who’s the Fairest in Engagementland?

For those of us prone to mirror-gazing and taking stock at this introspective time of year, here’s something worth pondering: are we really doing what it takes to nurture employee engagement within our companies?

It’s a fair question, especially when you consider the powerful benefits that derive from

superior employee engagement, e.g., enhanced productivity, improved innovation, greater profitability and reduced turnover, to name a few. The media has been filled with stories about these benefits and about the incentives that employers use to raise engagement levels.

But far less has been written about the attributes shared by companies that enjoy superior employee engagement. A notable exception is the Hay Group’s report titled, “What it takes to become a high performing company.”

In addition to highlighting the key attributes of companies with high employee engagement, the report also calls attention to this critical fact: companies boasting high engagement levels also are high-performing companies. They’re industry leaders in terms of their financial performance. “Indeed, these organizations roughly double industry averages on five-year ROA, ROI and ROE,” the authors write.

As the report shows, here are a few of the key attributes shared by high-performing, high-engagement companies:

·      They treat employee development as a priority. “Employees in high performing companies offer more favorable views of their ability to improve their skills in their jobs. As a result, they are more confident about their ability to achieve their career objectives by continuing to work for the company.”

·      They treat employees with great regard. “Those organizations that show a high regard for employees are more likely to find them willing to go above and beyond the formal requirements of their jobs, pour extra effort into their work, and deliver superior performance.”

·      They have leaders who lead. “Good leadership is widely known to make a significant difference to bottom-line performance … High performing companies are viewed as having effective leadership, leaders (whom) employees can trust and have confidence in, and leaders whose actions and behaviors are consistent with company values.”

·      They keep employees aligned with business goals. “High performing companies help employees to feel fully aligned with the organization by ensuring that strategies and goals are clearly communicated to employees and that employees are regularly informed about business plans and results.”

Again, these are just some of the attributes covered in the report, which also offers related statistical data for you digits-driven thinkers.

Clearly, as responsible employers and HR professionals, we need to give these attributes our serious consideration. But for those of us interested in transforming our companies into high-performance dynamos, our consideration isn’t enough. We must actively nurture these attributes in the New Year.