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.

Reviewsnap Launches New Brand and Website!

Reviewsnap, the leading cloud-based performance management software solution, today announced the launch of its bold new brand.

A key component of Reviewsnap’s new image is its new brand mantra, “All together now.”

“Reviewsnap’s performance management system is ideal for companies that want to get everyone on the same page,” said Dave Arringdale, Reviewsnap president. “That mission is reflected in our new brand mantra. We are here to truly help, not just to provide a service.”

“At Reviewsnap, we believe performance management software needn’t be overly complex or difficult to use. The simple and intuitive layout we’ve designed in our new website reflects our belief that functional simplicity creates a very positive experience for our clients,” Arringdale said. The bold design elements in the company’s new website and logo similarly support Reviewsnap’s image as a market leader for performance management software solutions.

“What hasn’t changed at Reviewsnap is its deep commitment to excellence in understanding and serving clients at the highest level through genuine customer service and support,” Arringdale said.

As part of its heritage, Reviewsnap aims to build a true and trusting partnership with every client. “At its origins, the Reviewsnap system was developed based on feedback we solicited from the customers we would ultimately serve — human resource professionals, business consultants, managers and executives,” said Arringdale.

Reviewsnap used this unique insight to develop a complete, fully automated performance management system that offers user-friendly, reliable and affordable on-demand Software-as-a-Service (SaaS) solutions that help companies:

· Align goals for greater results
· Enhance communication and coaching
· Increase employee engagement
· Save time and money with improved efficiency

“Our customers run the gamut, from very small to very large companies,” Arringdale said. “They all look to us for high-quality, on-demand human resource and business services solutions. We know we have to provide the most versatile and robust performance management solutions possible — and we do that while keeping our prices affordable and our customer service top-notch.”

ReviewSNAP Introducing a New, Innovative Benefits-Based Performance Management™ Approach to Performance Appraisals

ReviewSNAP™ announced today that it will roll out its benefits-based performance management enhancement in the fourth quarter of 2011. Benefits-Based Performance Management™ (BBPM™) is an innovative approach to conducting performance reviews and ongoing feedback in a way that clearly conveys to the employee the benefits that accrue to them when they embrace workplace behavioral changes.

ReviewSNAP has developed this enhancement to the performance review process because it has found employees often do not understand completely why they should take seriously some of the ratings, comments and suggestions offered as part of their performance review. They may hear what they believe is a concern about their performance, but often fail to make the connection between how taking those concerns seriously and then making a conscious and focused effort on changing work-related behavior will benefit them in any material manner.

This approach does not have to represent a major departure from standard performance review processes. But it does provide the reviewer with additional tools to add verbiage to the reviews and to their discussions with employees that is intended to deliver more impact for employees as to why they should make important changes in their work approach.

According to Dave Arringdale, ReviewSNAP President, “Employees sometimes walk away from a coaching or review session wondering how they will truly benefit if they make behavioral changes to improve their performance in a particular area. Benefits-Based Performance Management™ helps embed into the entire feedback process a sense of partnering between the manager and employee and provides a clearer target for the employee to shoot for to help them become more successful. It’s really about what’s in it for me?”

This concept has been under development for some time. ReviewSNAP, in conjunction with its parent company, Applied Training Systems, Inc., has been conducting research for some time on the various ways performance reviews affect employee behavior and performance. That research uncovered a significant finding in that using a benefits-based approach seemed to outperform a more standard approach to conducting reviews and giving ongoing feedback.

“Whether we want to believe it or not, people are selfish by nature,” said Arringdale. “While they generally want the employer to believe they are eager to do a great job, they are not always that eager to modify their work behavior enough unless they feel there is a real payoff of some sort for them.”

ReviewSNAP has developed a comprehensive library of benefits statements that can be integrated into the actual performance review if desired. This library will soon be integrated within its Web-based performance management system. The addition of the library and the benefits section of the review templates are expected to take place by mid-fourth quarter of this year. The use of this feature will be optional within the system.