Salary Administration Should Be Linked To Performance Rating

Create a Relationship Between Salary Administration and Performance

The third sin in employee compensation is failure to concentrate on performance appraisal process and performance rating distribution when dealing with salary administration. So measuring individual performance is actually the weak link in the salary administration equation.

The primary objective though for any manager when you get right down to the bottom line here is to get the absolute most that you possibly can from your people. So in order to accomplish that though, managers must be able to distinguish performance differences between people. If they can’t distinguish performance differences between people, they’re going to have a very difficult time with salary administration.

A good performance rating distribution is something which shows only 15% of your people has been labeled exceeds or exceptional or level one. And 50% have been labeled meets expectations or essentially average. Again, if you can’t differentiate performance, you won’t be able to differentiate salary administration.

So given the bad and good performance rating distributions, here’s how you can spend a 4% merit budget. With a good distribution, you can grant a significantly larger increase to level one performers or people who are exceptional and exceeding expectations.

With the bad distribution for example and exceeds again, given a 4% merit budget achieves 4.5% merit increase. If you have a good distribution, meaning we have fewer people rated exceeds or level one, you can actually increase that significantly from 4.5% to 6% for an average increase.

So again, in this type of environment, what you’re going to be asked to do is probably focus on retaining your best people. And your best people will have better job opportunities than your average employees. But that seems to be where most companies focus their attention during down times.

Remember moving people to the correct spot and range is generally what managers should be doing. Take the merit increase guidelines to the next level and communicate more clearly to the managers how salary administration should be distributed.

Split the salary range into thirds with the definition for what types of people should be paid in each part of the range. Call the range thirds “entry level”, “experienced” and “advanced”. So we simply have taken the salary range and split it into three parts. Some of you may be already doing this. I think it’s a good tool to provide managers.

The ultimate objective is for managers again to move each individual to the correct spot in the salary range based on experience and performance over time. And I think this kind of guideline actually helps them do that. You will also see that I set the guidelines to reflect 0% increase for those that meet expectations and are already paid in the top third of the salary range.

And there are companies that actually will not allow essentially average people to be paid in the top part of the range. If I give that group zero, I’m able to save enough money to increase the percentage for those in the low third who are truly outstanding performers. Again, in this market, you’re going to want to concentrate on retaining your best people.

Edited Remarks from “The Seven Deadly Sins of Employee Compensation Plans (and How to Fix Them)” by Rick Olivieri