Connect Employee Compensation with Performance

by on June 18, 2009 · 0 Comment POSTED IN: HR Info Center

The performance review is important when it comes to employee compensation

Measuring individual performance is the weak link in the employee compensation equation. Compensation people can write formulas about how to dish out employee compensation but where they fall down is in measuring individual performance. And if you think about it, the primary objective for any manager bottom line is to get the absolute most from his or her people or all of the resources that they have available.

So, getting the most from their Human Resources is really what managers are trying to do. However, to do that you have to distinguish performance levels between people. You can’t really distinguish pay levels between people until you distinguish performance differences.

And the way most employee compensation systems are set up, the performance review or performance evaluation process and its form and the result is what they use to make the differences between employee compensation. And the best employee compensation systems actually try to stretch out the difference between those who are below average, those who are average and those who are exceptional or above average.

One helpful idea to link employee compensation and performance is to establish for your organization a performance rating distribution target on a company wide basis. It’s not a hard and fast distribution. It doesn’t require you to force rank all your people. It only communicates to managers that this is the company’s expectations as to what percent of our people we think should be in above-average category of performance appraisal, what percent should be in the meets and exceeds, and what percent should be in the meet.

You will find that overtime if you communicate that to people they will actually come into line with those targets over time. You’ll also find specially if you are an organization that has a lot of high performance rating people, that as you moved people into the meets category in this example, you will find it’s a lot easier for people to accept a level three performance rating than if most of the people are in level two or level one.

The performance review is actually one of the most important communications that is performed between the company and its employees, especially when it comes to employee compensation. Think about what a performance appraisal form actually does. It not only lays out what the expectations are for the job and literally there are surveys to show that 40% of the employees out there still do not really understand what’s expected of them on their job.

One of the things noticed about performance review process itself is that there’s a tendency to focus on past performance. And while that’s well and good and you should say something about the past, the past is the past. Really what you’re trying to do through this process and almost any other process you follow – management process you follow is improved for the future.

So, instead of being 90% weighted to past performance and what occurred in the past that you ought to be somewhere around 50-50. Managers should talk about the past but spend at least 50% of your time talking about the future.

There also should be different evaluations for each job position. Supervisory employees may be evaluated on a couple of other metrics that non-supervisory employees are not evaluated on. Additionally, looking at a performance appraisal system every year may be useful in order to make important changes and have constant feedback between managers and their employees.

And they all advise you to keep notes of how an employee does during the course of the year. When you talk to them what was good, what was bad? And have a file for every employee and write it down on a yellow sticky. And put it in these folders. And at the end of the year, there should be no surprises. You’ve talked to the employees about the situations in the past. It’s just a summary of all these yellow stickies that you’ve accumulated over the last 12 months.

The supervisor needs to have control over the performance appraisal process. They should go and talk to whoever they have to in order to collect information to do a good evaluation for one of their employees and forced ranking has decreased dramatically.

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

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