Define performance categories in your compensation policy

by on June 16, 2009 · 0 Comment POSTED IN: HR Info Center

Rating consistency is vital in employee compensation policy

Define the performance categories you’ll be using to evaluate employees in your compensation policy. Do it as accurately as possible. You’ll notice I have in this case, three performance categories or competencies. If you have more than two categories, chances are you are doing duplicate measuring, meaning that there is overlap between these categories and competencies. And so, in my opinion probably any more than ten is duplication. So try to combine it if you can to something less than ten.

Consistency in rating is important with compensation policy
So every word that describes these categories should be chosen very carefully. In fact, the entire document – the words on the performance appraisal form and in your compensation policy should be chosen carefully.

A recent survey showed that nearly 40% of American workers do not know what is truly expected of them on their job. Sounds amazing but it’s true. Make sure your managers are trained in writing good objectives to eliminate confusion with employees. I like using the SMART process in compensation policy, which teaches that all objectives should be specific, measurable, attainable, realistic and timely or time bound.

Salary cuts and compensation policy
It doesn’t cost anything to improve your performance appraisal form and process, but there are things that will have expense implications like how you handle base salaries in the coming year. The average projected salary increase for American budget for 2009 has now fallen to around 3%. Six months ago, it was even projected at 4%. And almost 1/3 of the companies are now projecting no increases for 2009.

Salary cuts are not necessarily a good idea in my book because your good performers also will take a salary cut and that means almost immediately they’re 10% below market. And somebody is going to give them that extra 10% and maybe more.

So, I’m not in favor of salary cuts as part of compensation policy even though I’m a diehard Democrat and egalitarian. There are some, you know, good things to say about teamwork and egalitarianism but I’m not necessarily for the same salary cut for everyone. You may delay your increases by three months. If you’re on an anniversary or focal date, delay it by three months.

One third of a 3% budget during the next 12 months could mean a lot of money. And it could mean the difference between being profitable and not being profitable.

Consider focal reviews.
Focal review moves all employee compensation policy decisions, raises, and reviews to one date. If you’re on anniversary date for employee compensation.. Its a big trend in over the last 20 yeas is to move companies into focal review kind of situations. It’s easier to budget It gives you a chance to evaluate everybody on the same scale at the same time. And I think there’s some real advantages to do that. All these and consistency are really important.

There are companies who will be giving no increase. I mentioned literally, almost 1/3 of the companies surveyed in salary planning surveys are now saying they’re not going to give any increases at all. You may be in one of those situations. So maybe you can focus on some of the other things I’m going to mention today.

Compensation policy “set asides”
You may give no increases to most employees but have special increases or special budget set aside for a certain employee. They could be the engineering group or some other group. So, that’s a possibility. Remember, be honest and up front about this.

Merit increase guidelines for compensation policy decisions
And if you haven’t adopted – one, if you are going to give increases and haven’t really adopted merit increase guidelines, I think it’s a great tool to use to communicate to managers what a reasonable increase should be given your budget.

Edited remarks from the Rapid Learning Institute webinar: How to Set up Fair and Effective Pay Plans in an Uncertain Economy by Rick Olivieri

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