Good Compensation Rests on Pay for Performance

by on June 26, 2009 · 0 Comment POSTED IN: HR Info Center

In Pay for Performance, What You Measure is What You Get

Employee compensation plans suffer from a failure to concentrate on the performance appraisal process and the performance rating distribution. You know, compensation people can write formulas to distribute compensation dollars until the cows come home. But when you’re talking about pay for performance, it talks about two parts to that equation. And the other part is actually measuring individual performance which is a hard thing to do. And not very many companies do this well. There’s a truism in pay for performance that what you measure is what you get. So this system, the performance appraisal form and process is extremely important.

The primary objective for any manager though is to get the absolute most from his or her people. It’s essentially managing their human resources. And if you’re like most companies, the largest expense the company has is probably human resources and primarily compensation expense. You’ll also find that the performance appraisal form in a document is probably the most important communications you have with your employees. The reason it’s so important is it actually communicates to the employees what the expectations are for their job. It tells them what their strengths are and weaknesses are, but it also tells them what’s important to the company. Again, what you measure is what you get over time.

So if you emphasize customer service, teamwork, communications, initiative, creativity — whatever those things are, you need to build those into your performance evaluation program. We want to pay for performance. It essentially says that we want to differentiate pay based on individual performance.

To do that, we need to differentiate performance between people. And to the extent that we can do it, the stronger our pay for performance program will be. One way to measure this is to actually look at your performance rating distributions. Most companies these days are trying to make sure they identify and take care of their above average people. Right or wrong, that’s what most companies are trying to do. And if your performance rating distribution is out of whack, you, first of all, are not identifying those who are truly exceptional. And eventually, you don’t link those differentials to pay very accurately.

Let them know that on a companywide basis you expect a certain percent of your people to be exceeds, a certain percent to be meets and exceeds and a certain percent to be meets expectations. Just publishing those guidelines generally results in the managers actually falling in line over time without actually resorting to forced ranking kinds of process. The more people you have in the category equivalent to “meets expectations”, the more acceptable it is to your employees.

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

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