Performance: The third leg of a compensation management system

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

The philosophy behind your compensation management system should be “We pay you fairly for what you do.”

The third best predictor in a compensation management system is performance. And actually it’s also potential. Now, what is potential? Potential means that you’re silly enough to want more responsibility and good enough to earn it.

Potential as a component in compensation management
Now, a lot of people out there have the common sense to say, I don’t need all that extra burden for a little extra money that comes along with it. I have a life. Okay, but those of us who have Salmon syndrome. Somebody comes along to you at some point in your career and they go, I have a great opportunity for you. It involves 50% more responsibility, 10% more pay. The salmon got to go upstream. That’s what we do. We go upstream constantly. If it’s upstream, we’re excited, we’re happy. If it’s downstream or if we’re lateral, then we’re unhappy. And we need to recognize that in the way we talk to people and in the way we communicate to them about salaries.

Performance does predict in compensation management
Last year’s performance is not the best predictor of this year’s pay, but I tell you what, let’s be really clear.

Last year’s performance dictates this year’s bonus, if you’re eligible for one. It dictates whether or not we might keep you. If we ever have any problems in the company, ever gets tied or things are difficult. It’s how we decide who to retain. It’s also how we decide who to promote, by the way. It’s the good performers who are going to get the promotions. And we even give good assignments, heck, parking spaces. I mean, we give all sorts of things to the people we consider better performers. But what we don’t do – what we can’t do is we can’t necessarily give people, based on their performance, big raises.

A universal formula for compensation management
I’m going to give you kind of a universal formula for what I believe works – every company I’ve ever taken under my wing, whether internal or external, I can tell you, this is where I would start with a compensation philosophy.

I would tell you, pay fairly for what you do. And to be able to say to people, we pay fairly for what you do, I don’t know, it’s a one size fits all kind of philosophy. It’s not sexy, but it is comforting. I mean, it does recognize market and it does, i.e. recognizes gravity. “We pay you fairly for what you do.”

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