Unlink your base employee compensation from performance evaluations

by on June 11, 2009 · 0 Comment POSTED IN: HR Info Center

Base pay employee compensation has very little connection to individual performance

One of the problems you have in most organizations is if you’re using a classic performance evaluation system, you’re giving people that notion that last year’s performance is linked to this year’s base employee compensation This turns out to be not real fun at the time of salary administration because now you got to explain how they’re getting 3% after they had a really great year and they worked really hard and they did a lot of good stuff.

When you tie these two things together, your performance management system and base employee compensation, you’re going to have an anti-climactic discussion. There’s no good way to tie a performance management system directly to base employee compensation and not be in a conundrum at the end of it because you don’t have enough money to make that really work.

Examples from industry leaders
Companies that have made record profits year after year, like the most profitable corporation ever-Exxon Mobil, do not go from last year’s performance directly to this year’s base employee compensation because they think that’s untenable. If Exxon Mobil thinks it’s untenable and financially imprudent, how the devil can anybody else afford to do it?

The second best predictor of employee compensation is not performance either, it’s compensation ratio. The market is going to dictate how big somebody’s increase is before their personal performance comes into play.

Compensation ratio is like replacement cost. It literally means your salary divided by the midpoint of the salary range or the type of work you do, as we defined it in the marketplace.

What it means is we are looking at what you’re paying somebody already as the second most important reference in terms of, you know, figuring out what to pay him next.

The salary range exists for every job whether you know about it or not.
But you know what? It doesn’t matter whether you got around to it or not. It exists. If you don’t know this, you’re driving blind. If you don’t have a salary range for every job, if you don’t have this kind of stair stepped out so you know what all the jobs are worth, how they fit together, you got a big problem, okay?

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