Over the weekend I found myself in a delightful conversation where someone asked me a question after reading my article “Managing Performance – Where do I start?” They were intrigued to see how one’s performance management system could be so integrated into so many other avenues of business. The aspect of which was most interesting to them was compensation.
They mentioned they had also read my other article “Compensation – Back to Basics” where I do touch on the subject but fail to go in to any depth on the subject. This was great feedback! Knowing there was such an interest in this particular topic I gave it some thought. Then afterwards I came to the conclusion that this was indeed some “Ideas I thought might be worth sharing.”
Delving into a performance management system is not a process to take lightly. This is the reason I did not go into much depth in my last article on compensation. There is much thought that must go into a pay for performance system because there are so many different ways you can do it. In the end, you will have to create a program tailored to the specific needs within the specific area of the specific organization.
Some organizations have multiple pay for performance systems and others use one general one to blanket the entire organization. So how do you know which pay for performance system is going to be right for you? Well the answer as in so many aspects of human resources is of course, “It depends.”
In this article however I want to outline a process that can be used to give consideration to elements which are vital to the creation of a pay for performance system.
1) What is the organizational goal?
If you don’t know what your organizational goals are, then you have much more important matters to think about than a pay for performance system. Without knowing what the organization wants to achieve you won’t know what objectives and behaviors are important. This is the foundation of all business decisions including this one. You also want to know what specific goals this pay for performance system is going to achieve.
2) How is staff performance being assessed?
This is where your performance appraisal system actually ties into the pay for performance system. Asking this question will determine if the staff are even being assessed to begin with. You would be amazed at how often the answer is, “They aren’t!” If this is the case in your organization then the development of your performance appraisal system is needed.
3) Is the performance management system in line with our organizational goals?
Here is an opportunity to evaluate the performance management system to be sure it is actually in line with the organizational goals. If it is outdated or perhaps is not currently measuring the performance of the staff accurately then it may need some modification. This is going to depend on what your desired outcome of the pay for performance system is.
For example, if the goal of the performance management system is to improve customer service, creating a commission structure to reward staff for each sale may not be consistent with the goal.
4) Establish your pay for performance based on your performance appraisal system.
Each appraisal system should be able to determine if goals are being met. There are going to be individual goals, team goals and organizational goals. There is also pay for performance measures that can be used on these various levels. Typically front line staff will have more individual goals to achieve as part of their appraisal system where as the executive team may have goals more focused on the success of the organization. It’s important as you design your pay for performance system you keep in mind the following:
a. Does the system encourage the desired behaviors?
For instance, in the earlier example of creating a commission structure for your sales force if the goal is to increase sales in exchange for higher rewards it could encourage higher sales by rewarding those who sell the products or services.
b. Does the system encourage undesirable behaviors?
Again using the creation of a commission structure, this approach may not encourage behaviors that lead to the success of higher customer service satisfaction. An upset customer is not a likely proposition for a sale. Thus many commissioned staff would likely not take the time to adequately manage the customer’s needs.
c. Is the pay for performance system internally equitable?
This question answers if this pay for performance system creates an imbalance in the organization. The answer to this question is going to be determined via the job’s worth within the organization in comparison to the other roles. For example if a commission structure allows a sales agent to earn more than the sales manager is this acceptable in your organization? In some cases, it might be!
d. Is the pay for performance system externally equitable?
This question answers if the pay for performance system maintains the level of competitiveness the compensation strategy calls for in the external market. If the intention is to attract top talent and the pay for performance is not high enough you may find yourself unable to fill vacant positions unless the candidate is compensated in another way such as a higher base salary.
5) Document your pay for performance system
Be sure to document your pay for performance system so you are able to fully explain it and evaluate it properly. Each aspect of it should be fully explained so anyone who is new to the organization is able to understand it.
6) Develop a communication strategy.
This is an important step that is often overlooked. Develop the means in how this change is going to be communicated to the staff. People inherently do not react well to changes especially when it affects their compensation. People have bills to pay and families to take care of and if the new system is not properly communicated in a way that makes them feel secure you could wind up with a firestorm of angry workers and potentially lose some of your top talent. A poor thought out communication plan can be a costly mistake to any organization.
7) Implement your pay for performance plan.
This step may involve training those who are overseeing the staff this affects or the people who will be administrating the pay for performance system. It will likely involve a number of different areas that need to be informed regarding the changes. Some of these areas may be but are not restricted to payroll, management, benefit administration staff and let’s not forget the employees themselves.
Always evaluate what you have done to be sure the new pay for performance system is consistently rewarding the desired behaviors and keep your eyes and ears open for potential undesired effects. As many things as we are able to plan for sometimes unforeseen effects happen. If that is the case, determine if there is a need to halt the system and modify it. For instance if you are paying a call agent in a call centre for every call they answer, you may be encouraging them to hang up on or transfer customers in order to take the next call. This is an example of one situation where you would want to consider stopping the initiative and come up with a better solution.