Five common pitfalls and how employers can avoid them
Many organizations across Canada are seeking to forge links between performance and rewards. They see it as a way to focus attention on business priorities, motivate employees and recognize those who make superior contributions.
But it can be challenging to make pay for performance work effectively. The road to linking performance and rewards is often filled with potholes that need to be carefully navigated. The following are five common pitfalls and some suggestions to help navigate them.
1. The organization says it believes in pay for performance, but leaders and managers don’t walk the talk. Before embarking on the road to pay for performance, a company must decide whether this is the right path. Resistance could be a sign there are organizational design or cultural issues at play that are at odds with this approach.
A company may determine it is too difficult to evaluate performance or contributions for certain employee groups and may elect to use across-the-board pay increases or increases based on time in grade. Similarly, an organization may use an across-the-board approach to mirror union pay practices. (First-level supervisors who supervise unionized employees may be paid a premium over union rates, with no differentiation of pay based on performance.) Finally, an organization may decide pay for performance runs counter to collaboration or teamwork and may choose a blanket approach.
Even if an organization decides pay for performance is the way to go, it must deal with leaders and managers who won’t put the principles into action. To shift and align behaviours takes time and effort.
The company can introduce guidelines related to desired performance distribution curves to challenge management thinking. It can provide training and communications support to help managers understand what is expected of them and monitor their pay decisions to ensure key principles are being applied. The organization can measure and reward managers for their ability to manage performance effectively, which encompasses their ability to effectively link performance and rewards.
2. Managers rate employees and allocate pay increases inconsistently. A common complaint is that the performance bar varies within and across groups. Some managers may give top pay increases to a select few, while others may provide top awards to the majority of their people. Inconsistencies will undermine the process and lead to concerns about fairness, especially if employees compare notes.
Companies can encourage consistency by training and coaching managers on how to make effective pay decisions that align with the organization’s pay-for-performance principles.
They can provide managers with support tools that help them determine appropriate pay increases. They can provide a specific budget for merit increases. Finally, they can audit or review pay decisions to ensure managers are applying a similar definition or standard of superior performance.
3. The performance rating scale is poorly defined, making it difficult to create meaningful links between performance and rewards. Sometimes the tools used to support pay for performance can hamper decision-making, especially if an organization applies a performance rating system that is either too simplistic or too complex. If the rating scale has too few levels, managers will find it difficult to differentiate employees based on performance and may be forced to use the same rating for employees who are at different levels.
If the rating scale has too many levels, managers may not be clear on what type of performance warrants one rating versus another. In either case, it’s difficult to explain to employees why they received a certain rating and the links to pay are weakened or deemed unfair.
A rating scale with three to five levels works for many organizations. But effectiveness is not just about the number of levels, it’s also about how clearly each level is defined and delineated. Effectiveness hinges on managers understanding what distinguishes each level from the others.
4. The budget for merit increases is small, making it hard to differentiate rewards based on performance. This is a common concern, especially in recent years when budgets for merit increases have been modest. However, the principles of pay for performance remain the same. In fact, one could argue they’re even more important when budgets are lean.
The key is to differentiate reward levels based on performance and ensure dollars are directed to top performers. Low performers must be identified and given small or no increases to make sure those dollars are available. As part of any compensation review, companies should make sure pay levels are competitive with the market.
5. Employees don’t understand how their pay increases are determined. While training and communication for managers is critical, employees must understand what is expected of them and how their performance will be evaluated and linked to rewards. If employees do not understand the rationale for a given increase, they will not be clear on what behaviours and results must be repeated, or changed, to earn comparable or higher pay increases in the future.
Many organizations also educate employees on how the business operates and how it earns its revenue. Helping employees understand how they fit into the bigger picture — and how they contribute to the company’s success — provides a meaningful context for performance objectives while underscoring the importance of pay for performance.
Thus, the effectiveness of a pay-for-performance approach lies not only in how decisions about pay increases are made, but in how pay and related matters are communicated.
Liz Wright is the compensation practice leader for Watson Wyatt in Toronto. She can be reached at [email protected].
But it can be challenging to make pay for performance work effectively. The road to linking performance and rewards is often filled with potholes that need to be carefully navigated. The following are five common pitfalls and some suggestions to help navigate them.
1. The organization says it believes in pay for performance, but leaders and managers don’t walk the talk. Before embarking on the road to pay for performance, a company must decide whether this is the right path. Resistance could be a sign there are organizational design or cultural issues at play that are at odds with this approach.
A company may determine it is too difficult to evaluate performance or contributions for certain employee groups and may elect to use across-the-board pay increases or increases based on time in grade. Similarly, an organization may use an across-the-board approach to mirror union pay practices. (First-level supervisors who supervise unionized employees may be paid a premium over union rates, with no differentiation of pay based on performance.) Finally, an organization may decide pay for performance runs counter to collaboration or teamwork and may choose a blanket approach.
Even if an organization decides pay for performance is the way to go, it must deal with leaders and managers who won’t put the principles into action. To shift and align behaviours takes time and effort.
The company can introduce guidelines related to desired performance distribution curves to challenge management thinking. It can provide training and communications support to help managers understand what is expected of them and monitor their pay decisions to ensure key principles are being applied. The organization can measure and reward managers for their ability to manage performance effectively, which encompasses their ability to effectively link performance and rewards.
2. Managers rate employees and allocate pay increases inconsistently. A common complaint is that the performance bar varies within and across groups. Some managers may give top pay increases to a select few, while others may provide top awards to the majority of their people. Inconsistencies will undermine the process and lead to concerns about fairness, especially if employees compare notes.
Companies can encourage consistency by training and coaching managers on how to make effective pay decisions that align with the organization’s pay-for-performance principles.
They can provide managers with support tools that help them determine appropriate pay increases. They can provide a specific budget for merit increases. Finally, they can audit or review pay decisions to ensure managers are applying a similar definition or standard of superior performance.
3. The performance rating scale is poorly defined, making it difficult to create meaningful links between performance and rewards. Sometimes the tools used to support pay for performance can hamper decision-making, especially if an organization applies a performance rating system that is either too simplistic or too complex. If the rating scale has too few levels, managers will find it difficult to differentiate employees based on performance and may be forced to use the same rating for employees who are at different levels.
If the rating scale has too many levels, managers may not be clear on what type of performance warrants one rating versus another. In either case, it’s difficult to explain to employees why they received a certain rating and the links to pay are weakened or deemed unfair.
A rating scale with three to five levels works for many organizations. But effectiveness is not just about the number of levels, it’s also about how clearly each level is defined and delineated. Effectiveness hinges on managers understanding what distinguishes each level from the others.
4. The budget for merit increases is small, making it hard to differentiate rewards based on performance. This is a common concern, especially in recent years when budgets for merit increases have been modest. However, the principles of pay for performance remain the same. In fact, one could argue they’re even more important when budgets are lean.
The key is to differentiate reward levels based on performance and ensure dollars are directed to top performers. Low performers must be identified and given small or no increases to make sure those dollars are available. As part of any compensation review, companies should make sure pay levels are competitive with the market.
5. Employees don’t understand how their pay increases are determined. While training and communication for managers is critical, employees must understand what is expected of them and how their performance will be evaluated and linked to rewards. If employees do not understand the rationale for a given increase, they will not be clear on what behaviours and results must be repeated, or changed, to earn comparable or higher pay increases in the future.
Many organizations also educate employees on how the business operates and how it earns its revenue. Helping employees understand how they fit into the bigger picture — and how they contribute to the company’s success — provides a meaningful context for performance objectives while underscoring the importance of pay for performance.
Thus, the effectiveness of a pay-for-performance approach lies not only in how decisions about pay increases are made, but in how pay and related matters are communicated.
Liz Wright is the compensation practice leader for Watson Wyatt in Toronto. She can be reached at [email protected].
