Workplace compensation is essentially a supply and demand system, says Dorf, who is managing director of Compensation Resources, Inc. in Upper Saddle River, NJ. Supply has been strong, and that means small or no raises, but that is starting to change.

A bunch of studies say maybe 60 percent or more of employees would look at another job as economy improves. Plus people who delayed retirement are now considering retiring—their 401ks have come back in value. Demographically, the baby boomers are starting to retire and there aren’t sufficient workers coming along to replace them.

So there’s going to be a reversal of supply and demand, says Dorf:

• Anticipate increases in demand for skilled job applicants
• Expect turnover of skilled staff
• Plan for increased cost of turnover—hard cost and soft cost

That all means that employers must develop programs that allow you to:

• identify your star players and compensate
• engage high performers to keep them on board

You Need Professional Help

Most organizations have an accountant and an attorney and an insurance agent, says Dorf, but many companies haven’t done much with getting professional assistance with compensation, and that’s going to be increasingly important.

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"FARM"

Dorf uses the acronym FARM to outline the goals of compensation planning:

Focus employees on achieving key business objectives. For example, says Dorf, sales people like to work within their comfort zone—they want to sell product they are comfortable with to customers they know at lowest price they can—but that isn’t necessarily what company wants. The company may want to sell new products to new customers at higher prices.  Compensation can help with that focus.

Attract qualified and quality employees. We have seen companies who were so poorly organized that they were truly bottom feeding with no idea of what they needed, says Dorf.

Retain staff who contribute positively to overall company performance.

Motivate and engage staff to achieve higher levels of performance.

Everyone wants to be “competitive” but they don’t define what that word means, says Dorf. You need a formal statement of company's position on compensation that:

• Identifies elements of pay, market positioning, emphasis on fixed/variable pay, etc.
• Indicates company's position on pay for performance
• Serves as baseline for market assessment, plan design, and redesign
• Circles back to basic compensation objectives

Defining Position on Pay for Performance

Here’s what to ask to assess your pay for performance, says Dorf:

• Can your company measure performance?
• Can you effectively track performance?
• Can you tie compensation and employee actions to performance?
• Do employees recognize the link between results and pay?
• Are employees motivated to achieve higher levels of performance?

Is Measuring Performance Once a Year Enough?

Think about this, says Dorf: You’re in charge of sales, and each of your salespeople has a bogie or target of $12,000,000 in sales for 2012. Are you going to wait until 12/31/2012 to look at their performance?

Of course not, says Dorf. You’re going to be looking on a much more frequent basis—probably at least monthly. Are the sales you need for the month closed? Are the sales you need for next month in the pipeline. Are you at the goal of $1,000,000 a month?

And it’s really the same for any job, Dorf says— performance evaluations need to be done more frequently than once a year.

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Performance Management Challenges

Some of the issues managers face in trying to implement pay for performance:

• Managers are not properly trained in doing performance management. You need to do consistent training, at least annually or maybe role playing twice a year, says Dorf. In two major studies his firm did of government employees, 90 percent were at the top of the performance scale.
• Entitlement mentality reduces the effectiveness of performance management.
• Inconsistent usage by managers tends to disengage employees and invalidate the system
• Managers are unable or unwilling to identify the truly outstanding performers.
• Limited budgets make it a challenge to differentiate pay based on performance.

In tomorrow’s Advisor, SMART goals, plus an introduction to a special guide for smaller—or even one-person—HR departments.