In a BLR webinar titled “Pay-for-Performance: Pros, Cons, and Assessing Whether It’s a Good Fit for Your Organization,” Brooke Green offered five key principles to follow when establishing such a system.
5 Principles to Establish a Pay-for-Performance System
How do you establish a system of rewards that truly differentiates in a meaningful way? Green outlined five principles for us:
- Focus your program design. Don’t pay for the same thing twice. “We need to have a reward portfolio . . . it needs to be diversified and we need to know the intent of the reward element,” Green explained. The benefits and perquisites you get relate to the value of you being a member of the organization. Your base salary relates to the value of your role to the organization. Recognition is the value of your contribution to a particular initiative. Incentive pay such as bonuses, on the other hand, are correlated to the value of your results. By identifying these elements, we can clearly understand the importance of not paying for the same thing twice and we can be sure employees understand the pay-for-performance program.
- Set clear performance-reward linkages. How does the average person know what to do each day to impact the bottom line? You need to ensure that employees know how their actions translate into helping the company, and you can take this link and use it as your basis for incentive pay programs.
- Remember the management in performance management. Green explained that “the problem is that managers don’t want to deal with performance management. It’s not that they don’t want to deal with it, it’s that they don’t feel confident in their abilities.” Many companies realize that managers need more training before a pay-for-performance system can be implemented. The performance appraisal itself is just a formalization of what managers and employees should be discussing all year. Businesses should look at this as an ongoing part of their process, which will help make the link to paying for performance very clear.
- Secure funding and differentiate rewards. Once you have a budget for merit increases, for example, understand how to use it to differentiate rewards to different individuals. This means that some individuals will not get an increase, and the best performers will get higher rewards. You can also differentiate opportunities for top performers. The key is to ensure that you have differentiation as the motivating factor.
- Communicate, communicate, communicate. Green noted: “if the top performers don’t feel that the company has acknowledged them in a meaningful way, that’s a communication problem.” Employees need to understand the pay-for-performance system and how they can excel within it. They should understand the salary range for their position and where they fall within it and how they can affect that. Communication should be a two-way street: you should be able to understand what they value. Your system will only be effective if you offer incentives that the employees value.
For more information on pay-for-performance, check out the following:
Big Bang Theory of Pay for Performance
Promotions, Execution, and Carve-Outs Under Big Bang Theory
Brooke Green is a Principal with Hay Group, where she provides consulting advice and implementation assistance to clients with compensation support needs. Her particular focus is on the design, communication, and execution of broad-based compensation programs within public, private, and nonprofit organizations.