Yesterday, we looked at the first seven of consultant Jim Kochanski’s nine factors for pay-for-performance success. Today, the remaining two—plus an invitation to a webinar next week that will help you become fluent in pay for performance at your organization.
Kochanski is senior vice president of the performance and rewards practice at Sibson Consulting.
[Go here for factors 1 to 6.]
7. Make Merit Matter
Of course, one of the problems with merit pay has been that we’re mostly working with low merit budgets. But even with a small budget, you can differentiate merit for high performers.
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Entitlement |
Real P4P |
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All for one/one for all (i.e., “we all get some, or we all get none”). |
Even with a small budget, base pay increases are differentiated for performance. |
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If there is a base pay increase budget, almost everyone gets the same thing. |
If there is not enough base pay increase budget for everyone, high performers may still be eligible. |
“Carve outs” from merit enable companies to differentiate rewards for high performers. Take a 3 percent budget. Carve out 0.5 percent for top performers. That means you have a 2.5 percent average for average performers (75 percent of population), and a 4.5 percent average for high performers (25 percent of population). That’s pretty significant differentiation.
When 3 percent shows up in the budget, and managers tell people, then everyone expects 3 percent or more! We box ourselves in, says Kochanski. One way to handle this is to put two lines in the budget.
8. Make Variable Vary
“Carve outs” can also be applied to variable pay. For example, if you have a 20 percent bonus target, but business results push it to 22 percent, carve out 2 percent for high performers. That allows you to significantly differentiate incentives for high performers.
This is a communication issue and requires working with finance to get it into the budget.
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Master pay for performance at your organization—webinar coming next week. Learn more.
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9. Tie Promotions to Performance
Kochanski has found that promotions are poorly managed. Budgeting for the cost seems to help. Promotions should be related to growth and turnover. If you’re promoting faster than that combination, you’re adding cost and making the organization top heavy.
You need to track and report across units, with calibration. Certainly require several levels of approval, Kochanski says.
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Entitlement Promotions |
Real Pay for Performance |
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For example, take a look at these criteria and how they may affect compensation.
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Criterion |
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Assessment |
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Degree of increase in responsibilities |
Moderate |
More significant |
Significant |
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Performance compared to expectation |
Effective |
Very effective |
Exceptional |
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Current salary relative to midpoint of new grade |
High |
Same |
Low |
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Current salary relative to others in similar jobs in new grade (with similar skills, knowledge, competencies, and experience) |
High |
Same |
Low |
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Depth and breadth of skills and knowledge (assumes demonstration) |
Moderate |
Higher |
High |
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Recommended increase |
Modest Increase |
Moderate Increase |
Significant Increase |
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Pay for Performance: Strategies for Successfully Embracing the ‘New Normal’ in Compensation Design
Live webinar coming Wednesday, April 30, 2014
10:30 a.m. to Noon Pacific
Performance is the new normal in every aspect of our world and especially in compensation. Tighter budgets, more expensive markets, stronger competitors, and better management are drivingtop-to-bottom evolution in performance-based pay.
In addition, Say-on-Pay voting for executive compensation and a generally higher activism rate of shareholders have swiftly transformed executive compensation programs from service-based metrics that were augmented by performance to performance-based metrics that are augmented by time of service.
It is essential that business leaders, HR experts, and compensation professionals have a thorough understanding of the best practices and potential pitfalls of pay for performance (P4P).
Participate in our interactive webinar next Wednesday, and you’ll learn:
- Why performance is the "new normal" for most jobs, even those never held to this type of standard before
- How this "new normal" has impacted base salaries and other types of pay programs
- Five great reasons to embrace P4P
- Who loves P4P, who hates it—and why!
- How to define objectives, goals, and metrics
- Tips on communicating achievements, rewarding success (or not), and celebrating accomplishments
- How to track, how often to track, and what to track
- Reasons why P4P sometimes doesn’t work and how to effectively maneuver around them
- Communication strategies for discussing your P4P programs
- Action plans for companies wishing to establish or improve P4P practices at their organization right now
- And much more!
In just 90 minutes, you’ll learn the circumstances that support pay for performance and about the metric identification and goal setting needed for success.
Download your copy of Training Your New Supervisors: 11 Practical Lessons today!