Pay-for-Performance—Is Management Willing?

Green, who is a principal at Hay Group, offered her tips at a recent webinar sponsored by HRHero/BLR. In yesterday’s Advisor, she suggested that HR managers ask three key questions before launching a pay-for-performance program. [Go here for Question 1]

Question 2. Is Management Willing to Differentiate?

At the heart of pay-for-performance is paying higher performers more. The pay difference between mediocre and exceptional performance must be meaningful enough to change employee behavior.

To make that possible, pay increases and incentives must be withheld from poor performers and reduced for good performers, and for many managers, that’s not easy.

The typical differential between regular performers and stars is 1.5 times or less (reported by 68 percent of companies in a recent Hay Group survey). Best practice is to maintain at least a 2 times differential, Green says.

That is, for example, top performers get a 6 percent raise versus a 3 percent raise for other employees—that means something.

Five Principles for Differentiated Rewards

Consider the following five principles for establishing a system of differentiated rewards, Green says.

• Focus program design. Don’t pay for the same thing twice. (Once in the merit increase and again in the incentive pay)
• Set clear performance-reward linkages. Make it clear what an individual has to do to affect company results.
• Remember the “management” in performance management.
• Secure funding and differentiate rewards
• Communicate, communicate, communicate

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Question 3: Are Employees Skeptical?

If employees don’t have faith in system, it won’t motivate. Some of the reasons for the skepticism that Green hears from employees:

• Limitations of merit pay (Too much of the budget is consumed by cost-of-living and equity adjustments)
• Overlapping objectives
• Paying multiple times for the same outcomes (if you are using the same criteria for merit pay and bonus, then you’re paying twice for the same work—that’s not optimal, Green says)
• Lack of clarity around objectives and measures
• Inadequate differentiation of performance
• Performance ratings tend to skew up
• Many managers and supervisors lack the will or the know how to properly evaluate performance
• Inadequate differentiation of rewards
• Many managers settle for mediocrity than make waves in their departments ( I’ll give everyone a little something.)
• Many lack courage to provide lower performers with lower pay
• Misalignment of effort and resources
• Disconnect between Reward ROI and administration energy

Pay-for-performance, wage and hour, new rules, retention, equity—a few of, what, a dozen policy issues you’re dealing with today? How can you be sure your systems are operating according to policy? There’s only one way—regular audits. The rub is that for most HR managers, it’s hard to get started auditing—where do you begin?

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