Companies have seen a bit of a revolution in performance-based pay in the past few years. Most have removed the rank-and-yank style of performance management. Some are removing performance ratings altogether to emphasize the future-looking, coaching-based conversations managers should be having with employees. If the intent of performance management is truly to improve performance, the old ways of doing performance evaluation just don’t cut it.
That said, high-performing employees want to feel like they are getting rewarded for their performance, and that under-performers are not; it’s part of their definition of fair pay. In the 2017 Compensation Best Practices Report, PayScale found that 89 percent of organizations reward and/or recognize performance in some way.
PayScale found that 89 percent of organizations reward and/or recognize performance in some way.
While performance-based pay remains a welcome staple of most organizations, we often get questions about the best ways to move to a pay-for-performance culture. At PayScale, we believe that your pay brand, the how and why decisions in your compensation plan, should both reinforce your culture and help accomplish business objectives. What follows are the top seven tips for moving to a performance-based-pay culture. For even more details check out our ebook Modern Pay For Performance.
1. Get buy-in from all levels.
It’s hard to really adopt a culture without support from all levels of your organization. Executives need to reinforce the decision to move to a performance-based-pay culture. Managers will have to commit to giving, even difficult, real-time feedback. Employees will have to both understand the value of performance feedback and that not every conversation about performance results in a base pay increase.
2. Decide what good performance looks like.
One of the reasons pay for performance fails is because we don’t trust our managers to truly evaluate performance well. According to CEB, “90 percent of HR leaders say the process doesn’t even yield accurate information.” One of the keys to performance management is developing consistency across managers about what good performance looks like. Hold calibration sessions for managers to agree on the key aspects of good performance for the roles in your organization.
3. Create feedback mechanisms
Another reason we fail to trust performance management is that it’s not frequent enough. To be effective, conversations and feedback about performance have to happen frequently, or in real time. For some, this will mean manager to employees, for others, they’ll build in 360 mechanisms to deliver performance. I spoke with a hospital recently who said their feedback system wouldn’t work if patients weren’t also able to provide direct feedback. What will make feedback most meaningful in your organization?
4. Figure out how you plan to reward and recognize performance
When you ask some people about paying for performance, they immediately think of bonuses, incentives, commissions and the like. Others think of base pay and a merit matrix. There are a lot of ways of connecting the dots between performance and pay. The right way will depend on the culture of your organization. Here’s a bonus tip: don’t underestimate the value of peer recognition attached to a monetary value.
5. Budget your performance-based rewards
As they say, put your money where your mouth is. If you intend to link performance-with-pay, make sure people see it on the budget. If you aren’t able to give substantive raises to your highest performers, consider including performance-based incentives and/or rewards as their own line item.
6. Make failure fun
The first time I heard about a biggest mistake contest, I thought it was too good to be true. What better way to underscore the benefit of learning than to share the biggest failures that led to the best lessons? Make it fun, make it public, and get your executives involved.
7. Evaluate your evaluation: is it working?
As with any shift you make in your organization, make sure you have clear goals: what is the change you’re hoping to see in your culture? Take some time to evaluate how it’s going three months, six months, a year, two years down the road.
I heard from one organization that when they rolled out their new performance-based pay plan, they took a full year to shop the plan and three to develop, implement and evaluate the plan. Depending on the size of your organization you may be able to accelerate that pace, however it often takes longer than we think it will and the shift to a pay-for-performance culture is not a small one. At the end of the day, the time spent in transition is worth it. While any change can be uncomfortable, change is pretty much the only thing we can count on as we move into a tech-enhanced, more uncertain, highly mobile future.
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Is pay-for-performance part of your compensation strategy? We want to hear from you. Tell us your thoughts in the comments.
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