One of the latest strategies in this area is known as performance-based pay and links the employee's reward to their performance and contribution to the company's success. Executing this strategy successfully relies on human resources merging periodic performance reviews with the compensation process.
Performance-related pay motivates employees and encourages learning, innovation, creativity, problem-solving and empowerment. Being able to identify top performers within an organisation is key to its success. Employee performance reviews should reflect true performance and not be subject to anomalies caused by the different approaches of individual managers. By implementing web-based performance appraisal systems with workflows based on industry best-practices, companies can ensure all employees are measured under the same criteria.
Even once overall appraisal ratings are applied to the data and an increase range is applied, the work isn't over. A delicate balancing act to allocate a budget pool is required to ensure that budget increases are applied appropriately. Compensation decision makers may be working with multiple spreadsheets that cause more effort and confusion. The simple collection and tracking of each manager's spreadsheet is an ongoing, but avoidable chore.
With the right set-up of business rules, performance, salary and variable compensation, data can be manipulated in real-time by managers within the same system, allowing the compensation team to know when submission or approval deadlines have been met and by whom. Every change can be tracked, audited and validated.
The current downturn calls for greater diligence with regard to compensation. Now is the time to optimise processes to ensure the most efficient use of resources, and engage, retain, and develop the company's most valuable asset - its workforce.
Since, for most companies, there will be a smaller pie to divide this year, it needs to be distributed proportionately among the people that will help the business to grow. In the long-term, any successful human capital strategy must retain top performers.
But how can this be achieved?
Automate compensation management and link to performance appraisals: No Compensation system is complete without sound performance management data. Calculating the effect of an employee performance management system is not always so cut-and-dried. If a business is concerned about how its current performance management processes affect compensation, it must leverage compensation surveys and map them to the positions the company currently employs. If this reveals that the organisation is drastically overpaying its workforce, an employee performance management system can help close the gap.
Improve Compensation Alignment: Most organisations claim to pay at market rates and some organisations purposely pay a premium. Almost all companies leave some money on the table for negotiations. Compensation specialists often rely on market data and subjective review ratings to determine salary adjustments. This is flawed because many performance reviews aren't objective and consistent among groups. As the cycle repeats itself, compensation becomes increasingly poorly aligned, ultimately affecting the bottom line.
Most performance management systems result in a fairly flat distribution of ratings, making it difficult to differentiate pay and other incentives enough to motivate top performers or change the behaviour of poor performers. A system that supports calibration (adjusting the performance measurement to match a known standard), a wider rating scale, and/or comparative rating, results in a fairer and more accurate distribution and helps employees understand where they stand.
Beyond Financial Reward: Of course, it must always be recognised that money is not the only motivator for engaging and retaining a workforce. Particularly in the current economic climate, employees may be more worried this year about job security than their annual increase. In this context, spending extra time on talent assessments and other succession planning activities to look for development opportunities, such as training or an increase in work responsibilities, is not time wasted. These alternatives reflect the company's faith in key employees while defining paths for career growth.
Avoid Errors: Human capital is an organisation's greatest cost - yet too many businesses continue to manage employee data and calculate salary adjustments using basic spreadsheets. Research has consistently proven that spreadsheets are full of errors. In fact, people are typically only 95% to 98% accurate when they create formulae in spreadsheets. Compensation data is also confidential. To disseminate the information, there is typically a need for multiple versions which are sent out to department heads and then recombined at the end of the process. The intricate administration of the process also leads to potential errors.
Compensation is crucial to retaining employees, keeping morale high and enforcing a performance-based, goal-oriented culture. Having an effective compensation strategy can help an organisation survive and thrive in the current economic environment.
By integrating compensation with performance management processes, organisations can ensure that employee increases are fair and equitable. In addition, it makes it easier to provide incremental bonuses and manage raises during promotions. The end result for the business is that it can accurately identify and reward top performers, while fairly distributing consistent salary adjustments based on merit.
Pay-for-performance is the fair and equitable way to reward and retain talent within an organisation and is even more crucial during the current economic crisis to retain staff and increase productivity. The only way to guarantee the integrity of a compensation plan is to link it to the employee performance management system, which will provide the tools required to manage, monitor and measure employee performance accurately at every step in the process.
Richard Oyen is director of HR and talent development at SumTotal Systems
How can employers best manage compensation during recession?
In lean periods, businesses need to focus on areas that directly impact the bottom line and in this respect compensation has one of the most profound impacts of all.
