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Why does the gap between pay and performance still exist?

The high-profile cases of huge bonus payments to executives of failing companies highlight the mismatch between personal performance and that of the organisation.

The media coverage of ex-RBS chief Sir Fred Goodwin's huge pension pot triggered much debate about the connection between performance and remuneration. But 'Fred the Shred' is far from alone in securing enviable rewards for failure.

Research in September 2008 by corporate remuneration consultancy Patterson Associates found that CEOs of under-performing FTSE 100 companies tended to earn more than those delivering better shareholder value. More recently, DigitalLook research on non-executive chairmen indicated that the top 10 best paid saw their companies' share price plummet by 36%, while the lowest paid actually played a part in delivering a 1% share price rise.

Clearly as non-execs they cannot be held fully accountable for company performance and, during a period of equity market turmoil, factors other than share price must be taken into account when deciding remuneration levels. Nevertheless, such stories highlight the uncomfortable fact that there often is a big discrepancy between what is merited and the actual reward.

So how can organisations re-calibrate their pay and payroll systems to reward talent and achievement instead of failure and bluster?

"We are seeing greater moves to align performance with reward," says Dave Inman, business development director of performance management business Qikker Solutions. "At the moment, for many this appears easier to achieve for discretionary pay, that is, 'pay for performance'. This is typically because many organisations do not appear to have a formal 'job family' structure that describes defendable pay scales."

Nick Felton, head of business intelligence at COA Solutions, the company behind the People Analytics employee performance software, says many companies are holding back from bringing HR and payroll closer together and concentrating more on performance because of cost worries. However, Felton argues that not investing in this way could prove a false economy, as rewarding performance fairly may drive business growth.

Felton works with clients in the banking and IT outsourcing sectors. "We're doing a massive project for a large company that we are rolling out to 26 countries across EMEA," he says. "The focus is on linking reward to performance and they are linking in appraisal scores across all of those 26 countries."

Yet for many there is a long way to go. Research last year by business outsourcing provider ADP found 57% of companies don't measure payroll efficiency. Moreover, payroll is actually more likely to come under finance (49%) than HR (40%). However, the research also found that a quarter of finance professionals in charge of payroll would actually rather it was part of HR, and almost as many of their HR counterparts (22%) say they would rather it was part of finance.

A Webster Buchanan Research report published in April, Balancing Cost and Service Quality in Payroll, advised payroll should work with HR to create one 'central source of truth' for employee data. Chris Berry, managing director of Computers in Personnel, which sponsored the report, asserts that newer Web 2.0 tools offer practical opportunities for both HR and payroll to communicate more effectively.

The high-profile cases of huge bonus payouts to executives of failing businesses are evidence of misalignment of personal performance with that of the organisation. One of the challenges organisations face is that when striving to set objectives for performance, managers can suffer from 'tunnel vision' and lose site of the bigger picture.

Pay for performance requires a multifaceted approach, believes MidlandHR product strategy manager Karen Bull. She cites the following as essential: understanding the organisation's goals; clarity on how individuals can contribute to those goals; incorporation of the underpinning values of the organisation, including CSR; full understanding of the cause and effect of the targets being set; and a healthy mix of both long and short-term incentives, bearing in mind the long-term ones need sufficient elapsed time for payment.

Getting the above right has proved a big stumbling block for many employers. Yet growing exasperation at frequent mismatches between performance and reward has pushed the issue increasingly to the fore and encouraged some to look at how HR and payroll can combine more potently.

De Vere Hotels

Working with talent retention specialist learnpurple, Kellie Rixon, director of people development for luxury hotel brands De Vere Collection and Deluxe, introduced the YES! campaign last autumn as a way of rewarding staff for their performance. De Vere wanted additional sales in a declining market and, rather than recruiting costly new sales staff, sought to motivate its own workforce to generate business and have them directly rewarded for their efforts.

After initial buy-in was established with the board of directors, the programme was communicated through engagement sessions held within each department. Each month there is a different incentive, and each department has its own. Individuals can set their own targets too and, to ensure consistency, the existing learnpurple Talent Toolbox talent management system was adapted to include YES!

The programme was communicated through posters and pictures on boards within each communal staff area, also celebrating the previous winners and what they had achieved. With each payslip, extra communication was sent out that let everyone know who the top achievers were over the previous month.

The first monthly winner of YES!, executive chef Alan White, did everything from local taste-testing to taking out menus and actually generated more Christmas bookings than anyone else at his hotel.

"Making our incentives and rewards specific and immediate has been a real success," says Rixon. "It's hard to maintain a 'bonus culture' when achieving the top line is tough: the beauty of the YES! campaign is that it has been largely self-funding. So we are recognising people's contributions, generating some real team challenge and rewarding people in tough times."