In a recent webinar, Sibson Consulting's Jim Kochanski provided 9 keys to implementing an effective pay-for-performance program. In yesterday’s article, we outlined the first 5 keys. Here are the remaining 4.
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Get Your Report Now!6 & 7) Merit decisions should truly be merit-based and variable pay should truly vary
The sixth and seventh keys to an effective program involve merit pay and variable pay. In short, merit pay should truly be based on merit (and differentiated accordingly) and variable pay should truly vary from person to person and from year to year, depending on whether performance goals were met.
In an effective pay-for-performance plan, base pay increases are earned based on demonstrated achievement—they are not an entitlement. In an entitlement, there is an "all for one/one for all" mentality (i.e., "we all get some or we all get none"). If there is a base pay increase budget, almost everyone gets the same thing in that situation.
In a real pay-for-performance program, even with a small budget, base pay increases are differentiated for performance. If there is not enough base pay increase budget for everyone, high performers may still be eligible. When increases are given, better performance should result in better increases (in terms of the percentage awarded).
Variable pay, especially management annual incentive pay, is a good indicator if an organization has a real pay-for-performance program instead of an entitlement program masquerading as pay-for-performance.
8) Promotions should be based on performance
The eighth key is to manage promotions and the accompanying promotional increase as a key reward for high performance. In entitlement programs, promotions have:
- A time-basis rather than a merit basis
- No budget
- No tracking or reporting
- Few standards
- An unclear approval process
- Opportunity for favoritism
In real pay-for-performance promotions:
- The promotion is performance-based
- The cost is budgeted
- They are tracked and reported across units
- The promotions are calibrated
- They require multi-level approval
When establishing a new pay-for-performance system in your organization, make sure the promotional increase is greater than a merit increase and takes into account multiple criteria to determine the appropriate increase amount.
9) Use metrics to track the program
Implementing an effective and objective pay for performance management process helps you communicate expectations and results to your employees, which in turn drives higher performance levels from them. To ensure the results are as intended, be sure to analyze the program and use metrics to track progress.
For more information on pay for performance, order the webinar recording of "Pay-for-Performance: Practical Strategies That Incentivize Your Workforce in a Cost-Effective Way." To register for a future webinar, visit http://catalog.blr.com/audio.
Jim Kochanski is the senior vice president of the performance and rewards practice at Sibson Consulting and is a past leader of its organization and talent-management practice. He develops approaches and methods to help clients improve performance, upgrade talent and connect performance and rewards.