Pay for performance will work only if employees understand the rationale for differentiation, explains Prakash Satagopan, business compensation manager for APJ at Hewlett-Packard.
Pay for performance is one of the most discussed topics in HR circles, but the devil of this generally accepted pay philosophy lies in the details.
How do we execute it effectively? How do we ensure employees understand its rationale? This is where HR managers need to dive in and understand the perspectives that can get it right.
Before we talk “pay”, let’s talk “performance”. To measure performance, it’s critical every employee and team are clear about:
1. How their performance objectives are set.
2. How their performance is measured, and
3. How they get paid for their performance.
Setting performance objectives is about alignment of the organisational goals with the goals of each function. Function leaders have to determine how their team will contribute towards the overall goal, and communicate this effectively.
Many times, this activity has to be delivered against a timeline, which in my view, dilutes its essence. However, preparing ahead of time and planning a good communication strategy will ensure all employees understand their performance goals and sign up to them.
Be smart about measuring performance
With the objectives set, it is equally important to be clear on how to measure performance against them, using the “whats” and the “hows”.
I categorise the “whats” as goals to accomplish. For example, in a sales role, performance will be measured against the revenue target. Or in an HR recruitment role, it may be measured against a targeted timeline to fulfil requisitions for a specific period of time. An HR generalist role may be measured on the basis of the targeted attrition rate.
And while we set goals, we all need to set in motion the levers or metrics that will be used to measure performance in each role. For this, I suggest the SMART philosophy – specific, measurable, attainable, relevant and time-based.
Let’s consider an example of SMART goals from the perspective of an HR recruitment role.
- S – what are the timelines to fulfil roles at each level?
- M – what tracking mechanism will be used to monitor this?
- A – is the goal per industry norms, and attainable by the bandwidth the team has?
- R – is the objective relevant from a business context?
- T – is this goal for the year or will it be reviewed within the year?
On the other hand, I relate the “hows” to behaviours – how employees go about achieving their goals. This may be demonstrated by aspects such as collaboration, teamwork, leadership and execution. Taking the same example of an HR recruitment role, we may study the following behaviours.
- How was the recruitment target distributed among team members?
- How did they engage with the relevant stakeholders to achieve these targets?
- How was the sourcing strategy designed to achieve the goals?
Frequently, these cannot be purely measured purely by metrics and this is where interaction, discussion and gathering feedback become critical.
With this done, every manager needs to spend time calibrating performance levels of each individual. Each job is unique and so is the person performing it. As a result, it becomes essential for managers to have consistent, but clear expectations on both fronts.
This is where transparency, organisational framework and policies come into play to help managers differentiate performance. A bell curve approach is essential, but in practice there are challenges in implementing it, especially if the team size is small and performance is high. In this case, peer calibration, which involves relative comparison, may be useful.
Preparing ahead of time and planning a good communication strategy will ensure all employees understand their performance goals and sign up to them.
Next comes a key driver of performance – communication, such as how effectively employees use one-on-one discussions with their managers and team members. A structured and regular one-on-one session is essential in ensuring that an employee is moving in the right direction. Discussions on challenges, progress and updates are critical in achieving objectives with the right attitude.
Performance results should not come as a shock or surprise to employees. They should have received regular inputs through the year.
Equitable, not equal
Finally, let’s move to the aspect of pay. As compensation managers, we have a fixed budget. The objective is to pay equitable, but not equal. Here, HR plays a critical role in educating managers and employees on how this works, perhaps using workshops, training sessions or case studies. Simulating a real situation is one of the best ways to do it.
What I have realised is that even during a difficult year for the company, a difficult performance decision can be executed well if the communication is clear, crisp and honest.
Such decisions are driven by differentiation in performance, made by using pay bands and ratios. It is an important step, given that it shows how strongly the company believes in the philosophy. It has to be done with as much transparency as possible in order to develop trust with the employees.
With that done, the right levers, such as base pay increase, bonuses, stock and other benefits, can be used to show that not only is the organisation equitable, but it also understands employee needs.
To take an example, employees often get confused when high performers at a high pay band receive a lower increase, while low performers at a low pay band receive a higher increase. Here, we as compensation teams, need to ensure that we don’t make it look like we want to pay everyone the same – rather, it is about how equitably we want to pay.
With such issues at hand, it is clear employees need to be educated about the compensation philosophy. It is tough, but there is no point in avoiding it. Transparency is essential, made possible only through regular interactions with employees, such as an annual education series.
Many organisations do this only when it is due, that is, at the end of the year. But it really needs to be looked at as a constant evolving journey that continues to educate employees.
Often, a perception is the reality. When employees are educated on the pay philosophy in a transparent way, the trust factor builds up and noise levels go down.