LINKING PERFORMANCE MANAGEMENT AND PAY- FOR- PERFORMANCE

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1 LINKING PERFORMANCE MANAGEMENT AND PAY- FOR- PERFORMANCE Global Mindset conference Milan, 28 Sept 2010

2 Agenda Quick case study Tips for implementing a Pay-for-Performance system Potential risks Enablers Bad PFP leads to disengagement Drivers of employee commitment Tips series 1 : technical aspects of system design Tips series 2 : formal company communication Tips series 3 : the role of managers Additional resources

3 Case study

4 Why did we do it? Old system was a mess : Process not followed by managers No impact on pay nor career management Administrative nightmare Our objectives : Introduce a pay-for-performance culture Encourage alignment between the different BUs IPO plans Share the wealth with employees Develop accountability and on-going feedback and dialogue between managers and employees

5 The system Goals catalogue, year-on-year maintenance and sharing / cascading of objectives Employee self-evaluation Introduction of mid-year review Guided performance distribution curve Moderation sessions across groups Variable pool funding Direct link to individually differentiated payouts (bonus and increases) Integration with other HR systems (succession management, learning and development, payroll...)

6 Outcomes 93% of employee self-appraisals on time (were not mandated in the first year) 90% of manager ratings on time Thousands of employees in 14 countries reviewed for moderation of ratings in less than a month Salary increase budget was controlled Bonus payments differentiated by performance rating Reduced lead-time to pay

7 What worked... and what didn t Positive Negative Great employee participation and feedback : some managers talked performance with them for the first time Easy tool and user interface made the move to technology a breeze Massive cost savings through salary increase budget control Improved succession planning and training plan Moderation sessions not very well received by managers Pay decisions not very collaborative due to the pool distribution Not enough time for training on how to give feedback No communication on the results of the appraisal round Proper pay discussions not held in many departments

8 Tips for implementing PFP

9 Potential risks A conflict between : Employee and manager working together to improve performance (problem solving, on going, collaborative approach with accountability on both sides) And opposing interests when discussing the pay and reward impact of the performance appraisal Potentially more arguments about the appraisal results, as the financial impact makes both parties more rigid in their approach

10 Enablers Top leadership buy-in is a must On-going dialogue with stakeholders for design IT systems and integration with other HR tools Time... Trial and error... Continuous monitoring Understand that each system is unique Accept that there is no perfect way to assess employee contributions accurately

11 Bad PFP leads to disengagement 2/3 of employees are unhappy with how payfor-performance works at their organisation. On average, 27% of dissatisfied employees have actually reduced the amount of effort they put in at work. It s 35% for senior leaders (self-declared)! (Source : CLC)

12 Influencers of employee commitment Formal plan communication 22% Manager communication 48% How organisations pay How organisations communicate about pay Incentive satisfaction Process fairness perception 64% Actual fairness of pay distribution Employee commitment 57% higher vs effort of strongly not committed Source : CLC Discretionary effort - Impact on company results

13 Tips 1 - Design aspects Must : Align individual performance expectations with organisational goals Strong line of sight Avoid giving too many objectives focus on core Recommend : a fuller assessment of performance Results and behaviour-based (competencies) 360-degree reviews? (be careful before deciding) Consider an even number of ratings?

14 Tips 1 - PFP is a continuum Ratings No rating Uncontrolled ratings Guided distribution Forced distribution High performers No differentiation 1.5 to 2 x average >2x, within salary range Position in SR irrelevant Low performers Small payment No increase Small increase for 2d lowest rating

15 Tips 1- Support distribution fairness Budget or variable pool? Merit recommendations : Based on performance rating only / also include another factor like position in salary range? Discretionary / range in the cell? Aggressive / moderate differentiation between cells? Other data included? (last increase, other employees in team, bonus info...) Training and HR support How / Will you hold managers accountable?

16 Tips 2 Communication of results Go beyond regular communication on tool and system Why? For fairness, accountability and prevention of abuse Decide on reasonable level of transparency : By grade, unit, job family, a combination? Average and/or minimum maximum? Communicate overall results of performance appraisal and pay decisions: Performance rating Pay increase Bonus

17 Tips 3 - The role of managers Extract from the 10 manager drivers to improve engagement list from CLC study, Provide fair and accurate informal feedback 2. Emphasize employee strengths in performance reviews 3. Clarify performance expectations 6. Amplify positive employee performance traits and filter negative effects 7. Connect employees with the organizations strategy and its success 10. Demonstrate credible commitment to employee development

18 Tips 3 -What s in it for me as manager Outcomes of good performance mgt Manager and employee problemsolve together Identify which employees : - can benefit from job training - to develop for greater responsibilities Help each employee to understand his/her contribution to company success Identify performance problems early on Remove barriers to performance that are not under employee control Documentation for disciplinary action Benefits Non confrontational resolution of issues Motivated employees with the right skills to perform the job If you re not replaceable, you re not promotable Increased motivation and discretionary effort They don t grow too large to be handled Better productivity Protection from unjustified legal action

19 Tips 3 - Beyond the form Explain that you are developing management tools, not an HR program and not just a tool : Why and how to differentiate between employees What to discuss at a moderation meeting How to give constructive feedback How to manage poor performers How to develop individual development plans How to communicate about pay How to recognise performance (beyond pay)

20 Additional resources Implementing a performance appraisal process Bowland Solutions white paper Linking pay to performance HumanResourcesIQ podcast The current state of performance management and career development 2010 Hewitt survey results Performance pay entices high performance workers Kelly Global Workforce Index results 2010 Pay for Performance does not always pay HBR article

21 Additional resources cont d Helping managers talk about pay 3 tips from Corporate Executive Board survey at Bloomberg Speaking of pay: how managers communicate pay is as important as the amount employees receive HRMagazine article at AllBusiness Why managers don t manage pay CMC compensation Group blog post

22 Thank you! Jim Davis

23 About the author Sandrine Bardot Check my profile on LinkedIn for Recommendations, Answers, Expertise and more free presentations. Comments, questions? (sends you to my website contact page) With over 16 years of Total Rewards experience in different countries, I am now an International Compensation & Benefits consultant, servicing primarily Europe and the Middle East. As of October 2010, I head Compensation & Benefits for Mubadala in Abu Dhabi. In parallel, I will continue designing and delivering compensation-related trainings, mentoring a few HR managers and sharing my ideas at speaking events. I'm also working (slowly slowly...) on the development of a website where employees, managers and HR will find tools and tips to help them go through a better employee evaluation experience.

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