Stop Tying Pay to Performance Really?

Stop Tying Pay to Performance Really?

The POE Group, Inc. National management consulting firm est. in 1997 located in the Tampa Bay Area Clients range from small firms to the F1000 Areas of Expertise Executive compensation consulting Employee compensation consulting Sales force compensation consulting Performance assessment and feedback systems Practice Emphasis Strong customer service through client relationships Full service in our areas of expertise Sharing of knowledge to build client capabilities Our client retention ratio is above 90% in the last ten years, reflecting the long-term value we provide.

Reasons Cited for Abandoning Pay for Performance (P4P)* It s impossible to determine the tasks that will need to be done in the future precisely enough for variable pay for performance to work well Employees spend a lot of time and energy trying to manipulate the variable criteria in their favor, helped by the fact that they often work better than their superiors Variable pay leads employees to focus exclusively on areas covered by the criteria and neglect other important tasks Variable pay for performance tends to crowd out the joy of fulfilling work * March 2012 edition of the Harvard Business Review

What is the Beef With Pay for Performance? Environmental influences Increased attention toward corporate governance resulting from spectacular corporate failures (Enron, Worldcom, Tyco) Increased scrutiny of executive pay levels and practices Financial meltdown and a global recession Discontent with using performance appraisal as the criteria for merit pay Change in employee attitudes regarding rewards

Why Do Companies Pay for Performance? Communicate what is important (alignment) Motivation External competitiveness Distribution of limited resources Enable scorekeeping Shift risk (if performance pay is variable) The market requires it to remain competitive

Employee Perception of the Link Between Pay and Performance

Positive Results Differ by Position Kenextra WorkTends Survey.

Factors Contributing to the Link of Pay and Performance Line of sight is vital to a strong pay for performance link Identify the correct participants and what are the correct measures Participants should be able to influence the achievement of results Provide meaningful rewards that employees will value and try to achieve Effective P4P programs discriminate in levels of performance Effective P4P systems must have well designed communication programs so that employees fully understand three things: 1. The process involved in assessing performance 2. The potential award and its value 3. What is required to obtain an award

Pay for Performance through the Performance Appraisal Process The majority of companies use performance appraisal to attempt to link fixed pay and performance Three four percent merit budgets don t allow much discrimination Using a typical merit matrix creates winners and losers (e.g., the bell curve) The process is generally subjective although we advertise it as objective Performance appraisal is a difficult task to perform effectively Typically appraisals are done annually or every six months too long considering the changing nature of work Manager-employee relationships are not 1:1 as they were in the past Combining the pay discussion and the coaching discussion is especially difficult Many experts question the value of linking fixed pay change to appraisals

Pay for Performance through the Variable Pay Systems Variable pay spending reached a record high of 12.7% of payroll in 2014* (this represents 91% of US companies) Variable awards tend to have higher motivation value than changes to salary and potentially allow greater discrimination in performance There is flexibility in design, with different plans for different employee groups Different measures for different groups related to their impact on the business Different mix of fixed vs. variable pay Different mix of group vs. individual measures Different frequency of measurement and payout Variable pay systems a great communication tools to increase employee awareness of key business outcomes * Aon Hewitt 2014-2015 Pay Change Survey

Points to Consider in Migrating to Variable Pay for Performance One size does not fit all employee groups companies should consider segmenting their approach (e.g., management, sales, production, staff) Salary change still occur, but more related to the external environment or internal equity than performance Performance appraisal focuses on coaching, problem solving, and development Performance issues must be addressed early by managers no waiting for year end Measures must be carefully selected possibility of aberrant behavior Program communication and rationale must be well executed Requires greater transparency of business measures and results possibly more information than some companies are willing to provide employees The culture of the organization will significantly influence effectiveness

The Effect of Employee Engagement on the Pay for Performance Link What is engagement? The extent to which employees are motivated to contribute to organizational success, and are willing to apply discretionary effort to accomplishing tasks important to the achievement of organizational goals (Kenexa) Why do we care about engagement? High engagement firms had total shareholder return 19% greater than the average. Low engagement firms had TSR 44% below the average (Aon Hewitt) Organizations with comparatively high engagement were much less likely to see a decline in EPS in 2008 the year the recession officially began (Gallup) An analysis of the Best Companies to Work for in America indicate that high levels of employee satisfaction generate superior long-term returns (Wharton School of Business)

Measuring Engagement Kenexa measured engagement by the following: Pride: I am proud to tell people I work for my organization Satisfaction: Overall, I am extremely satisfied with my organization as a place to work Advocacy: I would gladly refer a good friend or family member to my organization for employment Retention: I rarely think about looking for a new job with another organization

Relationship of Engagement and Pay for Performance Kenextra WorkTends Survey.

Drivers of Employee Engagement More opportunities to do what I do best Career development and training More flexible job conditions (e.g. control over how much work gets done, flex time, telecommuting) Greater clarity about what the organization wants me to do and why A coach or a mentor other than my manager Regular specific feedback about how I am doing

Total Reward Components Short-Term Fixed Pay The foundation of most all reward systems. Must be market competitive. Short-Term Variable Pay Long-Term Pay Short-Term Variable Pay Encourages pay for performance differences by providing the opportunity to influence important business results. Provides a piece of the action. Long-Term Pay True ownership motivation and behavior. The American dream realized. Short-Term Fixed Pay Benefits Benefits Many variables with limited options. Consider further segmenting to H&W, retirement, executive. Minimum level generally provided. May create different benefits for different employee classes needs analysis. Work Environment Learning and Growth Learning and Growth Feedback systems performance management, coaching and mentoring. Also development systems of skills and competency training, career development and succession planning. Work Environment Organizational factors such as climate, leadership style, and work / life balance. Also the specific work itself challenge, variety, autonomy, etc. 16

Key Takeaways Tying it All Together Pay for Performance 1. Employees are unconvinced of the link between pay and performance 2. Base pay linkage to performance is difficult if done through the standard performance appraisal 3. Possibly, variable pay offers a better linkage if the workforce is segmented 4. Positive association of P4P is related to employee engagement and the culture of the organization 5. Communication of measures, process, and outcomes is critical Total Rewards 1. Reward systems are communication tools use with caution 2. It isn t all about money other reward components drive satisfaction and engagement to a greater degree 3. Work environment and learning and growth differentiate the best organizations and lead to engagement

However, It is Still Somewhat About Pay.

The POE Group, Inc. National management consulting firm est. in 1997 located in the Tampa Bay Area Clients range from small firms to the F1000 Areas of Expertise Executive compensation consulting Employee compensation consulting Sales force compensation consulting Performance assessment and feedback systems Practice Emphasis Strong customer service through client relationships Full service in our areas of expertise Sharing of knowledge to build client capabilities Our client retention ratio is above 90% in the last ten years, reflecting the long-term value we provide.