An Aberdeen Group report last year revealed that when performance management and compensation are linked and strategically aligned, pay-for-performance programs can effectively improve revenue and profit per employee while enhancing retention of a company’s MVPs. For all the lip service paid to pay-for-performance, though, there aren’t many organizations doing it very well. Here are five new rules to help organizations make this compensation model work.

Getting talented and productive employees to build and sustain a business is becoming increasingly difficult, especially as competition for talent escalates. Insightful organizations are beginning to understand that human capital, much like financial capital, is an important asset.

Last year, an Aberdeen Group study entitled “The Pay for Performance Benchmark Report” revealed that a familiar concept — pay-for-performance — if instituted today, would likely bring a huge spike in productivity while, at the same time, the right people would be promoted to the right positions. Aberdeen says that when performance management and compensation are linked and strategically aligned, pay-for-performance programs can effectively improve revenue and profit per employee while enhancing retention of a company’s MVPs.

For all the lip service paid to pay-for-performance, though, there aren’t many organizations doing it very well.

As such, the following are five new rules to help organizations pay for performance, “while respecting the dignity and contribution of all employees,” from Tandehill Human Capital‘s Brad Hill (via IndustryWeek).

1) Base Pay Increase versus Incentive Payout
Given limited funds, it is imperative that companies recognize the difference in value between a base pay increase and an incentive payout. Paying for performance means tying the term of the reward to the term of the accomplishment, notes Hill. Companies cannot afford to give base pay increases for short-term accomplishment (e.g., achieving annual financial goals). Whereas such short-term accomplishments should be rewarded with one-time, lump sum payouts, “base pay increases must be reserved for growth in skills, competencies and responsibilities.”

2) Cost of Living Changes and Impact on Pay
Companies have no guarantee that their sales, productivity or profits will go up by a pre-specified percentage in the following year, so how can they commit to raising their compensation expense by that same percentage? As compensation is one of the largest expenses for most organizations, says Hill, “it is irresponsible to allow this category to increase every year at a rate that is unrelated to the performance of the business.”

The IndustryWeek article notes:

Part of the reason companies are hamstrung in paying for performance is that they accept e.g., a 3 percentage “cost of living floor” on wage increases. When there is a minimum 3-percentage expectation, that doesn’t leave much room to recognize the top performers.

3) Compensation Philosophies and Words Like “Attract, Retain, Develop, Motivate, ‘Pay at Market Median’”
In organizations’ pay philosophies, these words are overused and empty objectives with no strategy behind them. If you want to pay for performance, the compensation philosophy must define what pay is and, more important, what performance is. Companies may be better off with an Attraction Philosophy, a Retention Philosophy or a Development Philosophy that could talk about pay policy within a broader array of tools to attract employees, for instance.

4) Executive Pay and Average Worker Pay
A pay-for-performance culture starts at the top but doesn’t end up at the top; it must permeate the entire organization. Total rewards maintain a balance between what the executives contribute to the organization and what the average employee contributes. Hill aptly notes, “Sharing the wealth is a healthy team approach that properly values the contribution of every employee, and can give every employee a role and a stake in the success of the organization.”

5) Broad-based Incentives and Individual Rewards
Most companies already attempt to recognize individual performance with merit increases, promotions, special assignments, training, etc. Although this approach maximizes individual performance, it may not necessarily maximize company performance.

Maximizing company performance is not achieved by getting every employee to perfectly perform the activities outlined in his or her job description, says Hill. Rather, it is achieved by getting every employee to do all that he or she can to contribute to the success of the business.

Broad-based incentives (such as gain sharing or profit sharing) can be an insurance policy against the failure of change initiatives by providing employees with an interest in the success of the initiative. In allocating annual rewards, there should be broad-based rewards for successful company performance, and individual rewards for growth in skills, competencies and responsibilities, and exceeding expectations.

Hill says his aforementioned five new rules can help you to pay for performance by ensuring a few things: that pay practices are fair and balanced; that pay is understood as an ongoing investment in people; and that every employee understands the value of his or her performance.

A well-conceived and -executed program can do wonders for an organization’s human capital assets. In ensuring that employee goals and objectives are directly aligned with corporate strategic goals, and tracked for performance, the foundation is laid for proper compensation — one of the reasons workers stay with their jobs.

Of course, both pay-for-performance and employee engagement are complex. Neither is a one-dimensional concept, something that can be increased simply by sending out a survey or instituting a program. What works well for one group of people may not work well for another, and what works today will not necessarily work for tomorrow. Organizations that are successful at increasing employee engagement realize that it requires culture change.

Yet the world’s most successful manufacturing organizations are able to build engaged, high-performing workforces by investing in every employee.

Source

IndustryWeek: Winning Compensation Models: Partnering With Employees To Create Performance Gains