The way companies are measuring and managing employee performance is changing, which means the way they handle payments and other employee compensation strategies needs to change too. Today, more and more businesses are exchanging formal performance ratings for ongoing feedback and coaching techniques. This is great for employees and our performance culture, but it does present entirely new challenges for employee compensation. Now, the question is how can we pay people without actually rating them?
Performance management has come a long way in recent years and the traditional approach has now transformed into a strategy that fosters better relationships between employees and managers, which is more engaging and ultimately more effective. Old quantitative rating systems are being retired for open dialogue, a continuous review and coaching process as well as complete transparency.
While this is great for employees and managers alike, it does mean there are fresh rewards and compensation challenges. Both performance management and compensation aim to maximise employee engagement and motivation yet both are now emphasising different ways of getting there. With performance management, HR professionals have made the necessary changes to better meet this goal by providing employees with coaching and feedback that focuses on a person’s relative strengths and weaknesses. They’ve realised that achieving this is better done when employees are intentionally not compared against one another and instead the focus is internal and personal.
Compensation, on the other hand, has the primary focus on ensuring that investment decisions related to pay and rewards are made in an effective manner. This is still being done almost entirely by comparing employees against one another based on the value they deliver to the company. However, this is becoming more challenging with less reliance on a traditional performance rating.
The good news is that if managed the right way, the compensation challenges presented by the emerging difference between the new performance management and traditional compensation strategies can actually be seen as opportunities by HR professionals. They are opportunities to transform traditional compensation methods so that it better suits the new performance culture and, ultimately, is more effective for both employees and the company.
There are four main areas that highlight the new compensation challenges as a result of the new performance culture. Take a look at these key areas below along with the opportunity for HR teams to transform their current compensation strategy:
If you’re one of many companies that have scrapped formal performance ratings for more effective coaching and feedback performance reviews then you’ve probably already realised that rewards and compensation have just gotten even harder. With no formal, quantitative ratings to tie performance too, how do you accurately and equitably make compensation decisions that ensure compensation budgets go to the employees that deliver the best value to the company? Without annual performance ratings, the decision lies with managers, but with no formal rating system to guide them it poses a real challenge that could impact effective budgeting.
The answer is to ensure that however you decide to replace formal performance ratings, that the new process is well-defined and consistent across the organisation. This should involve calibration sessions where managers and stakeholders meet up to discuss employee contributions both past, current and even predicted contributions based on what the manager knows about the employee and their skills or capabilities. This requires managers to have a deep understanding of their teams on an individual level and also requires employees to remember their own contributions so that they can properly relay and discuss these with managers. Calibration sessions enable managers to compare employees on a general level to help benchmark above-average employee contribution without pitting employees against each other with formal ratings.
You can also evaluate employees using a goal-based process. This involves managers working with employees to set SMART goals based on the needs of employees, teams and the business as a whole. Regular review and feedback should be used to monitor employee progress meeting these goals and for managers to provide any additional support or resources needed for them to do so. Ongoing progress and evaluation of whether employees are reaching their goals or not, how many and how often they do and so on can help show which employees are contributing the most value as well as achieving their own needs so that they remain motivated and engaged.
Even if you do still have some form of formal ratings for your performance reviews, a continuous process presents its own compensation challenges. The annual review is no longer considered enough to properly gauge an employee’s performance and value, but how do managers make effective compensation decisions with more frequent performance reviews and regular information that is continually changing the picture?
If you are keeping ratings, think about modernising them to reflect the ongoing actions of employees and how they continually meet organisational objectives or company values rather than individual competencies. Annual end-of-year rating reviews can be based on information received at regular check-ins during the year that considers if and how many individual goals employees have met or other actions that have contributed to the organisation as a whole.
Today, businesses are using more informal and frequent methods of rewarding employees such as the use of ‘spot awards’ or non-monetary recognition. These types of rewards can be more motivating for employees and are more suited to the new informal and continuous performance culture, but they are also notoriously hard to monitor or are so small that they are deemed unnecessary to monitor. This means it’s difficult to spot equity issues or other problems, but even small awards can be demotivating to employees if they aren’t distributed fairly.
Giving managers more autonomy and decision making with on-the-spot awards like this can be a great way to recognise performance in real-time but they need the right training and guidance to ensure that it is fair and effective. This should include a clear overview of the company philosophy and values when it comes to rewards, clear definitions of reward-worthy behavior and training and guidance for determining appropriate reward type and value. Asking managers to regularly justify their reward decisions not only means that the company can ensure the compensation strategy is equitable, but it also means that managers get used to thinking in depth about their own decision making and might even make them more aware of their own teams performance and therefore, likely to recognise the right behavior when it happens.
Employees expect more transparency than ever and they have a right to do so. The challenge is ensuring that the new informal and continuous compensation strategy is effectively communicated to employees and that the whole performance and compensation system is transparent even with so many moving parts to consider.
Talking about pay decisions can be difficult and uncomfortable, but it’s becoming more necessary for employees now expecting managers to do just that. Managers may feel uncomfortable talking about pay because they don’t understand the components of the compensation structure themselves, weren’t directly involved with the final decision and so don’t feel accountable for it or just don’t want to have the uncomfortable conversations that surround money and pay.
This means that businesses need to go beyond simply training managers on the compensation structure and how it works. They also need to train them on communication and how to effectively translate this to employees so that they also understand. Even just basic training in this area can give managers the confidence they need to take on these uncomfortable conversations. This should include a clear understanding of the compensation structure, the importance of communication for employees and a deep understanding of how to navigate the complex and difficult issues that may arise in these types of conversations.
The changing world of performance management can be seen as either a challenge or an opportunity. It’s up to HR professionals to start seeing these threats as chances to transform their compensation strategy in the same way that they have achieved more effective performance management. The results can be employees that are more engaged and more motivated, with compensation that truly recognises your top talent and makes the best use of your compensation budget for effective decision making.
To find out how you can create a true pay-for-performance culture with today’s new performance management and how you can better manage the entire compensation process from employees to managers, contact us today to talk about SuccessFactors Compensation.