The first post in this series focused on the manager’s role in ensuring a strong link between pay and performance. Now, let’s talk about auditing pay/performance programs to make sure they are on track.
Here’s why. With salary budgets so lean, companies need to make sure they are paying the right people the right amounts. This is not always as simple as it sounds. A company with an existing pay system and approaches that do not support a true performance-based culture can quickly find its pay-for-performance efforts sidetracked.
Worse, the company could just as easily find that its pay system is rewarding the wrong things and at the wrong levels. Imagine a scenario in today’s competitive environment where managers award pay increases based at least in part on longevity and tenure rather than skills and results.
Salary levels demand scrutiny as well. Periodically, a company should look at existing salary levels to make sure that they reflect local and regional competition for talent, broader competition for specific skill sets and the market for talent as a whole. The key is to hit the sweet spot by paying what is necessary to attract, retain and motivate talent without over-paying.
One way to keep tabs on salary increase allocations and related performance management conversations is to analyze or audit the results of this process periodically. “Most organizations have some sort of guidance about the expected or suggested distribution of the employee population across the performance management rating scale, even if that just means providing fairly broad ranges,” says Laura Sejen, global rewards leader for Towers Watson in New York. “Ideally, companies should conduct an analysis of those performance ratings before the pay decisions have been finalized.”
By conducting such an analysis or audit, a company can identify problem areas and modify as necessary. For example, if a company expects half of the employee population to meet expectations but certain managers rate half or more of their employees as having exceeded expectations (and requiring a correspondingly high salary increase), that situation requires closer inspection. Are these managers’ employees really performing at such a high level or is the manager misinterpreting the purpose of the performance management process? If companies do not pick up on this type of situation early on, salary budget allocations (and the pay/performance system itself) could quickly become divorced from true performance thanks to inconsistently applied performance standards.
“Not many organizations monitor actual performance management process outputs or pay decisions,” says Sejen. However, those companies are missing an important opportunity to ensure that merit increase budgets and bonus awards are distributed based directly on performance ratings with clear differentiation between expected performance and performance that goes above and beyond the norm.
This is not something that is limited to the front line. It can easily occur at the upper management levels as well. “These issues can exist at any level in the organization,” notes Sejen. “Frankly, if executives are not modeling the desired behaviors in terms of appropriate performance ratings and pay decisions, it is difficult for them to insist that the rest of the organization do so.”
The next post in this series will look at the role of finance in reinforcing this pay/performance link.