This is the beginning of a series on making the most of compensation budgets.
With companies still holding the line on salary budgets and incentive pools even though the recovery has been going on for some time, it is becoming more important than ever for those organizations to maintain a close connection between employees’ pay and their performance.
The reason? With limited resources and an ongoing need for the best talent, organizations must make sure that the money they do have to spend on employee compensation goes to the right people and in the right amounts. In addition, “based on where we have been in terms of the economy over the past four or five years, many organizations are so lean in their operations and constrained in their hiring that they are focusing on improving the productivity of the existing workforce, ” says Laura Sejen, global rewards leader for Towers Watson in New York. “With limited resources available for pay increase budgets and reduced funding for bonuses, that raises the bar in terms of getting those dollars to the right people.”
Unfortunately, not all companies are able to do that. Therefore to achieve these goals, Sejen suggests that companies focus on improving performance management processes overall and to ensuring a clear link between performance outcomes and pay. The first place to start is on the front lines of the company.
When pay and performance become disconnected, the root cause of the problem can often be traced to front-line managers. “Most organizations by now have a fairly good performance management program in place, at least in terms of the objectives and design of the program,” says Sejen. “Where things tend to fall apart is in the execution, and managers are primarily accountable for execution.”
This situation is not always the managers’ fault, however. Companies need to consider whether those managers have received a proper orientation and training on (1) how to execute the performance management program by ensuring that employees are clear about their objectives and expectations, and (2) how to make appropriate pay decisions. Even when managers receive initial training when they assume the role of manager, that training may need to be updated and renewed periodically so that managers remain current and focused on the performance management process and requirements.
In addition, managers need to have some skin in the game themselves. A manager’s ability to manage and measure employee performance to help those employees achieve their goals and maximize outcomes and results must be considered when evaluating that manager’s own performance. The question is, are companies doing an adequate job of ensuring that managers are accountable for these areas of responsibility?
One way to develop managers’ ability when it comes to performance and pay is to identify the competencies required for success. With that information, the company can see how managers are performing in those competency areas and take steps through training, continuing education, coaching, mentoring, or other means to make sure managers are developing those competencies.
Coming up in future posts: auditing programs and the role of finance.