Blog Article

Differentiating and rewarding performance

Posted by Tom McMullen

Tom McMullen

The current economic climate has caused many organizations to rethink their performance management processes and the way they assess and reward for performance. Since the global economy bottomed out several years ago, we’ve seen organizations significantly increasing the pace of change in their performance management systems and how reward programs connect with them. At the same time, organizations are also struggling to help managers and employees perceive adequate value from their performance management systems.

A recent Hay Group research initiative on differentiating and rewarding performance, showed that while organizations are traveling different paths, the trend is clear that most are seeking to create better alignment between their business strategy, performance outcomes and how they reward employees for achieving individual, team and enterprise-wide results. Most study participants said they are increasingly focused on achieving both better performance differentiation and better differentiation in rewards attributable to that performance. To do this, an organization must have a shared vision of what it wants from a performance culture standpoint.

A number of the respondents found that managers and the employees they evaluate were becoming overly fixated on final performance ratings and how that affected compensation. Processes where the proverbial (compensation) tail is wagging the (performance management) dog. This often happens at the expense of constructive performance feedback and development guidance that should be the primary purpose of the performance management process. This has not lessened the desire for pay for performance in organizations, but it has led them to question a formulaic tie between performance assessments and rewards. Some have gone so far as to eliminate formal performance ratings altogether.

Since the economy bottomed out in 2008, we’ve seen more organizations placing more emphasis on individual performance assessment processes as well as increased weighting of individual performance in reward decision making in general. This includes individual performance modifiers on group based short term incentive and long term incentive programs.

Non-financial rewards are also becoming a more integral component in the total rewards mix. Over the past several years, many organizations have placed increased focus on non-financial rewards as a key employment brand differentiator and retention mechanism. Particular focus is being paid to career development, meaningful job design and work climate. Hay Group’s global employee opinion database underscores this.
With the importance of non-financial rewards evident, many organizations in the study are increasing their focus and utilization of non-financial recognition programs as a way of reinforcing the organization’s culture and performance orientation. There has been a clear trend in organizations moving away from predominately tenure-based or purely discretionary recognition programs to those that are aligned with key business priorities, such as innovation, collaboration and operational excellence.

Given a challenging economy and a focus on sustained performance results, organizations are asking more from their employees. Many are taking a fresh look at their performance management processes and reward linkages. Performance management can be a powerful tool to help businesses implement their strategy and reinforce their desired work culture if they invest the time and resources to clarify theses linkages. However, many have not. Managers and employees generally want to do the right things, but they need help in knowing what the right thing is, and understand their impact on delivering business objectives.

“Pay for performance” is not just about base salary increases and incentive pay. It’s about reflecting pay for performance in multiple and differentiated rewards as well as differentiated opportunities for promotions, career development, financial and non-financial recognition and meaningful work opportunities.

Differentiating and rewarding performance is difficult for managers doing this work and faced with a broad range of talent capabilities. They need tools and capability building to do this work well. A great program on paper will fail if the organization hasn’t done the ground work to build the toolkit and socialize managers to, most importantly, understand the purpose of the programs, but also grasp how to make the system work through goal setting, feedback, and calibration and communication processes.

The author would like to recognize the contribution of Jeremy Anders to this piece.


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