Is your firm ready for pay for performance?

Plans should reflect and reinforce culture employer trying to develop
By Annette Cyr
|Canadian HR Reporter|Last Updated: 01/20/2010

There are many options to consider and many ways to design an appropriate pay-for-performance plan. The place to start is with the compensation philosophy — different employers have different philosophies guiding compensation practices based on an organization’s goals and objectives.

To ensure alignment with the strategy and compensation philosophy, the pay-for-performance plan should reflect the type of culture an organization is trying to develop.

For instance, if an organization is in a substantial growth mode, it may want to pay aggressively and reward aggressively to attract the appropriate talent — and this should be considered in the design of the pay-for-performance plan and measures. If an organization is mature and looking to improve efficiencies, it may want to implement measures of efficiency and standards.

Not every organization is at a place in its development to successfully support performance measures linked to pay and rewards.

To determine if an employer is prepared, and to assess any obstacles that might be encountered, it’s useful to conduct an organizational assessment of readiness to guide in plan design and communications. (See sidebar for an example of an assessment used for a local utility.)

Questions to ask

Knowing the gaps and challenges that need to be overcome will aid in making the program a success. Also, consider the following questions:

• Is the organization oriented towards or supportive of performance measurement and management? Does performance matter?

• What specific behaviours does the organization want to reinforce? How will those behaviours or values be measured and communicated?

• Is the organization ready to define and differentiate performance and reward it accordingly?

• Is there significant enough reward opportunity to affect behaviour or to communicate the message about what is important and what the organization values?

• Is management prepared to assist in the development and delivery of a new performance-based pay program?

• Is management prepared to share information about the operations of the organization and businesses results?

Communication

If an organization is ready to develop a pay-for-performance plan, communication has to be carefully planned and executed to set the tone for what will follow. Communication should start before the new plan is implemented and continue throughout the process. It must eliminate fear, educate and, ultimately, create employee buy-in.

Business communication and literacy must be encouraged and the status and results should be reported on a regular basis. After all, if employees’ pay is tied to their performance and that of the organization, then they need to know more than the basics.

Employees need to know how well they and the organization are doing. Are they achieving their goals? If not, what should they be doing differently?

Line of sight

It is important that goals and measures of performance be clear and agreed to by the employee and manager. They should also be subject to discussion and mutual influence. The individual being appraised must feel he has had fair input in the establishment of the goals and the goals are reasonable. Employees have a greater degree of overall satisfaction at work if they understand expectations, standards and the link to the vision and goals of the organization.

Training

Training both the manager and the employee in the process is critical in making the process effective. Most managers are uncomfortable doing appraisals, just as most employees are uncomfortable being appraised. It is important for both to have the opportunity to practise and develop these skills through ongoing training and coaching.

Feedback

It should not be automatically assumed a manager is fully knowledgeable about an employee’s performance. Managers should be encouraged to seek feedback on employee performance from multiple sources. Identifying peers, customers, other employees and managers who have knowledge of an employee’s performance and seeking their feedback is an important way to ensure valid data.

Finally, compensation communications must be open, honest and clear. Employees need to understand how their pay is determined and what they need to do to be successful. As most already know, fear of anything — including pay and measurement — is largely based on the unknown.

Annette Cyr is the principal of the management consultancy Cyr & Associates in Oakville, Ont. She can be reached at (905) 452-3323 or acyr@cyrassociates.ca. For more information, visit www.cyrassociates.ca.


Culture shock

How to change a pay-for-performance culture

The following assessment was used by a local utility as a road map for how to change its culture.

Current culture

Desired culture

Strategy

Performance standards require greater clarity.

Clearly understood performance goals, measurements and standards.

Focus on developing individual and team measures, develop performance measurement tool to track.

Individual performance considered short term and often not linked to organizational strategy.

Performance tied to business strategies, short- and long-term focus and team focus.

Implement pay-for-performance plan and develop specific measures.

Information on pay and performance limited in communication.

Leaders conversant with plan design, information readily available and frequent communication on programs and progress.

Communication plan to be developed, management to be trained and held accountable, HR to track and measure program success.

Focus mainly on departmental performance, not total organization.

Clear understanding of organizational performance and link with individual contribution.

Move from tactical understanding in departments to overall strategic planning focus.

Management style — close control over subordinates.

Leadership at all levels needed to bring change. More accountability, communication and measures, less managerial-control orientation.

Engage leaders in the process.

Employees expect annual increase, no matter what the impact on performance or finances.

Pay increases must be earned with performance/cost-effectiveness.

Replace service-based pay with performance-based pay.

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