By Dan Roche, Director of Marketing, Decusoft
The performance rating has to travel across the gap and become a pay decision — and that crossing is the most important moment in the entire cycle, yet the least engineered. Employees expect to carry out their job duties and meet the goals and objectives set for them as well as demonstrate positive contributions to the organization. There is an expectation that employees will receive compensation for good performance.
Only 14 percent of employees agreed that performance reviews motivate them to improve. CEB (now part of Gartner) found that 95 percent of managers were not in support of the performance review processes at their firms, while 90 percent of the HR professionals in the sampled firms were of the opinion that the performance review processes did not yield pertinent data. that 44 percent of the employees sampled gave a rating that described their firms’ performance management systems as failing, while only 12 percent of the senior executives and HR professionals sampled responded the same way.
Information derived from performance management will be utilized at some point in compensation management. Performance management may have a compensation issue, and compensation management may have a performance issue. The primary concern is therefore the connection between the two processes and how the failure to manage performance and compensation may impact an organization.
What is at risk
Trust
Employees will evaluate the process based on their goals, their progress, the feedback they’ve received, and their accomplishments. If the compensation decision is unrelated to these elements, employees will assume the final performance rating is meaningless. Even if other factors come into play, if an employee’s performance is depicted as an important factor in the merit process, then there should be some sort of relationship that is communicated to the employee
Budget accuracy
In many cases, ratings are clustered within a narrow range, providing compensation planners with little to no information to differentiate employees — a well-documented tendency known as central tendency and leniency bias, where research has found that an employee’s actual performance can account for as little as 20 to 25 percent of the variance in their rating. Managers may also avoid giving low ratings due to the potential consequences, and calibration may also cluster employees at similar rating levels. If this is how ratings are communicated to compensation, it is likely that the merit budget will be doled out more evenly than was intended.
Credibility
Employees should not be expected to understand the intricacies of the compensation system but should be able to understand the relationship between the organization’s goals, the employee’s performance, the performance assessment, and the compensation decision. Other systems and processes may be involved in the rationale, and employees should be made aware of their existence and their influence on the compensation decision.
Why fixing each side doesn’t fix the problem
This gap is an opportunity to improve the merit process. This may be done without the need for a large-scale performance management or compensation project. It may be helpful to focus on the interconnectivity of the two processes. While performance management and compensation may continue to have separate owners, systems and responsibilities, employees will continue to see them as connected.
Managers are integral in this scenario as they are required to explain performance and compensation decisions to employees. A manager may be well prepared to discuss employee performance but have little information about the compensation decision that follows. In this case, the separation between the two processes becomes evident to the employee during the discussion.
What “one promise” looks like in practice
Having separate owners for performance management and compensation is acceptable because the functions have different systems and a clear delineation of duties. Performance management and compensation should, in the employee’s eyes, be integrated.
The rating keeps its meaning in transit
The performance rating should reach the compensation process without losing the information and context attached to it. How many times is the performance rating manipulated (exported, imported, copied, or re-entered) before it is entered into the compensation system? Can the compensation planner see the information used to generate the performance rating, or do they only see the final rating?
Planners see the basis, not just the number
A final rating, in and of itself, is not very informative. Two employees may receive the same rating for different reasons. One may have performed consistently at a high level throughout the year, whereas the other may have performed poorly earlier in the year but improved significantly towards the end. It is vital that planners can see the detail behind the ratings.
The manager can keep the whole promise
Managers don’t need to be compensation specialists, but they should be able to explain the compensation decision to the extent that they can demonstrate their understanding of how the organization’s different constraints (e.g. market position, salary range, internal equity, budget) influenced the outcome.
The employee can trace the line themselves
The employee should be able to answer these questions: What is the relationship between specific goals of the company, my performance, how my performance was assessed, and the compensation decision made? When this relation is not evident, employees will fill in the gaps with their own assumptions.
The cadence finally closes
Organizations have started implementing continuous performance management because they understand that performance happens throughout the year and cannot be depicted accurately through a single annual review. However, the value of continuous performance management is defeated if the information gathered is not tied to compensation. Goals, feedback, and check-ins should not be represented through a single rating. If they are, a lot of information will be lost when compensation decisions are made. This can be achieved without a significant shift in the organization’s performance management philosophy. The problem is where performance information is expected to merge with compensation.
How wide is your seam?
There are a number of practical questions that can be asked when looking at the connection between performance and compensation. How long after an employee performance rating is completed do you typically wait before using it to make compensation decisions?
- How many times is the performance rating manually exported, imported, copied, or re-entered before it is entered into the compensation system?
- Can the compensation planner see the information used to generate the performance rating, or do they only see the final rating?
- Are managers given sufficient training to discuss compensation decisions, or is most of their training focused on performance evaluation?
- Would the employee be able to describe the compensation decision they received and how it was derived? Could the organization describe it?
Uncomfortable answers to these questions may indicate the size of the performance/compensation gap. For most organizations, this gap is an opportunity to improve the merit process. This may be done without the need for a large-scale performance management or compensation project. While performance management and compensation may continue to have separate owners, systems and responsibilities, employees will continue to see them as connected. Thus, it is important for the owner of the process to be able to explain the interconnectivity to employees who are required to rely on the process.
