Workscape Institute

As an active member of several regional and national HR organizations, I can tell you with some confidence that there’s a lot on HR executive’s minds right now.  A host of new HR tools, such as compensation planning and performance management applications, are empowering businesses to drive engagement and retention like never before.  However, the recession’s ability to shrink merit budgets and increase margin pressures has caused some hesitation about initiating a pay-for-performance strategy.

While the recent downturn has left HR leaders feeling justifiably constrained, it shouldn’t derail a well designed pay-for-performance program.  Pay-for-performance practices extend well beyond rewarding your top talent and, when properly positioned, can literally transform your organization.  Here I’ll discuss 4 critical elements of pay-for-performance when you’re trying to motivate with 3% increases:

Pay-for-performance needs to be:
1) Embedded in your culture (starting at the top);
2) Fully visible to all employees;
3) Aligned to strategic objectives; and
4) Multi-factored.

1) Embed pay-for-performance in your culture

As you’ve probably noticed, the market’s poor returns have caused shareholders to once again scrutinize the compensation practices of leading CEOs, and pay-for-performance has, in some cases, even been a battle cry.  This moment provides a great opportunity to illustrate the first point.  A company without clear, aligned, and effective pay-for-performance practices set in place for the executive team will not be able to transform the company’s culture.

A leading compensation consultant once summed pay-for-performance’s baseline requirements as “internal equity and external competitiveness.”  Equity doesn’t mean uniformity, but instead a palpable sense of companywide participation that can only be realized when the program starts – and ends – with the executives.

2) Make the process clear – to everyone

Although commitment to becoming a pay-for-performance culture needs to start at the top, a clear understanding of how it affects everyone else is critical to maintaining organizational focus.  Incentive differentiation between top talent and those who are less engaged can be perceived as a cutthroat executive decision rather than a strategic move to motivate your teams… it’s up to HR to communicate through the transition.

3) Align rewards to strategic objectives

Tying individual rewards to company revenues is a suboptimal approach to pay-for-performance, because revenues are merely the result of a good company doing business.  In order for HR to maximize the potency of its tools, we need to think more broadly about what have been crucial drivers to our success and integrate those drivers into our rewards process.  One simple example that has been very effective for us is customer satisfaction.  Most companies talk about the importance of high customer satisfaction, but, by walking the walk and tying some reward elements such as employee bonuses to customer satisfaction metrics, HR can help deliver on that pledge.

Providing employee incentives for achieving and maintaining high customer satisfaction also creates an environment where your people feel like a top priority.  As Hal Rosenbluth observed in The Customer Comes Second, “…of course our clients are the reasons for our existence… but to serve our clients best we have to put our people first”.

4) Incorporate multiple factors

As indicated above, there are significant advantages to factoring in multiple elements in a rewards program.  For example, if your company often forms ad-hoc teams, then this should be factored into your pay-for-performance program.  If there is perceived to be tension between balancing corporate objectives (revenue goals, customer satisfaction), team objectives (project completion), and individual objectives (training) – then that speaks to misalignment, and warrants a thorough review. 

Ultimately, a finely tuned compensation package that accounts for all of these goals is going to be most effective at retaining and motivating your workforce… and in today’s war for talent, there’s no better value that HR can bring to the table.