Compensation and Performance Management [Getting on the Same Page]

Miscommunications lead to trouble in every type of relationship.

Take international relationships. In 1895, Italy and Ethiopia went to war because the wording in a treaty signed six years previously was confused in translation. According to their version of the treaty, the Ethiopians thought they could use the Italian embassy for their foreign affairs, while the Italians copy of the treaty stated the Ethiopians must use the embassy. This seemingly small miscommunication led the Italians to believe the Ethiopians were admitting to their colony status, while the Ethiopians maintained that they were an independent state. So, as the story goes, the First Italo-Ethiopian War broke out.

When it comes to work relationships, miscommunications between employers and employees may not lead to warfare, but they often lead to issues like decreased employee engagement, low retention, and poor performance.

One specific topic that is miscommunicated all too often in the workplace is compensation. When it comes to compensation, employers and employees are not always on the same page. At all. According to Payscale’s Compensation Best Practices Survey (CBPR), there is a gulf between employer and employee perceptions on pay. Of the employers surveyed, 43 percent agreed or strongly agreed that employees are paid fairly. Meanwhile, just 21 percent of employees agreed or strongly agreed with this statement (less than half the amount as their bosses!).

This gap in perception is a problem. However, understanding that compensation is a matter of perception is the first step to addressing the problem. In a recent webinar with Payscale, “Using Compensation to Motivate Performance,” BambooHR’s Cassie Whitlock points out that “value is all about perception.” So, it’s important to be transparent about that value with employees.

What Is Performance and Compensation Management?

Since one of the goals of an organization’s compensation strategy is to encourage high employee performance (and thus meet key business goals), compensation should be a natural piece of your overall performance management strategy. Performance and compensation management unites performance management and compensation management under one umbrella so an employee’s job-related performance is more directly tied to their compensation.

What Are the Four Types of Compensation?

Compensation can mean different things in different companies depending on their industry and workforce. The four types of direct compensation for employees you’ll see most often are:

1. Hourly Pay/Wage: The most common and direct form of compensation. Typically used with unskilled, semi-skilled, and part-time positions.
2. Salary: Customarily a yearly amount that is split evenly into pay periods so that workers receive the same amount every paycheck throughout the year. Positions that require more education or specific skills generally pay a salary.
3. Commission: Commission-based compensation is designed to incentivize employees to produce at a high level and may be used in certain industries where the employer cannot guarantee a consistent workload.
4. Bonuses: Bonuses give businesses a flexible option to reward employees additionally for great performance.

What Is Performance Compensation?

Traditionally, compensation was seen as a fixed amount for a particular position, based on factors like job requirements, level of experience, seniority, and more. But as the job market grows more and more competitive, the concept of performance compensation (also called pay-for-performance compensation) is gaining traction. According to a survey by Salary.com, in 2018, 75 percent of organizations had incorporated pay-for-performance compensation into their overall compensation plan.

Performance compensation encourages employees to do their best work and rewards them for achieving goals or objectives. It is typically an additional compensation component, alongside fixed pay. Pay-for-performance compensation is variable and depends on the performance of the worker.

Let’s discuss two major ways to combine compensation and performance management, based on insights shared in the webinar mentioned above, in order to help employees and management get on the same page.

#1 Build a Pay-for-Performance Compensation Strategy

By linking performance and compensation management efforts, employers not only provide clear compensation guidelines for themselves, but they can help employees understand their value and work to increase it.

HR professionals should lead these strategic planning efforts by first working with senior leadership to create these strategies (and subsequent tactics). Second, you’ll want to make sure these strategies are tied to applicable data—because your people will want proofs. Data from your performance management efforts can help in this process.

As you go about discussing what your strategies might be, consider the three things Payscale’s Mary Lasky says your pay-for-performance compensation strategy should achieve:

1. Compensation should be fair and consistent with the value of an employee’s contribution.

2. Compensation increases should come at an appropriate pace and reflect the employee’s ongoing performance as well as changes in the labor market.

3. Compensation should motivate higher levels of performance from all employees.

Obviously, there are many ways to reward performance beyond a mere money payment. And depending on your situation (e.g., industry, company size, growth stage, etc.), you will want to mix base pay with a variety of other incentives. What’s important is that you do put the time into coming up with a thoughtful mix of monetary and non-monetary incentives that fit your unique organization, tie them to specific performance metrics, and then be prepared to pay up on a consistent basis.

As Whitlock points out, since rewards don’t have to be monetary and they don’t have to be scheduled, you can get creative with them. If you know a particular high performer loves the orchestra, get them tickets to an upcoming concert. Maybe you want to reward an entire team for putting on a successful event? Provide them with a catered lunch. And of course, traditional bonuses go a long way when you tie them to specific work accomplishments.

If you’re strapped for cash or have a smaller budget, you can provide employees with other rewards that still show you value their performance. A one-on-one lunch with the CEO or another senior leader will go a long way with ambitious employees. You can offer high performers a paid day off after a crucial deadline. Or maybe give employees who have shown the ability to be self-starters the ability to work remotely.

The list of ways you can reward performance goes on and on because, when you take the time to create your own unique pay-for-performance compensation strategy, the only limit is your imagination. What’s important is that you find the forms of compensation that work for your organization, clearly tie them to an employee’s performance, and run with it! (For more tips on the specific ways to create a pay-for-performance compensation strategy, refer to the webinar.)

#2 Improve Pay Communication

But don’t run too fast. There is some aligning that needs to take place before you discuss your pay-for-performance strategies with your people.

According to the CBPR survey mentioned above, two-thirds of the employees who felt they were underpaid were at least paid at market value, and 35 percent were actually paid above market value. So what is the problem? Perception!

Compensation is an exchange of value, and as we’ve already discussed, value is about perception. So, even if you come up with a perfect strategy to compensate your people according to their real value, it’ll be for nothing if they don’t understand it.

These misperceptions are why it is so important to be transparent with employees about their compensation and to align their perceptions with reality. Managers should be prepared to talk about compensation on an individual basis and match the value they provide (e.g., pay, benefits, experience, flexibility, etc.) with the specific value an employee provides (e.g., experience in industry, experience in discipline, product and competitor knowledge, etc.).

But here’s the rub: most managers don’t know how to talk about compensation. According to the CBPR, less than 20 percent of organizations are very confident in their managers’ abilities to take on tough conversations about compensation with their employees. So, before managers have these conversations with employees, organizations need to work out their communication plan.

After HR has worked with senior leadership to create a strategic compensation plan, they need to educate managers and train them to communicate the plan with individual employees. Whitlock recommends HR provide managers with the following “communication toolkit”:

1. Compensation plan talking points

2. Compensation plan information

3. Details for each employee they supervise

4. Tips for each type of conversation they may have

Managers should walk away from their training prepared to discuss the compensation strategy with employees, use data to show the whys of the strategy, and know how to implement SMART goals with specific employees to both show their value and offer paths for increased compensation.

Use software that makes it easy to make and track performance goals

This may sound like a lot of work to simply “talk about pay,” but as managers help employees connect the dots on why they’re compensated the way they are, employees will better understand their value and feel confident they are being paid fairly. They will also be more receptive to direction on what they can do to increase their compensation. Not to mention these two elements combined will lead to less miscommunication and misperception.

Of course, since it’s impossible to eliminate misperceptions completely, a culture of openness is imperative to succeed in these efforts. Employees should be encouraged to bring compensation questions or concerns to their managers when they’re unsure. With clear strategies in place and managers trained on how to discuss them, the answers will be readily available.

That way, whenever a gap in value perception comes up, manager and employee can work together to bridge it quickly and get back on the same page.