In today’s competitive labor market, especially for professional and managerial roles, the term “pay for performance” appears on virtually every job posting as a catchphrase to entice self-driven individuals.
An attractive job advertisement may be able to draw candidates’ attention, but do organizations truly have the pay-for-performance culture to retain high-performing employees? Why does it matter?
Defining “pay for performance”
It is important to first break down what “paying for performance” really means. Pay, in simplistic terms, is any monetary benefit one receives from work, including base salary, incentive compensation, and even retirement benefits.
But in a broader context, “pay” may be too narrow of a definition, as it fails to capture other types of reward employees receive, such as health and welfare benefits, career progression, and professional development opportunities. These elements may not be as quantifiable, but could be just as important from the employees’ perspective.
Defining performance is even more challenging. At the corporate level, the right financial and non-financial performance metrics vary by industry, business maturity, and other company-specific factors. For not-for-profit organizations, this may include mission objectives. Nevertheless, most employees are held accountable to individual objectives about their daily work.
The key to success lies in the connection between organizational strategy and these individual objectives—and, perhaps more importantly, the linkage between performance and reward outcomes.
Ultimately, rewarding for performance is a means to assessing return (i.e., growth and profitability) on investment (cost of employment).
We appreciate that rewarding for performance is a very broad subject. Some organizations spend decades trying to achieve the optimal reward-for-performance outcomes.
But as a starting point, here are a few things to look for when performing a preliminary evaluation of your organization’s reward and performance alignment:
1. Are you providing the right mix of rewards for the right roles?
With a well-defined reward philosophy and employee value proposition, an organization can define the right mix of fixed and variable compensation and determine the right reward elements that support its people strategy.
2. Are you setting the right performance goals?
Once the corporate-level performance goals align with the organization’s growth plan and overall strategy, all employees should be accountable to individual objectives that are
- consistent with these corporate goals and
- in terms of what each individual feel he or she can influence
3. Are managers empowered and enabled for their role?
Making the right reward decisions for the rank-and-file employees depends heavily on how managers execute. Hence, it is important to make sure managers are assigned appropriately and that they have the tools and training to help them do their job, such as making the right performance decisions and communicating outcomes to employees effectively and in a manner that is consistent with the organization’s culture.
It is natural to run into resistance when trying to push for improving reward and performance alignment because it is such a broad topic. Here are a few myths that you may hear as you try to push for a change:
Myth: It’s just a concept at the executive level to fulfill compliance requirements and keep investors happy
Most certainly, rewarding for performance is a hot topic at the executive level, as shareholders are always looking to increase their return on investment. But we also care deeply about rewarding for performance for the broad-based population because it contributes to a high-performance culture and makes employees feel impactful, which is a key driver for employee satisfaction and retention.
Myth: It may make our system fairer, but is not a priority because our hands are tied and it does not directly impact business performance.
When employees do not see a link between their reward and performance, they lose motivation to make a difference. This sense of lethargy is contagious, and it will eventually become part of the organization’s culture. High performers may feel frustrated and others may only work to stay afloat. Executives may have a great strategy in place to drive the business forward, but may find support for execution lacking if rewarding for performance is not cascaded throughout the organization.
Myth: There is no need to look at our reward-for-performance alignment because everybody else is doing what we are doing.
One of the main reasons why many organizations find rewarding for performance challenging is that there is no standard prescription. Getting it right depends on a lot of company-specific factors, such as the profile of its people and the organization’s culture. Businesses today are also highly dynamic, particularly in times like this when many companies are looking to transform themselves with the emergence of artificial intelligence and automation technologies. Many organizations are still struggling to get things right.
It is not too late to turn “cultivating a high performance culture” from a catchphrase to reality. The first step is to ask the right questions and identify the pressure points – start with a diagnosis of the health of an organization’s reward-for-performance programs and processes.
Sandra McLellan leads the Willis Towers Watson North American Rewards practice and is based in Toronto, specializing in Global Total Reward management including strategy, job leveling, base salary, incentive design, performance management and linking culture and rewards. Her previous post for the wire was Base salary increases: Same headline, different story.
Guest blogger Kenneth Kuk is a Senior Consultant in Willis Towers Watson’s Rewards line of business, based in Washington D.C., specializing in executive and broad-based compensation as well as HR issues in an M&A setting. Ken has worked with numerous Fortune 500, privately held and not-for-profit organizations across various sectors such as technology, professional services, aerospace and defense, retail, manufacturing, financial services, pharmaceutical, energy and utilities.