ATLANTA—The recession and its aftermath have given compensation specialists the opportunity to move their organizations from a culture of entitlement to a real pay-for-performance model, said Jim Kochanski, senior vice president at Sibson Consulting, during his presentation “Pay for Performance: Breakaway Success Strategies” at the 2012 SHRM Annual Conference, held here June 24-27.
When done well, pay for performance can motivate employees and foster cooperation. That’s because most employees consider the model to be fair. But only about 30 percent of organizations do pay for performance well, Kochanski said.
When establishing a meaningful system, leadership is key. “Pay for performance doesn’t bubble up from the bottom of an organization. But it does cascade down very well,” he said.
The first job is to find out what leaders view as the priorities for the pay program, Kochanski said. Do they want to attract and retain most employees or just key people? Do they want to motivate workers, keep costs competitive, align effort with goals?
“The best companies really do goal alignment well,” Kochanski said. Individual goals and priorities must be set in light of company and unit goals and priorities, which are defined by the executive team and carried out by the business units, managers and individuals.
To ensure consistency in employee ratings, Kochanski advised holding calibration sessions among managers. “If there’s one thing I would do, that is it,” he said.
When peer managers meet to calibrate ratings and compensation decisions, it creates and reinforces performance norms throughout the organization. “The first year is tough,” Kochanski warned, because tensions can arise when managers realize that employees in other units are being rated very differently.
But it’s important that the variable pay data is transparent to the organization’s managers and business leaders. A sample compensation scorecard can be used to reveal each manager’s rating tendencies. It can include each manager’s average performance rating, average merit increase, promotion rate and related data.
Merit and incentive pay are common rewards in pay-for-performance models, but promotions also are a key reward, Kochanski said. He advised budgeting around 1 percent of payroll for promotions.
When transitioning to a pay-for-performance system, Kochanski cautioned that it generally takes around three years to start seeing results: “A lot of these things, they don’t happen overnight. This is a multiyear effort.”
Using Salary Surveys
Variable pay can be used to control the growth of base salaries, but how do you know whether your organization’s salaries are in line with those of your competitors? That was the topic of another conference session, “Using Salary Survey Data Effectively.”
When using salary surveys, it’s essential that they are credible, with several companies participating. The surveys should contain data that are relevant to your organization in terms of geography, industry and organization size. And the surveys have to contain solid job descriptions so you can match the jobs within your organization.
“You really need to know your jobs,” said Karen Vujtech, SPHR, GPHR, managing director at Total Rewards Consulting. For all jobs, the compensation specialist should know the principal functions, typical duties, location on an organizational chart and related details.
Never match on job titles alone, cautioned Robert Fulton, managing director at The Pathfinders Group.
One significant downside to working with salary surveys, of course, is the cost to purchase them. Vujtech suggested a way to lower the expense: “Participate, and it always costs less.” Still, if you want reliable information, you’ll have to pay for it, Vujtech said.
Be cautious of free online surveys because they might not be reliable—“You get what you pay for,” Vujtech said—but don’t ignore them altogether because that’s what your managers and employees often see.
Despite the cost, you should use several surveys whenever possible. Multiple data slices from several surveys will allow you to validate the data, especially when it looks suspect, Fulton said. “Don’t put all your eggs in one basket,” Vujtech said.
John Scorza is associate editor for HR Magazine.
Building a Market-Based Pay Structure From Scratch, SHRM Templates and Tools, April 2012
Align Pay with Business Priorities to Reap Rewards, SHRM Online Compensation Discipline, June 2011
How to Use 'Carve-Outs' to Truly Pay for Performance, SHRM Online Compensation Discipline, June 2011
Study: Keys to Effective Performance Pay, SHRM Online Compensation Discipline, December 2010
SHRM Online Compensation Discipline
SHRM Salary Survey Directory
SHRM Compensation Data Center
SHRM Metro Economic Outlook reports