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LAS VEGAS—It’s an old saying that you can’t reward what you can’t measure, but the key to effective compensation is knowing what to measure, and that differs from organization to organization, explained Robert J. Greene, SHRM-SCP, Ph.D., in his June 27 workshop “Effective Rewards Management” at the Society for Human Resource Management’s 2015 Annual Conference & Exposition.

Greene, CEO of the consultancy Reward $ystems Inc. in Glenview, Ill., noted that attracting and retaining critical talent cannot be accomplished with rewards alone; other aspects of corporate culture, such as meaningful employee recognition, career development and a resonant defining mission, are vital. Yet the structure of rewards indisputably impacts the effectiveness of your workforce. If the organization’s rewards are not believed to be equitable, competitive and appropriate, “it will damage your organization’s value proposition and make attraction and retention more difficult,” Greene explained.

“The usual response is for people to believe they are somewhat underpaid,” said Greene. But “paid relative to what?” is the key. “When they feel they are being paid too little in comparison with what they could do, that’s a career-management problem, not a pay problem,” he pointed out.

Greene defined rewards strategy as, basically, “how we define, measure and reward employee contributions” (he prefers “contributions” to “performance” because it more clearly focuses on how employee actions add value to the organization).

He is often asked which standardized rewards system he recommends, but that question indicates the wrong mindset. “The rewards strategy that fits your organization, at this particular time, is the one that will succeed,” he said. And organizations differ from one another, and also change in terms of what they value over time.

“People will respond to rewards; don’t reward A if what you actually want is B,” he said. After determining what the organization values, it’s appropriate to focus on the best employee incentives to achieve that end.

Individual and team incentives should be tied to the organization’s context, strategy and objectives, and it should be clear to employees how meeting their own goals serves this greater mission. “Make doing the work and earning and receiving a reward an intrinsically rewarding experience, not just an extrinsic reward. Employees need both, not one or the other,” Greene said.

The role of job descriptions and performance (or “contribution”) appraisals should be to set expectations—employees must know the metrics on which they’ll be evaluated, have the resources and tools to do their job, and receive recognition for good work. They also need opportunities to learn and grow as part of the mix.

Provide Continuous Feedback

If performance management is the critical determinant of effectiveness, “why is it typically recognized as the least effective HR initiative?” Greene asked.

One answer is the lack of regular measurements and continuous feedback from managers. Too often, he noted, “at the start of the year job responsibilities and goals are defined, and then at the end of the year—typically, the night before an annual performance appraisal—the manager and employee both try to remember the year. At the appraisal meeting, they attempt to reconcile two very differently perceived years.” That, he warned, is the all-too-common process, and a recipe for disaster regarding employee motivation and engagement.

Additionally: “We are prone to think we are better than we are,” Greene said. “We overestimate our contribution to the group effort. Median performers will tend to believe they are at the 75th to 80th percentile.”

Throughout the year, managers should offer, as appropriate, feedback in terms of evaluation, appreciation and coaching, he advised. A full month in which employees receive none of these from their manager is a sign of trouble.

Make Pay Variable

Greene has long advocated variable pay—or pay for performance (or “pay for employee contributions”). Just as organizations will differ in what behavior they seek to motivate, individual employees differ in the value they add to the organization.

“[Having] general or across-the-board pay increases is the worst waste of money that I’m aware of,” he pointedly stated. “It’s paying for aging in place.”

In choosing and communicating variable pay formulas, ensure that the basis for rewards (both pay and promotion) is made clear. “Employees can and will ‘keep score,’” he noted, but they must understand the rules of the game. “Clarity is the most important gift you can give an employee.”

One way of restructuring compensation strategy is to tie base pay more closely with competence and to tie incentive awards (cash or company stock) to contributions, with cash and equity typically used, respectively, for short- and long-term incentives.

Another idea is to freeze fixed-cost base pay levels entirely, replacing annual raises with variable pay opportunities.

“Which approach fits you will depend on a number of factors,” Greene explained, including:

• Whether current salary rates are distributed appropriately.
• How current rates match up to prevailing market rates.
• How sound your performance management system is.
• Your organizational culture.
• How capable your managers are.

As Greene further describes in his SHRM Online article “Variable Pay: How to Manage It,” in order for a variable pay strategy to contribute to organizational success, it must be aligned with the vision and mission of the organization. “Heading in the wrong direction at high speed does not bring one closer to the desired destination,” he pointed out.

Greene is the author of the book Rewarding Performance: Guiding Principles; Custom Strategies.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow Me on Twitter.