Continuous Evaluation and Variable Pay Are Transforming Company Cultures

LAS VEGAS—Employers are creating cutting-edge performance management and compensation systems to help employees and organizations thrive, said speakers at the Society for Human Resource Management 2019 Annual Conference & Exposition.

Fine-Tune Performance Management

It is folly to set performance goals in January and then wait until December to review whether employees have met these benchmarks, said Jeremy Spake, a principal at talent management software firm Cornerstone on Demand, during a June 24 conference mega session.

A better way to keep employees on track and give them the help they need is to instruct managers to have more-frequent performance conversations with their direct reports.

"Shifting to continuous conversations is logical," Spake said. "It enables managers to check on any help that employees may need or discover skill deficiencies that need to be addressed, and if done correctly it can build trust."

Check-in conversations can be every other week, monthly or at least quarterly, Spake recommended. This helps managers revise or replace metrics as circumstances change.

Managers may push back against the added work, which involves planning, conducting reviews and documentation, but "HR can help to keep managers on track," Spake said, by showing managers how their departments and the organization can benefit from discovering and remedying issues that hinder employee performance.

HR can also train managers to give "impromptu feedback tailored in a way that's helpful, not hurtful, and to remember that guidance is a gift, not a whip." When pointing out problems or mistakes, use such language as "that's wrong," not "you're wrong," he noted.

These performance conversations can complement another performance management trend: ratingless evaluations, Spake said.

Jettisoning formal employee ratings "sometimes just leads to 'shadow ratings' behind the scenes, with less transparency," he said. However, there are also good reasons to do away with ratings, he continued. For instance, in the common ranking of 1 to 5, too often, the number an employee receives becomes the center of the discussion, which eclipses more-productive conversations, like how to improve performance.

"Establish a clear line of sight between performance and total rewards, even without ratings," Spake said.

He also suggested breaking up annual bonuses, such as paying them quarterly instead of annually, so they are paid out closer to the performance that's being rewarded.

[SHRM members-only how-to guide: How to Establish Salary Ranges]

Ensure Variable Pay Success

Traditional merit-based pay systems often reward mediocre performance, whereas a variable pay strategy rewards those employees who add the most value to the organization, said John A. Rubino, SHRM-SCP, founder and president of Rubino Consulting Services, a global human resources consulting company, during a June 24 concurrent session at the conference.

Most annual base pay increases in the U.S. have been in the 2.8 percent to 3.1 percent range, "which is no way to reward your best and brightest employees," Rubino said.

"Stop pretending that you're paying for performance with base pay adjustments," he advised. The alternative is a variable pay program, with lump sums based on performance. Variable pay increases make it easy to see the link between results and rewards, but "putting in place broad-based variable pay requires a culture change within organizations. Some are ready for variable pay, some are not," Rubino said.

"Base pay provides a compensation baseline, for expected and predictable performance improvement," he added. Salaries, however, grow exponentially, so that each increase raises the base on which future increases are pegged. "Slowing down base pay growth can at least partially fund variable pay program," Rubino said.

"Salary increases should be based on market value of jobs, determined by comparative position analysis," he noted. Salary increases then become market adjustments.

"Don't go down the road of variable pay until you can ensure that your performance management system works," Rubino advised. That's because variable pay draws on performance management metrics to determine targeted plan payouts.

All employees can be included in a broad-based variable pay program, with performance payouts often weighted by employee level. For most organizations, variable payouts can range from 8 percent to 19 percent of base pay, determined by meeting individual, team and organization goals, but often these are paid only if the company achieves or overachieves its goals.

"Specify what behaviors you want from employees, and structure the program around them," he said. "Articulate what outstanding behavior is, and build it into your metrics."

Invite employees to write their own goals, aligned to business unit and organizational goals, Rubino recommended. Whether metrics are quantifiable hard measures or not, the criteria must be valid and discernable.

To avoid manager subjectivity or biases, use a rating system that solicits feedback from multiple vantage points.

Like Spake, Rubino noted that employees are motivated by payouts timed close to the performance being rewarded. "Consider paying semiannually or quarterly if all performance measures can be accurately evaluated within those time frames," he advised.

"Top performers love variable pay. Your mediocre employees will not. Variable pay will result in [an increase in] voluntary departures by mediocre employees who just get by and who don't want to play by these rules."

He added, "Be prepared for turnover when you change the culture."

Rubino warned, "You can't change the culture of compensation from the HR department." Adopting a variable pay approach "must be supported by top leaders on down." HR, however, "can catch the ear of senior executives" and encourage them to get behind a variable pay strategy.

Related SHRM Articles:

Employers Try Better Ways to Measure and Reward Performance, SHRM Online, August 2017

Evolving Company Culture from Base Pay to Variable Rewards, SHRM Online, June 2017