(This is the second in a series of three blog posts that recap learning sessions offered at the recently concluded annual SHRM conference. Social Media Director Joan Ginsberg gave HRAGD members the opportunity to choose session for Joan to attend and blog about. This session was chosen by Tanagra Weaver PHR, who has been an HRAGD member since October 2010.)
If there was one thing that presenter Jim Kochanski wanted attendees to take away from his session it was this:
Most companies think they have a pay for performance (P4P) system, but actually do not. About 70% of companies who claim to, in fact, do not have a P4P system.
What they do have, according to Kochanski, is the alternative to a P4P system. They have an entitlement system. Kochanski then used several examples such as Big Foot, Elvis, and reality television to illustrate how there are differing perceptions of fake and reality, and how those perceptions create the corporate myth that it is using a P4P system.
Kochanski then spent the rest of his session explaining the nine drivers of a true P4P system that had been identified by his company.
1. Leadership articulates priorities for P4P, creating a value exchange. There are many possible business outcomes that leadership may be seeking – motivation, cost containment, employee attraction and/or retention, and others. The company can’t have them all, but identifying those that are a priority, and then explicitly communicating them to employees is the first step to keeping employee rewards from becoming entitlements.
2. A pay structure that defines pay opportunity. Kochanski called pay structure “the envelope that delivers P4P”. He claimed that the proper pay structure would be based on market and internal equity, and should be provided for each and every person and job. Pay competitiveness would inform pay structure, which in turn provides pay opportunity.
3. Goals must be set and aligned. About 1/2 of the employees make up his or her goals without input from managers, according to Kochanski. To properly align goals, companies must (a) improve visibility of goal setting, (b) document those goals, and (c) make them transparent. 78% of companies with the best P4P results have effective goal alignment.
4. There must be a norm of differentiation. In other words, there must be a ratings scale for employees, and there should be a target for how ratings will be distributed. It does not really matter how many levels of distribution exist, but the actual distribution should be visible to leaders and employees.
5. There should be calibration across managers. Instead of a single ratings by a single leader or manager, there should be a system of peer managers who meet to calibrate ratings and compensation decisions.
6. Merit must matter. Even when the budget for raises or other pay incentives is small, high achievers should be rewarded. Be sure to communicate to employees what will really happen, not what an employee wants to hear.
7.Make variable vary. When employees get the same percentage every year, the pay has become and entitlement and not a performance compensation. Annual incentive pay (AIP) for high performers or managers is often an indicator of true P4P.
8. Tie promotions to performance. True P4P promotions are (a) performance, not seniority, based, (b) budgeted, (c) tracked and reported, (d) calibrated, and (e) require multi-level approval.
9. Use metrics to track P4P. A sample compensation scorecard might include the average performance rating, the average merit increase by percentage, the promotion rate, and the percent of annual incentive target awarded, all compared or tracked by department.
In closing, Kochanski warned that the movement from an entitlement culture to P4P takes time and effort. He warned that it may take 3 full years before a company will see specific results.