Whenever you do performance reviews employees want to know, “What does my performance evaluation mean for me financially?” Many companies try to break the link between salary and performance reviews, as in performance is about performance and money is about money. But, I don’t think you ever truly can.
So, how can you achieve your company’s long-term goals, retain top employees and motivate under-performing employees with your salary review process?
Salary Review and Annual Performance Review Objectives
You must first understand the annual performance review objectives and the overall purpose of the salary review process before you get started. In general, salary reviews are about two things:
1. How the employee performs their job.
2. Where that employee fits relative to the external job market.
How to Evaluate Employee Performance
Your employee performance review will play a key role in the salary review process. And, in an ideal world, an employee would be reviewed for their performance against an objective set of criteria that’s job related. To decide on the criteria, managers must develop a draft job description which lists knowledge, skills and abilities (KSA) needed for the position, along with any further certifications or experience required.
After that job description is complete, the next step is to be sure to support your employee performance review process with good evaluation tools and managers who are trained to administer them. You can have the best tools in the world, but if your managers aren’t trained well to use them the tools won’t work. Likewise, you can have very well-trained managers but if your tools are insufficient you’ll struggle to get the results you need.
Finally, take the time to develop a clear definition of what success is for that employee in that job position. Does the employee need to complete a certain number of projects per year? Are there sales goals or other measures you can use? Have your managers work closely with the employee to establish this standard of success.
Once you have the KSAs defined, a performance review process established, and success defined for that position, you can rate the employee’s performance. The output from that performance evaluation is then part of the equation for the salary review process. It answers the question, “What kind of performer is this employee?”
How to Connect Performance Reviews to the Salary Review Process
Many organizations want to reward top performers with more money and non-performers with little or no money. Creating this pay-for-performance culture requires that employee performance intersects with the salary review process.
The key to making the salary review process effective, once the performance review piece is completed, is to compare this performance rating with the employee’s relative placement in the external market. Once you’ve done that, you can create a compensation matrix to be used within your organization as a guide for merit increases that is considerate of performance and external market conditions. This compensation matrix will provide a framework for your managers to follow, but allow some discretion on their part for the actual increases.
The following is an example of a compensation matrix for an overall budget of 4 percent of payroll.
Using the compensation matrix and salary guidelines above allows your salary increases to recognize and reward employee performance but also take into consideration market placement. This approach helps the organization not overspend for talent and keeps limited resources where they are needed in terms of rewarding people who are either behind the market rate or performing exceptionally well.
Stacey Carroll, M.B.A., SPHR
Director of Customer Service and Education at PayScale.com
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