Q & A Session – Shifting to Pay for Performance
The following is a transcript of questions and answers from PayScale’s webinar, "How to Play a Key Role in Compensation Budgeting." The topics covered include how to offer meaningful employee rewards on a tight budget, how to train managers on pay for performance, and how to talk to employees who have reached the top of their pay range. Answers are provided by PayScale’s director of customer service and education, Stacey Carroll, M.B.A., SPHR, Frank A. Cania, SPHR, and Betty Richardson, CCP.
Q: Can a merit-based job performance matrix (MBM) help protect against pay inequity?
A: Yes, one of the key benefits of using a job performance matrix is identifying individuals who are in a protected class and are being paid less than people who are not in a protected class. For example, for women versus men, you likely all know that in January 2009 the President signed the Lilly Ledbetter Fair Pay Act. The MBM is a great tool to use to ensure that you are paying fairly and identifying any disparities among protected classes.
Q: With smaller HR budgets these days, how do we create meaningful differentiation between wage increases to reward versus motivate people?
A: Differentiation is very difficult, especially with a 2.5 – 3 percent increase, so it is important to make good decisions in your merit based pay increases and make sure that you are putting as much money as possible towards those people who are truly exceeding expectations. In addition to proper HR budgeting, it is necessary that an HR manager be aware of the additional employee incentives at their disposal. There are a large number of informal inducements, as well as official wage increases. Feedback and visibility possibilities are a great way of encouraging high-performance people who perhaps you cannot reward more monetarily.
The typical situation in the market nowadays dictates that, if you want to give one segment of your employees salary increases, you have to be willing to give another segment less or no salary increase. In many cases, that is very uncomfortable for managers. However, if you want to retain your top performers and create a differentiation in pay, you have to decide how to best use the limited HR budget.
These sorts of decisions can be very difficult if the organization has had a well-established policy of uniform employee rewards for seniority or cost-of-living. Shifting to a pay-for-performance philosophy takes a lot of preparation in order to be implemented positively.
Q: How can you convince managers that pay for performance is fair and makes sense for the whole company? Sometimes they don’t want to buy in.
A: Using the job performance matrix is key to getting buy-in from senior management. They need to trust you and know that you are the subject matter expert. As you are rolling this program out, the individual managers need to know that it is supported from the very top of your organization. They are the ones who will have those one-on-one conversations with the employees. If they cannot explain why the employee is not getting any salary increase, or why they are getting a large increase based on their performance, then you are really not getting the benefit. It’s imperative that, if you roll out a plan like this, you do the required training, especially for anyone who is in a supervisory role. The last thing you want is a manager sitting across from an employee saying, “Well, I am going to give you a 1% increase. I don’t know why, but my hands are tied so that’s what you are getting. I wanted to give you more, but they won’t let me.”
It’s also important to ensure that, when it comes time for the performance appraisal, the employee is not surprised by the conversation and resulting amount of increase. Managers must continually keep their employees informed about their performance. When a company decides to start using a pay-for-performance model, it is essential to be open and communicate the way the new system works.
This is especially true for companies that have traditionally given blanket raises to all employees. Details such as how reviews are performed, what a performance appraisal is, and so on, should be communicated early on in the process. Showing employees a sample job performance matrix, so that they can see the direct relationship their performance has on their pay, is oftentimes very helpful. No matter how well-built your plans are, if you have a surprise built into them, employees will be upset and unhappy.
What many employers do, especially if this pay-for-performance system is a major departure for them, is to roll out the change for only a certain subset of the total employees. Oftentimes it’s best to institute this system for managers themselves first, so that they will be experienced when discussing the matter with employees later. Once they have gone through it themselves, they will be better able to communicate the plan to those who work for them.
A great time-saver for organizations rolling out or using pay-for-performance models is PayScale’s Insight tool. Each employee, along with their performance, pay, and how their pay relates to their position and industry, is shown, making comparisons and forecasting easy. This is the kind of information you want in front of all of your managers when determining merit pay increases. The Insight system “red circles” anyone who is paid over the top of their range and “green circles” anyone currently paid under the minimum. This sort of versatile tool can be of critical help, whether you share the system with your managers, or just print out a selected export of the relevant materials to assist the manager in decision making.
Q: A common problem with the job performance matrix is when folks fall in the fourth quartile. In other words, they are performing above expectation, but because they are making good wages for their field, their manager must explain to them they are ineligible for an increase.
A: A great question. With or without a compensation matrix, the reality is that positions are only worth a certain, finite amount to organizations. To help make this conversation easier, it is helpful to have reminders and other communication since the last employee review, expressing the company’s philosophy.
Pay-for-performance and market competiveness are key for employees to understand. You must explain that the target for any company is to pay at approximately the going market rate, and that no company can afford to be paying all positions, or even a category of positions, significantly above the market. The other thing to communicate is that the employee is already paid very well for their category, and then to state what is required for this person to move up categories. The discussion should be shifted to “what can the employee do” to be eligible for more money, rather than “what can the company do” to be able to pay more.
There are almost always ways in which employees can improve and become more valuable to their employer. If not, then it is often time to look at the possibility of their being promoted, which would probably move them from that “highest-paid” categories to one of the “lowest-paid” categories.
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