Pay-for-Performance Plans Make a Comeback

Back to Normal: Review Your Pay-for-Peformance Plan Now

Thinking about merit increases again for the first time in a very long time? The evening news reports that the economic recovery is shaky, with steps forward and steps back, but some companies are doing well again. If the annual pay-for-performance plan at your work was put on hold, but you can now consider starting it up again, here are some back-to-basics steps to follow.

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1. Review the status of your performance appraisal system.

Has your feedback process continued as usual, even though there wasn’t money in the budget to grant increases to base pay? Bravo! Good for you! Some organizations or individual managers make the big mistake of thinking that if there is no money to share, then why bother with the hassle of doing evaluations? If this scenario describes where you work, then now is time to turn around that mindset and get employee performance documented. 

Other Mistakes to Watch Out for in this Area

The Horn Effect

With no money at risk, did your managers decide this last year was the time to throw polite out the window and document every tiny mistake ever made by subordinates? Unleashing a pent-up dam of complaints and issues is not really healthy in the work environment. If you have a manager who overlooks all the good work done by an employee because of one misstep, that is the horn effect in action.

The Halo Effect

Do you have managers in your organization who went the other way and decided to give every one a perfect score to help boost morale? Over looking areas needing improvement and making everything positive because of one good accomplishment is the halo effect.

Have you ever been the hardest worker and learned that your coasting co-worker got the same reward as you? How did that impact your morale? Giving every one a great evaluation is not being fair if every one doesn’t deserve it. And if your management team insists they do, help them realize that, based upon those evaluations, there will be less money available to share at the top, since that is where everyone is.

For pay-for-performance plans to work, you have to have that link between what you pay based upon what was performed. Check to make sure you are in good shape for documented performance by confirming that every one in your work force has a current evaluation. This applies to both your exempt and non-exempt populations.

If you have concerns that some members of your management team were acting as the ogres with the horns or the angels with halos described above, you may want to go back in time and see if there are anomalies in the grading this past year that can’t be readily explained by a change in performance.

2. Confirm with finance and accounting that you really can go forward.

This is the year when clear communications and expectations between finance and accounting and your human resources group could not be more important. Do the numbers add up and still make sense when the Dow Jones is swinging 500 points in a week? Does everyone get it that increases to base pay are reoccurring expenses that will be factored into 2011, 2012, and beyond?

If you can’t afford a merit increase budget of at least two percent, it probably is not worth it to go forward with changes to base, but to instead use the money on incentive awards instead.

3. Pay extra attention to your process details and communication message.

This is not the time to make a mistake, so take the care to create a formal project plan and build plenty of time into it to get things right. Give your compensation team, i.e. yourself, more time than in the past to review the proposed increases and compare them with those appraisal results. You may have skipped this in the past, but this is the year, before the increases are communicated or set in stone, to review the recommendations in view of disparate impact. Are there any negative trends that correlate to protected classes?

For your employee communications message, how high up the chain of command can you get your “voice” for your communications? Ideally your president or CEO will agree to deliver the message around pay and its link to your strategic plan.

Make sure that the tone of the message is in alignment with the increases. Don’t expect employees to start singing “Happy Days Are Here Again” if the message is that modest merit increases are back, but we’re laying off yet another 15 percent of workers to afford it. Speak realistically about the future of the organization while instilling hope and tying in to your mission and values.


Beverly N. Dance, MBA, SPHR-CA, CCP, CEBS
Principal, Dance Associates
Human Resources Consulting

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