Performance Review and Compensation: Why and how you should separate these discussions
If you planning to drive high performance through money and trying to hang it in front of your employee, it’s a terrible idea.
What I will try to convince you in this article is why you should separate compensation and performance review discussion and how it will benefit you.
I will illustrate two methods on how you can run an effective compensation discussion, with an equally rewarding Performance Review aspect.
Performance Review in most of the places is hated and termed as a soul-sucking process. Apart from being once a year, the primary reason for its hatred is the annual number directly related to the compensation hike. Performance Reviews which are tied with compensation, create a blame-oriented culture, which directly or indirectly causes these:
- Stiffen hierarchy
- Weaken cooperative interaction between colleagues
- Discourage straight talk
- Politicized matters at the workplace
Why Rewards and Performance Review combined discussions never work out:
The main objective of your performance review is to help your workforce improve, develop and take up new challenges to help them grow.
When you have an annual meeting with an employee to discuss the past work done, there is already no concentration or urge to discuss performance reviews, development plans, as they were waiting to hear x percent increase of their present salary. I am not neglecting the fact that compensation discussion is important. I am simply stating that the workforce’s development is simply too important to ignore and to let compensation talks bury it. By taking away concerns about compensation, we have freed employee to relax and hear what their managers have to say and vice versa.
If you tagging Salary increase and hikes directly to Performance Ratings, there is a 70 % chance of a drop in performance.
When you tend to connect ‘rewards’ with performance, intrinsic motivation in employee decreases. Intrinsic motivation denotes in work denote to autonomy, belonging, learning, mastery, curiosity and taking up new challenges. Performance-based monetary reward indeed undermines intrinsic motivation and there is a neurological basis to support that idea. And trust me it’s not about more money, for more you can see this video on What really motivates you, backed by a study from MIT.
So, when you put in reward as performance pay basis, people initially seem to enjoy it, but over time they see that they try to seek the only reward and in a quest to that may leave your organization. And if you give rewards like this:
“I will reward you with the work you do for 50 % of the market salary and give an annual increment of 3 %”
The employee will leave your organization, say after 2 years to get a more successive hike to their base as compared to the 3 % you are giving. Their leaving is also justified as you have linked ratings to performance pay from day one, not planning their development, help them improve skills at any level or motivate to meet a new challenge. And if the employee leaves, the cost of getting a replacement may cost as high as 160 %, and leave alone the time and other factors.
What can be done?
Apart from making reviews a continuous process, have separate discussions of Performance Review and compensation hikes. By taking away concerns about money and status, you free employees to relax and hear what their managers have to say. There is an increase in interaction between the managers (which can act as coaches) and employees and can help the high performers too.
Make the review a quarterly process, to support the above notion. Have a discussion on employee work is done, the difficulties faced and the future objectives to be achieved. Instead of post-mortem analysis, employees skill development planning is a prime focus and how they can take up new challenges. The extrinsic behavior of fear, failure, and money get reduced and the employees are engaged in a better manner and also performing exceedingly well, which rewards may not have been guaranteeing. This will see significant feedback everyone is giving each other. People will work hard with the joy of building something and enjoy the recognition for the good work. All this will give them a reason to stay at the company.
Please drop the Annual Increment to the performance. Yes, you heard it correct. And pay the salary as per the local markets.
How to plan compensation:
Take the work profile, what is the present market mid compensation for the same, as per the local market region.
Decide to give the merit increase, see the how the present compensation works out on the basis of present market mid, (CR).
Have a percentage value for market adjustment. The market value is to be used for an individual’s skills as your index of compensation adjustment. Make sure you have properly researched data for employee compensation in the market.
You can pre-decide the budget before for different departments and can also allow the adjustments. You can also allow the managers to decide the compensation if needed be.
What it clearly does, it removes the two discussions and installs confidence in employees that the salary increase is not a correlation to the performance review. The performance review can be totally concentrated on their skill development, independence and accepting challenge whereas salary increment is totally related to the market.
The other way you can give increments is using the Netflix model:
What Netflix does is to check these:
- What can their present employee can get elsewhere?
- What can Netflix pay for a replacement?
- What can Netflix pay to keep the employee with them (If the employee has a bigger offer at the table)
This is also good for employees also, as an employee in order to make more money, will focus on increasing their value to your company and the market as a whole. This also aligns the employee’s interest in organization interest. You can also take a cue from Netflix’s stock model where they give employee choice to take the compensation as stock instead of cash. A great way to give employees a choice in how they invest in the company’s future.
The entire idea of separating the Review and compensation discussion is to get the best out of Performance Reviews and help you and employee grow better. Also, we understand that compensation is a part cannot be neglected, these models have helped the process to justify themselves.
Are you looking to separate compensation and performance review from each other and looking for a solution? Have a quick look at GroSum, and we will help you understand how it can benefit you and help set up your vision.