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4 steps to link variable pay with performance

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in Compensation and Benefits,Human Resources

Bonuses are back, according to research conducted by the Hay Group. But with a pragmatic nod to today’s austere business environment, employers are taking a hard look at why they’re dishing out variable pay, what they want it to accomplish and how they decide who gets how much.

Hay Group researchers found that 39% of companies have increased or plan to increase the proportion of variable pay their employees receive. However, with new bonus prospects comes a renewed focus on performance. Almost half of companies surveyed—47%—indicated they have increased or are planning to increase the performance thresholds employees need to reach to earn bonuses.

To make the most of your variable pay plan, link it closely with your business strategy, with strong ties to bottom-line results and return-on-investment goals. Here’s how:

1. Understand your business strategy. What performance goals will your bonus system help achieve? Here’s where HR must team with top management at the very highest levels—the CEO, senior executives and maybe even board members.

2. Align metrics with strategic goals. Work with line managers to figure out measures that determine how well individual effort or innovation supports business objectives.

3. Communicate clearly up and down the organization. It’s HR’s job to explain to employees how your variable pay plan works. But HR can’t do it alone.

Line managers have to reinforce it whenever they address employee performance. Midlevel managers must communicate progress up the organizational chart. And executives must clearly demonstrate their support for the plan.

4. Monitor the program to ensure it’s working. Every manager and executive is responsible for continually reinforcing the match between metrics and strategy. In HR, it’s your job to gather that information. Be prepared to intervene to ensure that managers properly use your performance management system and variable pay metrics.

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