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How to manage pay-for-Performance in today’s harsh new business environment

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in HR Management,Human Resources,Leaders & Managers,Management Training,Performance Reviews

Just as many organizations are finding they need to lay off employees—sometimes en masse—during the economic slowdown, they’re also finding that they’re suffering from a shortage of skilled workers.

It seems contrary. But an economy that has pushed gas prices sky-high, forced millions to live paycheck to paycheck, and created a need for more nurses, pharmacists and engineers than U.S. universities can produce has also created a perfect storm.

It has a direct impact on compensation. If your organization has plenty of employees but not enough of the ones with the skills you need to survive the economic downturn, you’re going to have to change the way you pay them. Make three changes to weather the tempest:

1. The best get more

Pay your stars more. Even if you’re laying off huge numbers of people, the retention of your best is your organization’s top challenge.

You must keep your highest-skilled, top-performing employees—the ones who can get you through to the other side of this economic crisis. How? Show them the money.

2. Others get less

Pay less-valuable employees less money. Yes, they might quit. Offer to drive them to the bus stop.

Difficult times call for compensation professionals to make difficult decisions. If your average raise is 3.8% and you give it to everyone, your stars are going to look for a bigger bite somewhere else. In fact, they already are. Research from the Society for Human Resource Management shows that 75% of all workers are open to considering new jobs. And 35% are already looking.

To retain your top talent, you’re going to have to give them bigger-than-average raises. Once you give someone a higher-than-average raise, you have to give someone else a lower-than-average bump. That’s a hard thing to do.

It’s probably not as hard as filling the vacancy left by the superstar who quit because you didn’t do it.

Advice: To make your all-stars feel valued, offer them raises that are 3% higher than those your low performers get. So if you’re giving 3% to someone who’s average, you need to come up with 6% for the hot property.

3. Nobody automatically gets more

Ditch any automatic, across-the-board bonuses that employees get for hitting their five-year anniversaries or because it’s Christmas. Save that money for bonuses that employees can earn by achieving individual or team goals or by helping the organization hit its financial targets.

Pay for performance means just that: An employee whose performance is stellar gets more pay than one who’s just showing up every day.

At most organizations, managers believe they do pay for performance. But they don’t. If they did, some people would get lots of bonuses and high raises, while others would wind up with neither.

A sudden switch to a true pay-for-performance system could ruffle feathers. Ease into it with lots of crystal-clear communication. Here are five ways to get started:

1. Tell employees how much of a raise they will get if their work is distinguished, excellent or simply proficient.

2. Establish accurate performance appraisal systems, and train supervisors in appraisal and feedback skills.

3. Know what your employees want. Money is the most appreciated reward, but time off is a close second and public thank-yous are right up there. Older workers appreciate different rewards than their young colleagues. Executives expect different treatment than nonexempt staff.

4. Budget for the change. Merely setting an average raise isn’t enough. You need five pots of money for merit increases, salary structure movement, adjustments in case of market changes, incentives and appreciation.

5. Communicate your new plan so everyone knows what to expect—and what to do to earn the most money.
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Sharon Koss, SPHR, CCP, is an HR consultant and author of Solving the Compensation Puzzle (SHRM, 2007). Contact her at SharonDoug@aol.com.

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