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How to manage (and explain) pay-for-performance plans

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


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. 

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. But 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.

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.

Culture shock: 5 ways to manage the change

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’ll 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.


Author: 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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