As most of us are in the midst of the annual performance review and compensation process, it is important to be mindful of what an indelible impact an employee’s pay can have on your organization. When the processes are managed correctly, it aligns your employee’s behaviors with your organizational strategy and generates better performance. When it’s not, the effects can be damaging to your organization: unmotivated and unengaged employees, high attrition, misaligned objectives, and poor business results. Given those high stakes, it’s so important for leadership to manage this process thoughtfully.
Compensation best practices seldom work in all situations, so this remains a challenge for many organizations. It is so important to come up with a clear strategy on how your employees are paid, and for leaders to understand the basic elements of compensation and how it is linked to an employee’s performance. Equally critical is to stay on top of trends in the market and revisit your incentive programs to determine if adjustments are necessary. Once you have an appropriate compensation plan tailored to your organization, the year-end compensation process should be, in theory, smooth and effective.
One guiding principle as you are making comp decisions at year end is to ensure that each individual is rewarded commensurate with their work performed throughout the year and is fairly administered and in compliance with your organization’s non-discrimination policies. When considering merit increases, people managers should make decisions that reflect both the relative performance of individuals as well as their position within the salary range with a focus on rewarding top performers. Salary differentiation is also an important consideration that encourages improved performance and increased retention of valuable contributors.
While this may not align with your organization’s specific policies or pay philosophy, below are a few guiding points for managers to keep in mind:
Employees who are top performers may be recognized with increases at or above the established merit allocation amounts. Individuals with average performance would receive lesser amounts.
If an employee has not met expectations in the past year or is new to the organization, consider deferring a merit increase for three to six months.
For employees to understand their level of performance and how it aligns with their pay, communicate with them about how your organization’s annual merit increase is determined (relationship to the outside market, its salary trends, general economic indicators(national and regional inflation and unemployment patterns), local, regional, and national market data—including industry pay program trends—which helps ensure that your organization’s merit program is comparable to those in similar industries.)
As I have supported many annual compensation cycles throughout my career, two key points I have always emphasized are to keep things fair and to be transparent. Managers should communicate to the employee that they translate their performance rating directly into compensation, which involves a formula. This shows that managers have little discretion in compensation decisions. It’s fair: If you have performed well, your merit and bonus increase based on a predetermined equation, and not on the opinion of the manager. And as I had mentioned in a previous blog, people want to know where they stand within the organization and how their performance is tied to their pay. Employees who have consistently delivered throughout the year should be valued and should feel appreciated.
As social and economic conditions remain uncertain, it is imperative we place focus on creating and sustaining a meaningful year-end compensation process to retain key talent and to build a culture that recognizes and rewards growth.