Musings from the Field: Implementing Pay for Performance Programs

We’ve recently been working with several clients on developing pay-for-performance employee evaluation programs. It’s a trend we love, by the way. Never big fans of automatic, because-you-were-here-another-year increases, we’re all in favor of rewarding employees for their performance and really rewarding the outstanding performers.

As we’ve been working closely with our clients to design and roll out their new programs, and train employees in their use, we thought we’d share a few things we’ve learned along the way.

Get input from employees early and often. The more input the better. We’ve used web surveys, focus groups, large-group meetings, small-group meetings, one-on-one interviews and all of the above to gather input from employees about what’s important to them in a performance evaluation system. Employee acceptance and buy-in of your ultimate program is much more likely if they have a voice and feel that performance evaluation is something that they’ve had a hand in constructing.

Build a system that is a SYSTEM. Employees shouldn’t ever feel that performance evaluation is something that is happening to them. It’s their performance you’re evaluating, after all. They should be kept up to date year-round about not only your expectations and requirements but also how they are doing. No employee should be surprised by their overall rating at the end of the evaluation period – they should have been having informal coaching discussions and more formal progress checks throughout the year, especially if there is performance that needs improving. Employees not only have to be given specific feedback about performance that may be lacking but also an action plan as to how they can go about improving the situation.

Train, train, train. And educate! We strongly believe in training ALL employees, not just supervisors in any new performance evaluation system. After all, employees will be the ones being evaluated, so why shouldn’t they have a full understanding of how the system works, how they will be rated, what they will be rated on, what resources are available to them, how they can get additional information, etc.

Make a difference. Two meanings here – pay for performance can make a difference in organizations. Done well, it can motivate employees to higher levels of performance, increasing the overall productivity and morale of your organization. However, when linking pay to performance, an organization must ensure that there is enough of a difference between the levels of pay associated with the various ratings. Nothing is more disheartening to a top performer, who, having worked her buns off all year finds out her increase for the top level of performance (let’s say it’s called Outstanding) is only 0.5% higher than the increase awarded to those in the Successful level. That sends a big “Why bother?” message to those at the highest levels of performance in your organization for that performance year. One recommendation we often make is to make sure it’s at least a 2.5% – 3% differential between ratings. Secondly, we also suggest that organizations think about making that highest ratings-level reward a lump sum. So, for instance, X% base pay salary increase for Successful employees; X% base pay + a lump sum award for Outstanding employees. This way not only are you not carrying larger base pay increases for eternity, you are also reinforcing the idea that employees are not entered into the “Lifetime Outstanding” club – they have to re-earn that rating each and every year!

We are inspired to see so many organizations linking pay to performance and hope these lessons learned might be helpful to you if you are moving your organization in the same direction!

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