Are you a small business that wants to implement a pay for performance philosophy, but nervous about committing to large merit increases for your high performers? Or are you a large organization that wants to reward high performers for work that has been accomplished and not what might happen in the future? If so, then this post is for you!
Over the last 25 years we have seen “pay for performance” as the predominant philosophy for financial rewards for employees. Prior to that, the majority of organizations used the tenure approach where employees were rewarded for longevity and each year were moved up another “step” in their compensation plan. Employers realized that tenure alone is not a reason to reward. High performance, which helps grow the organization, is where the real value resides. Therefore, compensation philosophies have changed and the focus was put on performance leading to value tied to growth strategy.
The new pay for performance philosophy gained momentum and has predominately manifested itself in rewards coming from annual merit increases. Employers began providing managers with merit budgets and asked managers to distribute those dollars among their employees providing their highest performers with more money than their lower performers, but still not spending more than their allotted budget. Therefore, rewarding high performance.
Overall, I think this approach is logical. However, this can be difficult for some organizations for a couple different reasons. One is cash flow. Many smaller companies vary in their revenue month-to-month. Therefore, committing to a large merit increase is difficult knowing that they are committing to continue paying an employee this higher salary and then building on it again in a substantial way year-over-year if that employee’s performance remains superior. Along the same vein, some organizations also feel that performance can vary and they prefer to reward for the timeframe being reviewed and not for potential performance in the future. The thought is that after providing a large salary increase the employee gets too comfortable and then performance drops.
A solution to these concerns is to reward strong performers using bonuses. The concept is to provide cost-of-living increases for all employees annually to align with the market. If an employee is promoted, a pay adjustment would be made in line with the new job duties. Then, at the end of the company’s fiscal year (when final profitability numbers are available), performance is reviewed and bonus dollars are distributed based on company performance and individual performance. This enables organizations to reward only the performance from the previous year and also provide rewards that align with profitability. Many times, the organization has been more profitable than expected allowing larger rewards than what would have been distributed during a normal merit cycle. These large rewards can motivate high performers toward achieving a large incentive payment in the upcoming year.
I have seen this approach work effectively and provide organizations with the comfort of not only sending the right message to employees that hard work will pay-off, but also keeping Finance happy that a strong reward system does not break the company bank account!
Meet The Comp Chick
The Comp Chick, aka, Jennifer Peacock has more than 25 years of diverse experience in human resources ranging from consulting to corporate HR leadership. She started The Comp Chick blog as a way to show her peers that Compensation doesn't have to be boring or difficult.
The Comp Chick, aka, Jennifer Peacock has more than 25 years of diverse experience in human resources ranging from consulting to corporate HR leadership. She started The Comp Chick blog as a way to show her peers that Compensation doesn't have to be boring or difficult. All information included in this blog is opinion.