How to Link Pay to Performance When You’ve Eliminated Reviews

Performance management is definitely undergoing a midlife crisis; it’s time for it to reinvent itself. For the past few HR and compensation conferences I’ve attended, the question has been heavy in the air: what are you doing about your performance process? Most agree that the processes are slow and cumbersome, out of date, ineffective, broken. Many don’t go the step beyond that to continuing the link between rewards and results. When I coach organizations about how to do pay for performance well, I always start by saying, “Well, you’ve got to get your performance evaluation right first.”

Upgrading performance processes

In the 2016 Compensation Best Practices Report, 44% of respondents agreed that the biggest shift in HR for the year is moving away from the annual performance review to more real-time feedback. But with so many options for change out there, where to start?

Feedback

Traditional reviews are known to cause a fight or flight response in employees. They’re not very motivating under the best of circumstances. Improve this by providing feedback that emphasizes and builds on strengths – what’s working. Help managers provide coaching around areas that need improvement. Try differentiating performance from results; rather than discussing the tasks completed, focus on the measurable outcome that connects back to organizational objectives. Reorient performance conversations to clarify job expectations and understand career objectives.

Frequency

42% of millennials would prefer feedback every week. Annual reviews just don’t move at the speed of business anymore. Rusty Lindquist at BambooHR calls the gap between intended direction and actual direction for employee performance “Organizational Waste.” Communicating more frequently helps catch the misdirection sooner. Often, by the time managers and employees talk, the moment has passed and they both struggle to remember what even happened back then. Annual reviews also don’t capture the trajectory of an employee’s performance, is it improving? How can you make regular feedback part of your regular business projects and cycles to improve feedback frequency?

Format

It doesn’t have to take forever to have the type of communication that can redirect employee performance in an intended direction. The five-page chronicles of performance don’t tend to drive future behavior. A tweet-length message may be all it takes to course-correct employee performance, and it doesn’t take days to draft.

Link it back to pay

After revamping performance conversations to make them more effective, it’s time to reconnect performance to rewards. Budgets aren’t unlimited; companies make choices to prioritize their spend all the time, and they typically spend in areas that provide results. Making those choices more transparent appeals to workers, and not just to a millennial audience. From an employee perspective, rewarding those who deliver results just feels more fair.

Base pay: Using a merit matrix, you can provide higher increases to those who perform better, based on performance rating and position in range. With limited budgets available for the fixed cost associated with salary increases, this option has been losing a little traction. It’s nice to differentiate increases for higher performers, but if your increases for your top performers only differ from average performers by a couple percentage points, should you even bother? Will your employees answer “Thanks a latte” if the increase only differs by the price of a daily cup of coffee? Maybe you can ditch annual increases in lieu of market increases; put the rest of your budget into incentive pay.
Incentive pay: This is perhaps the clearest way of linking performance and results with pay. With incentives, companies and employees agree on the right goals to deliver results, then pay on delivery. Consider offering team incentives; 26% of respondents to the CBPR already offer team incentives. Bonuses are another way of linking variable pay with performance. While they tend to be awarded after the fact, whether a specific goal was identified or not, a decently sized bonus can be an effective way of affirming some behavior or result you’re hoping to see.
Benefits and perks: Increasingly, the way to employee hearts is to have well-aligned benefits or perks. How can those be safely tied to performance, without risk of favoritism or discrimination? A typical one that has been done for a while is the flexibility to work from home, contingent on good performance. How about offering a day off after a major deadline is met? What about providing lunch for the team that hits their goal first or best?
Intangibles: It always bears mentioning that often the best way to reward performance is to notice it, acknowledge it, and thank it! “Thank you” doesn’t cost anything, and can lead to greater engagement and stronger trust between managers and employees. Or maybe you have a workplace that thrives on a friendly rivalry. A coveted trophy that rotates, employee of the month plaques, and plain old bragging rights all make for great motivators.

However you decide to proceed, talk to people. Talk to employees and managers to see what’s most motivating. For some, frequent perks can feel insulting: “I’m just doing my job.” For others, a little incentive can go a long long way. Once you’ve aligned the right rewards to the results you seek, in a way that works for the people you’re trying to reward, you’ll be poised to take out the competition.