The Pitfalls of Linking Pay With Performance and How To Overcome Them
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The document discusses the advantages and pitfalls of linking employee pay with performance, emphasizing the importance of a merit matrix to reward high performers while addressing challenges in compensation structures. It outlines trends in the rebounding economy, highlighting an increase in employee turnover intentions, and offers strategies for both offensive and defensive compensation practices. Best practices for designing a market-based compensation system are also presented, along with the potential pitfalls to avoid.
The Pitfalls of Linking Pay With Performance and How To Overcome Them
- 1. CBIZ Human Capital Services The Pitfalls of Linking Pay With Performance – and How to Overcome Them
- 2. • Edward R. Rataj • Managing Director, Compensation Consulting • Certified Compensation Professional (CCP) • Certified Executive Compensation Professional (CECP) • Frequently quoted in national news publications, such as the Wall Street Journal and Smartmoney.com Introduction 2
- 3. “HR matters enormously in the good times. It defines you in the bad." - Jack Welch 3
- 4. • Top 10 Reasons to Link Pay With Performance • Trends – Explore turnover in the rebounding economy. – Consider offensive and defensive strategies. • Best Practices – Review steps for designing a market-based compensation system. – Recognize and sustain high performance through a merit matrix. • Q&A Overview 4
- 5. Top 10 Reasons to Link Pay With Performance
- 6. Top 10 Reasons to Link Pay With Performance 10. ATB increases are not fair to top performers and over-reward lesser performance. 9. Limited-increase budgets must be allocated as effectively as possible. 8. As the economy turns around, there will be an increased demand for top talent. 7. Calibration of scores can facilitate better evaluations over time. 6. Implementing market-based pay structures provides quality data. 5. New tools provide real-time modeling of “what-if” scenarios. 4. It sends a direct message to employees and facilitates a culture of performance. 3. It creates “targeted turnover.” 2. The Affordable Care Act reduces differentiation of employer total rewards offerings. 1. Using a merit matrix rewards performance while accelerating employees to market-competitive pay levels.
- 7. Trends
- 8. Unemployment in Improving Economy • While the unemployment rate continues to drop, most of the change is the result of people “giving up” on their job searches. • A strong negative correlation exists between unemployment percentage and education: Bureau of Labor Statistics Table A4: Employment status of the civilian population 25 years and over by educational attainment Bachelor’s degree or above Some college or an associate’s degree High school graduate Less than high school diploma 2.5% 5.4% 4.2% 8.2% 8
- 9. • According to a recent WorldatWork survey, more than 8 in 10 employees intend to leave their current jobs as the economy improves. • The survey asked: Do you plan to pursue new job opportunities as the economy improves? Projected Turnover as Economy Improves http://www.rightmanagement.com.br/en/news-and-events/press-releases/2014-press- releases/item26654.aspx?x=26654 In 2009? In 2015? Yes, I intend to leave. 60% 86% Maybe, so I’m networking. 21% 8% Not likely, but I’ve updated my resume. 6% 1% No, I intend to stay. 13% 5% 9
- 10. • Offensive Strategies: – Top grading • Poach top performers at competitors who would help drive your organization forward. • This is especially true for sales staff. • Pay the “winners like winners and losers like losers.” – Aggressively pay for performance via a merit matrix (further discussion in the following slides). Compensation Strategies in the Rebounding Economy 10
- 11. Compensation Strategies in the Rebounding Economy • Defensive Strategies: – Provide total rewards statements. – Communicate regarding other positive aspects of being employed by your organization. – Consider changing targets for sales staff to ensure that they are reasonable, given the current downturn. – Reprice options – otherwise executives will. 11
- 12. Best Practices
- 13. • Plan and collect data. • Ensure job documentation accuracy. • Complete market analysis. • Design pay structures. • Model implementation costs. • Assess internal equity. • Create procedure manual. • Report results. Designing a Market-Based Compensation System 13
- 14. Designing Salary Structures Range Spread Midpoint Differential midpoint 14
- 15. Assessing Current State of Compensation Program 15 15
- 16. Merit Matrix
- 17. • Merit Matrix Approach: – Affects pay increases, not pay structure – Rewards performance – Focuses dollars on employees who are most likely to leave because of pay Merit Matrix 17
- 18. • Employee 1 ( ) and Employee 2 ( ) are both accountants with exactly the same tenure, experience, education and pay. Only performance differentiates them. To whom would you provide a higher pay increase, low-performing Employee 1 or high-performing Employee 2? Merit Matrix HighLow 2 1 1 2 18
- 19. • In this example, all other factors are equal except current base salary. To whom would you provide a higher pay increase, high-paid Employee 1 or low-paid Employee 2? Merit Matrix 2 1 Low High COMPENSATION 19
- 20. • Finally, all other factors being equal, to whom would you provide a higher pay increase, high-paid/low-performing Employee 1 or low-paid/high-performing Employee 2? Merit Matrix 2 1 Low High COMPENSATION HighLow 20
- 21. Merit Matrix Typical Matrix Performance 1 2 3 4 Exceptional 3.5% 3.5% 3.0% 3.0% Exceeds Expectation 3.0% 3.0% 3.0% 3.0% Effective 2.5% 2.5% 2.5% 2.0% Development Needed 2.5% 2.5% 2.0% 2.0% Critical Need for Improvement 2.5% 2.0% 2.0% 2.0% Quartile in Range 21
- 22. Merit Matrix Best Practice Matrix Performance 1 2 3 4 Exceptional 6.5% 5.5% 5.0% 4.0% Exceeds Expectation 6.0% 5.0% 4.0% 3.0% Effective 5.0% 4.0% 3.0% 2.0% Development Needed 2.0% 1.0% 0.0% 0.0% Critical Need for Improvement 0.0% 0.0% 0.0% 0.0% Quartile in Range 22
- 23. Merit Matrix Ultra-Aggressive Matrix Performance 1 2 3 4 Exceptional 13.0% 11.0% 5.0% 3.0% Exceeds Expectation 11.0% 6.0% 3.0% 1.0% Effective 4.0% 0.0% 0.0% 0.0% Development Needed 0.0% 0.0% 0.0% 0.0% Critical Need for Improvement 0.0% 0.0% 0.0% 0.0% Quartile in Range 23
- 24. Merit Matrix • Common Pitfalls – Structures out of alignment with market • Garbage in, garbage out • May improperly allocate limited salary increase dollars based upon the current competitiveness of pay – Performance scores not calibrated • Supervisors can learn to game the system • Cheating is rewarded • Top performers may not be properly rewarded – Matrix results outside of budget 24
- 25. Merit Matrix - Modeling 25
- 26. Merit Matrix - Modeling 26
- 27. Merit Matrix - Modeling Company XYZ Cost by Quartile $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 1 2 3 4 Quartile in Range MeritIncreaseCost Critical Need for Improvement Meets Expectations Exceeds Expectations Exceptional 27
- 28. Merit Matrix - Modeling Company XYZ Costs by Performance Level $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 Exceptional Exceeds Expectations Meets Expectations Development Needed Critical Need for Improvement Performance Cost Fourth Third Second First 28
- 29. Merit Matrix - Modeling Perf- Merit New Merit Last Name First Name Job Title Min Max Salary Quartile ormance Percent Salary Increase Brown Stan HR Generalist $47,042 $72,915 $46,000 1 4 6.0% $47,042 $2,822.52 Phillips Kevin IT Analyst $53,058 $84,892 $64,550 2 4 5.0% $64,550 $3,227.50 Pence Skyler Construction Manager $47,042 $72,915 $76,000 4 5 5.0% $76,000 $3,800.00 Pratt Jason Controller $70,169 $112,270 $103,299 4 2 0.0% $103,299 $0.00 Beals Susan Maintenance Manger $47,042 $72,915 $59,000 2 3 3.5% $59,000 $2,065.00 Duncan Elizabeth President $153,058 $229,587 $200,000 3 5 6.0% $200,000 $12,000.00 Salary Grade Adjustment due to employee being below salary range Lump-sum increase due to employee being at top of salary range 29
- 30. Merit Matrix - Summary • Cost neutral • Rewards performance • “Targeted” turnover • Fair and efficient method for administering pay • Accelerates employees to market-competitive pay levels 30
- 31. Additional Considerations • Nonprofit compensation • Executive compensation • Fair pay based on race and gender • Sales compensation • Job descriptions 31
- 32. Questions? Ed Rataj, CCP, CECP Managing Director – Compensation Consulting CBIZ Human Capital Services (314) 692-5884 erataj@cbiz.com 32