3 Rules for Linking Employee Performance, Performance Management & Pay

Is there such a thing as a CEO that is “satisfied” with the performance of his or her employees?  Likewise, is there one that feels the company’s performance management system is “working” well?  And what about pay?  Do you know any business leaders that are stoked about the ROI they are getting on the compensation investment they are making every year?  I’m guessing not. 

Employee performance management and rewards can be more effective if you apply 3 rules.

So why is that?  How can so many smart people run a successful business but not be able to figure out how to effectively manage the performance of their people and reward them in a way that drives more of the results they want?

The answer is because there are no rules.  You can’t find a book, study or report that says: “Here’s the way you drive, manage and compensate for superior employee performance.  Step One, Step Two, Step Three.”  And the reason there are no silver bullet solutions being offered is because every business is different—and you can’t make a set of rules that will work for all of them.

Or can you?

Certainly, there is no way to set up a step by step process or formula that ensures you will end up with the perfect approach to managing and rewarding employee performance.  However, there are some “universal” rules that successful companies follow to get a superior result in this regard.  So, let’s understand what they are.

Rule #1—Establish a Clear Performance Framework

Every company must develop a system for defining how performance is “constructed” within their organization, based on the cultural norms they want to promote and reward.  A good performance architecture will have three dimensions to it: a business framework, a compensation framework and a talent framework.  If you were to diagram the three parts, they would form a concentric circle emphasizing their overlapping and interdependent nature.  Here is a snapshot of what each framework should address.

Business Framework 

In this category, business leaders establish a clear vision of the future company; what the business will look like 3, 5, 7 years from now and what it will be achieving (products, markets, revenue size, purpose, etc.).  They also articulate the organization’s business model (how it drives revenue) and business strategy (how it competes in the marketplace with that strategy). 

With those fundamentals clearly in mind, the business framework then needs to identify what roles are needed to make the business model and strategy work in fulfillment of the owners’ vision.  Further, it defines what kind of people will be needed to fill those roles—what skills they will have to have.   All of this leads to the establishment of criteria that defines success for each role; and which will later inform performance expectations that are communicated to those who will assume those positions.

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Compensation Framework

The business framework should make the "ideation" (no, it's not a real word) of a pay approach easier.  If I know what kind of future business I’m trying to create, I’ve defined the revenue performance I need to realize that vision and I have taken the time to identify well-defined roles and success criteria, then my pay approach starts taking shape almost on its own. 

My business framework helps me understand who my talent “audience” will be that I have to attract with whatever value proposition I put out there (more on this under Talent Framework).  I can also think through what my pay philosophy is and what outcomes I plan to reward with the compensation strategy I come up with (see Rule #2).   With a philosophy in mind, I can evaluate what broad, pay design construct I should be working within.  Do I want a system that pretty much rewards everyone the same regardless of individual or team performance or something that recognizes the contribution of high performers?

Talent Framework

The two parts just discussed should inform and drive a business leader’s approach to attracting and retaining talent.  The Business Framework defined what kind of people I need in key positions in the organization.  An assessment can compare what I need with what I have and reveal talent gaps that exist.  Armed with this data, I know who my recruitment audience is and can begin formulating a talent strategy.

This part of the performance framework cannot be effectively developed if it is not closely linked with the compensation framework.  This is because you have to be able to appeal to the pool of people from which you will be drawing to meet your recruiting targets.  Will you be trying to bring primarily millennial talent into your business?  If so, at what stage are they in their careers?  Are they just out of college and beginning their careers or are they more advanced?  All of these factors should inform your talent framework.

Learn more about building a performance framework here: https://blog.vladvisors.com/blog/priority-1-for-2017-define-your-performance-framework

Rule #2—Articulate a Clear Pay Philosophy

Even if you had read my blog only once or twice, you have heard my position on the importance of a compensation philosophy statement that makes clear what your company is willing to “pay for” or reward.  You can get a good picture of what a pay philosophy should include here:

The only thing I’ll say in this context is that your ability to articulate your philosophy about how value is created in the business and how and with whom it will be shared is the key to creating alignment between employee performance, management and compensation.   It helps you create line of sight between the vision of the company, its business model and strategy, employee roles and expectations and how individuals will be rewarded for meeting (or exceeding) those expectations.  When you have line of sight, performance improves and both owners and employees are happy with the type and level of compensation being paid.

Rule #3—Make Your Pay Strategy Agile but Enduring

Perhaps that seems contradictory.  Logic would say that your pay strategy can be agile or enduring, but not both.  Not true.  It can and must be both.

Today’s performance assessment systems are unstructured and ever-evolving.  They employ a mentoring and coaching approach to managing performance that looks forward and not backward.  They are designed to match the pace of change that businesses have to respond to and lead. 

This trend requires business leaders to have rewards systems that can keep up with the exponential nature of transformation in business—where companies are making alterations in their business plans quarter to quarter instead of month to month.  However, this does not mean that companies need to reinvent their pay offering once a quarter or even once a year.  What they need is a Total Compensation Structure that consolidates their view of a range of pay offerings in which employees participate (salary, short-term incentive, long-term incentive, retirement plan, benefits, security plans, etc.)  This approach treats the various elements of compensation as if they were asset classes in an investment portfolio.  Instead of taking asset classes out every time there’s a modification of business plans or priorities, you simply need to rebalance your portfolio, just as you would with your investments.

If you follow these three rules, I can’t promise you will love every aspect of your employee performance appraisal and rewards systems.  However, what I can promise is that you will have confidence in the logic you applied to develop them and will feel good about what you have “sell” when you are trying to attract and retain top talent.


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