Show them the money - Human Resources - performance related pay

It's a constant battle. How and when do you institute pay-for-performance and discuss merit raises with your employees? How can bonuses fit into a compensation structure that already bases raises on performance? How do you "Show them the money"?

YOU CAN HAVE BONUSES AND MERIT INCREASES

Many organizations find that goals-driven performance sounds a lot like their current bonus program that is based on setting and achieving goals.

There are several ways to manage this apparent conflict in systems:

* Create a two-tiered system in which the performance management goals are within the current job structure and the bonusable goals are project-based.

* Create a bonus benchmark, where exceeding the goal by a certain percent makes the employee eligible for a bonus.

* Create a parallel system--identify ways to score progress toward goals that is both bonusable and part of ongoing job duties. Record metrics created as part of the job duties and identify goals and corresponding rewards before work is performed.

NEGOTIATING BONUSES

With bonus negotiation, it's best to discuss percentages at the get-go. At this year's annual performance review, discuss the bonus system for the coming year.

Make your discussions specific: What is the threshold performance that activates the minimum bonus percentage? What is the target performance for the target bonus percentage? Is there a cap for over-the-top performance? Clarifying these benchmarks up front will help to avoid disagreements later.

DISCUSSING MERIT RAISES

Discuss merit raises after a performance review. By tackling performance first, you clarify with your employees that a salary increase isn't automatic, it's intrinsically linked to performance.

MAKING MERIT RAISES FAIR FOR ALL

A merit-raise matrix can help you communicate your company's compensation strategy. The matrix has two components:

* Place in range, and

* Level of performance.

Range refers to the spread in pay for a job title or category, from the lowest to highest wage.

* Low: The lowest third of a pay range for a job title or category.

* Middle: The middle third of a pay range for a job title or category.

* Upper: The top third of a pay range for a job title or category.

You can use the midpoint of a range to compare between ranges, or to compare one job category internally to the same job category in another company, geographical area or competitive industry.

Resources for calculating pay ranges for a particular job title include: Salary.com, www.salary.com; corn; Accountants Inc.'s Compensation, Benefits and Workplace Trends Guide, www.accountantsinc.com/market.htm; and Robert Half/Accountemps' Salary Guide, www.rhi.com/resources.

PERFORMANCE LEVELS

Levels of performance most easily can be delineated as:

* Needs Improvement: The lower 3 percent to 5 percent of employees who are on constructive counseling and need to improve their performance by a certain time or they must leave the company.

* Meets Target: The vast majority of employees who meet their targets with occasional flashes of brilliance, and are learning and growing at an appropriate rate in their job.

* Exceeds: The top 3 percent to 5 percent of the organization--also at risk for leaving. This is the employee who constantly is over the top in meeting and exceeding every goal. These individuals need larger challenges or the organization will lose them.

IMPLEMENTING THE MATRIX

The table to the right highlights how the matrix works. This structure works with any percentage increase as well as in profitsharing situations.

Employees who are in the lower third of their salary range and who meet or exceed performance expectations should move to the middle third of their range.

Employees who are in the middle third of their salary range and who exceed performance expectations should receive the target increase, plus .5 percent. Those in the middle third of their salary range who meet the target (80 percent of your employees) should receive the target increase.

There should be no increase for any employee whose work performance needs improvement.

COMPENSATING TOP PERFORMERS

Why give a top performer a lower percentage raise? First, if the percentage is calculated on base salary, the employee will still have a larger dollar raise than most. If there is a need to give a larger financial reward, a one-time cash award or special bonus tied to a project is better than an increase to base pay.

Salary increases are designed to get someone to the middle third of their salary range and keep them there for as long as possible. If base pay increases are too high, your employees will top out in their range, and not be eligible for any increase, unless the range is adjusted for a cost of living increase.

Without a compensation structure, such as the matrix, job grades will get out of alignment and people can get paid for longevity, not performance. Pay needs to match the type and quality of work done, and be based on the job description and accountabilities. The performance of the individual within that job then reaps consistent rewards.

BEYOND THE MONEY

Compensation is just one way to reward performance, another is to promote someone to the next level. It is important to honor the job structure and not just randomly create a position to give a tenured employee some room for a salary increase. There needs to be a substantial difference in type and kind of work done for different job categories.

By creating a raise structure based on objective and quantifiable criteria, to which an employee can aspire, you place the responsibility for performance on the employee, while placing accountability for coaching the employee to meritorious performance on the manager.

Merit-Raise Matrix

A matrix is structured to have the percentage of employees distributed
as follows:

Performance        Range->  Low          Middle

Exceeds            3%-5%    Move to Mid
Meets Target       90%-94%  Move to Mid  80%--the bulk of
                                          increases--budget
                                          to this number

Performance        Upper

Exceeds            Keep from topping
Meets Target        out at the end
                    of the range.


Needs Improvement 3%-5%

Counsel-Employees get no increase at this level of performance

If the average increase will be 4 percent, a matrix would roll out as
follows:

Performance        Range->  Low          Middle

Exceeds                     5%           4.5%
Meets Target                4.5%         4%
Needs improvement           0%           0%

Performance        Upper

Exceeds            4%
Meets Target       3.5%
Needs improvement  0%

Mary Richardson, M.A., is a senior consultant at Herrerias & Associates specializing in human resources and organizational development. You can reach her at mary@herrerias.com.

COPYRIGHT 2002 California Society of Certified Public Accountants
COPYRIGHT 2002 Gale Group