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Reorganizing Compensation Systems posted on Friday, 01 January 2010

Retain and engage top performers with pay for performance.

As the turbulent economic conditions continue to inflict chaos on small and medium-sized businesses, employers are faced with the daunting task of trying to pick up the pieces and advance ahead. The latest Business Confidence Survey conducted by Administaff reported more than 52 percent of small business owners expect an economic turnaround in 2010, while 13 percent indicate that a rebound is happening now.

Regrettably, many organizations are trapped in the same place they were a year ago, with hiring and pay freezes on the horizon. With regard to plans for employee salaries and wages, Administaff’s survey also reported that 54 percent of participants expect to maintain employee compensation at current levels into 2010, 23 percent plan increases versus 10 percent last quarter, 4 percent expect decreases, and 18 percent were unsure.

Watson Wyatt’s 2009/2010 U.S. Strategic Rewards Survey revealed that while many companies reported a sharp decline in anticipated merit increases at a low 1.5 percent in February 2009, companies are projecting a rebound in merit increase budgets for 2010. The survey also found that many businesses were rewarding workers in 2009 based on their performance. In an article titled “Pay Raises Expected to Rebound in 2010, Survey Suggests,” Stephen Miller, online editor and manager for the Society for Human Resource Management, cites the following statistics from the Watson Wyatt survey:

• Workers who “partially meet expectations” in 2009 will receive a median merit increase of only 0.2 percent, down from 1.5 percent in 2008.

• Workers who “exceeded expectations” in 2009 will receive a median 3.1 percent increase, while workers who “far exceeded expectations” will receive a 4.0 percent increase.

While the scenario may not look good for weak performers, it is a step in the right direction for hard working employees who deserve to be compensated appropriately. It is also a relief to business owners who are looking to give workers some type of incentive in light of tighter budgets.

An upside resulting from the recession is many companies have been forced to examine and reorganize current compensation systems. Paying workers based on performance, commonly referred to as pay for performance, offers employers and employees several advantages over the traditional “across the board” merit system.

Attracts top performers. When companies start recruiting, a pay for performance system will entice the right kind of employee who is seeking an organization that values hard workers. It can also help extract potential employees who are not the best fit.

Increases morale and retention. Top performers want to be recognized for their hard work. It is more motivating for employees to know they will be well compensated when they meet or exceed goals than it is when everyone receives the same increase regardless of their individual performance. Employers that provide extra incentives to valuable employees are more likely to enjoy lower turnover rates.

Enhanced productivity. When individual and group goals are aligned with the company’s objectives, productivity can be greatly enhanced. Each person is held accountable for doing their part and more, and poor performers are forced to work harder and carry their weight of the workload.

There are numerous factors to bear in mind when implementing a pay for performance system:

Incentives should reflect the work. While it is important to establish realistic goals, a pay for performance program should make it worthwhile for employees who do more to receive more. Offering a small incremental pay increase between each level of performance is not very motivating to a high achiever.

Consistently Communicate. Employers should keep staff in the loop by talking to them as soon as possible about any new incentive or merit plans. As with any change, there is always the potential for initial resistance. However, companies that regularly communicate with their staff will find the adjustment less painful and employees are provided with an opportunity to give their feedback.

Everyone should have accountability. Executives should also be held responsible for their performance. Employees will be more impressed knowing that everyone across the board is following a similar pay for performance program.

Commit to the program. Oftentimes, companies opt for the traditional compensation system because it is easier to manage. Pay for performance programs require supervisors to avoid bias and subjective decisions, and instead must determine merit increases based on objective performance measurements.

Companies that implement an effective pay for performance system will find the end results well worth the effort. A system that holds employees accountable for their individual roles can generate a more productive, engaged and happier organization.

Steve Moore is a team manager in San Diego for Administaff, the nation's leading professional employer organization (PEO), serving as a full-service human resources department that provides small and medium-sized businesses with administrative relief, big-company benefits, reduced liabilities and a systematic way to improve productivity.

Posted by Steve Moore