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Article | Accent op HR

Rethinking Pay for Performance

Addressing a persistent challenge from an Employee Experience perspective

Future of Work|Total Rewards
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By Nina Fauser , Arjan Roovers and Raymond Wammes | March 4, 2021

Addressing a persistent challenge with a fresh Employee Experience perspective

More and more of our clients are exploring how to future-proof their pay strategy and are increasingly struggling to integrate Pay for Performance in that strategy. With the evolving nature of work and increasing complexity of global businesses, companies need to revisit and shift how to govern pay programs. Now is also the perfect time to develop a Pay for Performance program as companies begin to rethink their purpose and redefine their Employee Experience (EX). Through our High Performing Employee Experience (HPEX) research we have learned that Total Rewards is a critical pillar to the EX and Pay for Performance plays a significant role.

Based on that same research we found that companies that outperform financially connect with their employees on a different level due to an increased focus on the EX. Through this connection, these companies can inspire purpose, drive performance, provide growth opportunities and build deep trust in leadership. All of these can be taken into account in an organisation’s Pay for Performance by understanding the different pay elements and which elements can help drive the connection.

Our Getting Compensation Right Survey results show that, for instance, only 1/3 of base pay programs in place do effectively underpin paying for performance. That leaves many companies either seeking to improve these programs or thinking about abandoning them altogether. The challenge lies in a variety of factors, such as limited budget or resistance to differentiation.

To help companies address their challenges, we dissected Pay for Performance to its core: rewarding those behaviours that align with strategic goals to drive company performance. We see ways to generate more value through a holistic Pay for Performance approach by looking at the purpose and role of each Rewards element. The good news is the key to this alignment is in the hands of every organisation.

Defining the purpose of each Reward element

To identify the right factors on which to base performance pay, we must rethink the purpose of each Reward element. Our Total Rewards Model is built out of four major areas: Pay, Benefits, Careers and Wellbeing.

Typically the Pay area like base pay (increases), short- and long-term incentives (STI and LTI), recognition, and profit-sharing schemes has all historical Pay for Performance areas, which means performance results directly affect and influence these elements. The higher the performance of an employee, the higher the rewards in these pay elements.

However, we found that elements under Careers such as learning and development, coaching, mentoring, and career management are indirectly influenced by performance. Employees who perform well usually have an added advantage in getting increased access to these career opportunities.

After identifying the reward elements to use in your Pay for Performance program, we focus on the direct reward elements or the historical pay areas. We define them based on whether they are suitable for past or future performance:

In practice, many companies make a relation between past performance and future-oriented reward elements: some reward elements are measured against past performance but could better be linked to future performance instead. To illustrate, we found that base salary and LTI are more suited to inspire future performance. Meanwhile, STI, sales incentives and recognition should be used to reward past performance. This then leaves room for companies to define past and future performance for their employees.

Determining the purpose of each reward element

Companies must determine the specific purpose of each reward element to provide a solid foundation to their Pay for Performance strategy. We built an illustrative example below, but these purposes may vary from company to company:

For instance, a company may determine that they are providing base pay increases to reward the acquisition of new skills that support an employee's role, remain competitive in terms of market value, or even both. Companies with a strong focus on development could determine that their base pay increases should reward the achievement of an employee's personal development plan. Meanwhile, sales incentives may be given to drive sales growth, drive performance or reward performance.

Clearly, the purpose of each element will vary depending on the organisation and the goals that these elements will support. Each of these elements play their own role, but to set the right performance expectations, clarity on their respective purpose is needed.

Attaching performance expectations for each Reward element

Once companies determine the purpose of each reward element, it’s time to define performance expectations. This will help provide clarity on what you are aiming to achieve with the various reward elements offered to your employees and set the right performance expectations.

This approach will give companies the opportunity to reward both past performance as well as those elements that will be crucial for the future. It will enable your organisation to find the right mix of performance drivers that will inspire the right behaviours and are also most effective in driving the EX.

Using Pay for Performance to inspire the Employee Experience

Employees need to feel confident that the Reward offerings they are provided, will drive their performance and help them grow personally and professionally. When companies achieve this sense of purpose among their employees, people are energised to bring excellence for themselves and the company they belong to.

This brings us to the key question: how can your Pay for Performance programs elevate the EX and drive the right behaviours? Your Pay for Performance programs, achieved through your Reward elements, motivate employees, much like the organisation’s purpose motivates the organisation. Taking the EX perspective when rethinking your Pay for Performance strategy means ensuring each element contributes to one of these experiences to drive desired employee behaviours.

Authors

Associate Talent & Rewards

Analyst – Rewards


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