More and more, we are seeing companies move away from the old-school habit of Annual Performance Reviews and focus on creating an environment where every team member is clear about what success looks like and has the tools and information to know how they are doing every day. This blog outlines some of the biggest reasons why this is important and how you can begin to do this in your company.
One of the biggest questions companies have when they start down this path is, “if we do away with Annual Performance Reviews, then when do we do our annual pay increase/review?” This question makes a lot of sense when you consider that many companies stuck in the old Annual Performance Review model are probably stuck in other outdated practices, too. In fact, Aubrey Daniels identifies this as one of thirteen common mistakes companies make that actually have a negative impact on performance. Daniels outlines these mistakes in his bestselling book, OOPS! 13 Management Practices That Waste Time and Money.
Daniels suggests that the ideal compensation system is "Pay for Performance." This is one where income is earned strictly based on results - examples include a 100% sales commission job or a manufacturing job that pays by the piece produced. But, he says that these are not usually practical, and there are often many other things required of an individual that aren't measured by the result. Another idea is "Pay for Compliance" where individuals are paid based on their behavior instead of the result. This creates a tremendous amount of work for the employer who has to identify the exact behavior that will lead to the desired result, and it kills creativity and accountability.
The answer lies in creating a fair and motivating system that gives ongoing earning opportunities for consistently high performance. So, just like annual performance reviews are going away, so are across the board annual raises. Daniels point out that annual raises are the opposite of motivating because once the raise has been granted, it becomes an entitlement; no one will take it away, even if performance does not continue at the same high level.
Recognizing that 100% Pay for Performance and Pay for Compliance systems are not realistic solutions for most companies, Daniels suggests a combination of base salary and some form of performance pay. There are three conditions necessary for this to work:
- You must be able to pinpoint the behaviors and results that add value to the company
- You must have an easy way to measure those behaviors and results
- The measure must be easily tracked by the performer
The right solution will attract A Players to your company by combining a generous base salary with additional variable pay in the form or performance comp tied to individual, team and company results. There is no “one-size-fits-all” answer for designing the perfect system. Each company is unique and requires a system that rewards the right behaviors and results and that allows individual compensation to grow as the company grows and reaches new levels of profitability. Creating the perfect system for your company won’t be easy, but if done well, it will help build a strong culture of earning and results and will kill any counterproductive elements of entitlement.
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