The UK government released a consultation paper this past November asking for opinions on ways to make executive pay more transparent. It follows a recent public discussion on executive pay that has raised the question of whether companies should publish ratios comparing CEO pay to compensation across the company’s workforce.
What’s being addressed here is the need for greater transparency between performance and pay. This discussion is also happening at the ground level as performance management strategies evolve from annually run processes to more frequent, ongoing approach based on regular feedback and check-ins – the implications of this shift also impact compensation strategies. As a result, we’re seeing an evolution in the role of line managers and their role in communicating performance expectations and decisions about salary increases or bonuses to employees.
The CIPD’s latest survey of employee views on working life confirms this shift in thinking. Sixty-one percent of employees who have a performance management process believe their line managers are ‘very effective’ or ‘fairly effective’ at communicating objectives and expectations. This statistic shows the importance of line managers developing their skills when it comes to awarding compensation during the performance review process.
Yet, the CIPD report also found that just under a third of employees (31%) believe that their pay is linked to their performance, while more than half (59%) do not. Even worse, only just over half of respondents (54%) believed they were being rewarded for their efforts (for example through staff bonuses, pay raises, the ability to purchase company shares, or promotions) in a fair and consistent manner. To address these issues, it’s vital for the performance management process to be as transparent as possible.
Transition to a qualitative approach
Taking a transparent approach to performance and pay brings many benefits. It enables organisations to address the critical issues of fairness and perceptions of fair treatment across the workforce. If employees believe that their pay does not reflect their performance or match that of similar employees, it will affect their level of engagement significantly.
Here are five practical considerations for developing more transparent and responsive pay and performance structures:
- Consider how often you will hold regular check-ins with employees throughout the year. Ultimately, these performance conversations should happen as part of the pace of business, which can be weekly, bi-weekly, or even monthly. Ongoing conversations help managers get a more comprehensive look at employees’ overall performance, so they can shape decisions about compensation and make sure that there is a clear connection between what employees have done to earn a compensation increase or spot bonus.
- Take the opportunity for a holistic redesign of salary and benefit packages alongside rewards and recognition programmes. Ongoing performance management may mean more frequent salary reviews combined with ad hoc performance rewards such as an extra day off from work or a gift certificate to a local restaurant or coffee shop. Even the smallest recognition for good performance can go a long way.
- Empower line managers to make decisions that allow them to reflect employees’ performance through pay. Salary increases or spot bonuses don’t have to be completely owned by HR. Instead, HR should work with line managers and provide them with resources and tools to make informed decisions about compensation and how to communicate specifics around compensation with employees.
- Provide clearly defined factors for line managers. In addition to obvious performance metrics, such as an increase in sales numbers, line managers might also consider whether an employee is thinking about leaving or if a competitor is trying to lure them away. Other factors include the employee’s outcomes and competencies across a range of measurements, an employee’s salary relative to the salary of colleagues and the increases in their salary during the time they have been with the organisation.
- Analyse pay and performance data frequently during the early implementation phase of new pay and performance structures. If proposed salary awards are transparent and shared at this level of management, discrepancies will soon become clear. This is why it’s important for HR to organise information sessions so that one manager does not award much larger salary increases than another. There must be transparency and consistency in the approach and what defines top performers.
In an attempt to be more responsive to changing business needs, forward-thinking organisations are increasingly doing away with rigid rating systems in performance management and replacing them with more agile, qualitative structures that allow meaningful conversations about performance and are based on pay transparency.
The salary review process or increases shouldn’t be an annual event. Enabling individual line managers to have far greater discretion over salary and performance rewards, while ensuring that these rewards are entirely transparent, allows an organisation to be more proactive in retaining its rising stars and to respond to internal and external business events more effectively, securing the long-term success of the organisation.