Investing in your people’s professional development demonstrates that you value their work. And happier, more engaged employees perform better and are less likely to churn.* So then, why do performance reviews remain a touchy subject? Some specialists blame it on the connection between performance and compensation management. Show
Traditionally, people’s careers and finances depended heavily on the outcome of performance reviews. However, many forward-thinking employers are decoupling reviews from pay or not centering appraisals around raises and promotions. That way, employee development becomes the focus of the organization’s performance management strategy. However, separating performance reviews from compensation is more of an art than a science. There isn’t one single path, and opinions are split among HR and people ops professionals, thought leaders, and team members worldwide. That’s why in this article, we’ll discuss:
💪 Build transparent and scalable compensation management processes with Leapsome Our tools help automate your performance reviews and compensation workflows, enabling your managers to make data-informed people decisions.👉 Learn more The purpose of performance reviews
Reviews also allow leaders to ensure workers feel supported and challenged while giving them guidance on the skills they need to improve. Finally, keeping track of team performance lets employers and management teams identify knowledge gaps, consider hiring needs, and assign training budgets. However, since performance appraisals are often part of the criteria for compensation and promotion assessments, they sometimes have a finger-pointing nature. That’s why we advocate for reviews to be centered around employee development — whatever your salary structure is. The process becomes a tool to align your team, adjust expectations, and help employees understand why investing in individual learning and development (with, for example, personalized learning paths) can be valuable to them and your organization. 📈 According to a piece published in the Harvard Business Review, “regular conversations about performance and development change the focus to building the workforce your organization needs to be competitive both today and years from now.” The purpose of compensation plans
Paying someone for their time, meeting legal requirements, and attracting and retaining talent are some of the most obvious purposes of compensation. However, we’ve chatted with HR consultant Marie Richter, who brought attention to other objectives: “eliminating financial worry [or] threat for employees, showing appreciation of their work, and differentiating between responsibilities.” On top of what we usually think of as compensation — like salary, bonuses, and stock options — you may also offer employees indirect compensation. Some examples:
Understanding your organization’s compensation strategy and its objectives can help you shape
remuneration practices, so they’re in line with your company culture. This includes recognizing the relationship your company wants to build between compensation management and employee performance. Pros of linking compensation to performance reviews
The key to benefiting from this pairing is focusing your reviews on employee development. Some of these benefits include:
Better employee recognition
Companies are competing for top talent now more than ever, and financial compensation for a job well done can improve retention. More pay transparency
Employees need to know that managers are honest with them and feel empowered to offer feedback and have ongoing conversations about compensation and performance. That way, the pairing can be a powerful tool for motivating your people. ☝️ Regardless of financial rewards for high performers, keep investing in employee development. Lower employee stress levels
Having to raise the subject of pay revision is another reason why employees who are more reserved — or come from underserved backgrounds — sometimes become disengaged. Many people fear losing their jobs and may accept less money than more privileged counterparts with equal skills. If your company decides not to tie salary and performance management together, communicate your remuneration model to employees. That way, they’ll
know what to expect and won’t feel left in the dark. You should also be transparent about your company’s compensation system during your hiring process, so candidates have all the information they need to make informed decisions about their careers. ⭐ Build trust and create a positive work environment with LeapsomeOur all-in-one people enablement platform empowers you to build streamlined processes for a fair and transparent performance review and compensation experience. 👉 Learn more Pitfalls of linking compensation to performance reviews
These drawbacks include:
Binding compensation to OKRs can be problematic
As we’ve explained in our guide to setting the right objectives and key results: “If you’ve set the right OKRs (in a sweet spot between challenging the status quo and a ‘pie in the sky’), hitting 80% of your target should already validate your efforts and courage.” Additionally, goal-setting can be highly subjective, and certain factors — like a company changing course or shifts in team dynamics — can cause staff members to not meet their goals. In this case, it’s wrong to base their compensation on factors that are out of their control. Finally, linking compensation to OKRs might make your employees feel tasks that aren’t tied to OKRs don’t matter, limiting their vision and negatively impacting their motivation. This might also increase frustration and competitiveness, making company decisions seem unfair (especially as team members often work together toward the same OKRs). Self-assessments can become disingenuous
Self-assessments should drive development, not fear. And even the most ethical people might see a blurred image in the mirror if their livelihood is at stake. Would they honestly reflect on their shortcomings and ask their manager for direction? Or would they — even unconsciously — fail to see they’ve underperformed in a particular area? Assure your employees that the purpose of self-assessments is fostering personal reflection and encouraging development-focused conversations. For example, an employee might rate themselves as “extremely proficient” in communication skills. Their manager, however, could mark that skill as “an area of growth.” This mismatch is a great opportunity for
the worker to share their perspective with their manager. It could be that the person is simply unaware of the criteria that influence the rating or has a different understanding of what great communication skills look like. Reviews can be biased
As an example, employees may not give their peers honest ratings in a 360° review if they know their department’s salary raise and promotion budget is limited. The opposite could also happen: peers may want their colleagues to receive wage bumps and promotions, giving them exaggerated positive reviews despite potential poor performance. In a more subtle context, would reports be sincere when reviewing their managers? Or would they omit constructive feedback, hoping not to be punished when it’s time for their own performance appraisal? Finally, race bias, gender bias, ageism, affinity bias, and other forms of unconscious bias are still blatant. How they often come into play in compensation-oriented performance reviews might widen systemic wage gap issues — such as women earning less than men and BIPOC women being paid even less. It’s not easy to admit that this might happen within the company cultures we’re trying to build. Still, not acknowledging the intricacies of interpersonal relationships and systemic issues isn’t going to make our cultures flourish. Four strategies to connect performance & compensation management For many organizations, decoupling performance management and compensation isn’t realistic Tying compensation to performance reviews isn’t always a matter of choice — some organizations need to comply with board and union regulations that mandate a pay vs. performance connection. Some companies also prefer to work with incentive plans for top performers. That’s why we’ve made a list of four strategies you can employ to connect performance management and your organization’s
compensation strategy effectively. Make development the focal point of performance management
However, if you make employee development the focus of performance reviews, you can show your people you’re invested in their professional growth and value their advancement. Additionally, instead of pointing out poor performance, the review conversation becomes about identifying:
This all paves the way for creating a healthier work environment. “After a performance review, there could be a salary increase (quite often there should be), but it shouldn’t be the main result of the review, much less the only one… Schedule performance appraisal & compensation management talks separately
“Compensation and performance reviews [can be] tied together but reviewed separately — i.e., once performance reviews are complete, performance ratings can then be used to calculate compensation changes.” Run consistent initiatives to break down biases in the workplace
So it’s crucial to run frequent reviews to help uncover and break down biases, along with engaging in bias reduction exercises to ensure fair evaluations. 💡 Curious to know how you can avoid unconscious bias in performance reviews? Check out our comprehensive playbook! Another way to reduce the impact of unconscious bias is to enable managers and HR professionals to make joint decisions and share control over performance reviews with relevant stakeholders. “There should be two or more additional parties that check the review and the ‘performance rating,’ assuring that the performance justification matches the rating and that the manager is not exerting unnecessary pressure or bias on the employee.” Create transparent & streamlined processes
It’s harder for team members to develop their skills if they don’t know what they’re being evaluated on or have development frameworks that tell them how to move to the next level. A lack of transparency and consistent processes can also create unhealthy competition and resentment between teammates. Your approach to your organization’s pay strategy and performance evaluation is critical to your ability to retain and attract great talent. And you can’t operate without great people! Your compensation practices should reflect your company culture. So whether or not you choose to associate salary talks with performance appraisals, employee development should be at the heart of the review process. And even if performance directly affects pay in your company, these should be separate conversations. That way, the employee will be more open to feedback and have time to absorb it before talking about money. In addition, be as transparent as possible about your compensation strategy from the get-go to avoid dissatisfaction. Consider that a growing number of workers would like their employers’ salary ranges to be public. This strategy may or may not be your cup of tea, but reflecting on it is a worthy exercise to understand the culture you’d like to build. “One of the main reasons why companies link performance reviews to compensation is to establish a common understanding of the employee’s performance level through a review to then be able to compensate them fairly, according to the current market rate, but also their level of expertise and performance. (…) Create fair & scalable compensation processes with Leapsome
At Leapsome, we grow with you. Our tools for compensation and promotions can help your team simplify the salary structure process and evolve — no matter what stage your compensation management strategy is at. 🚀 Leapsome helps forward-thinking companies upgrade their compensation and performance management Our holistic platform lets companies customize, automate, and scale their processes effortlessly.👉 Book a demo Which of the following are aspects of a performance management process function?5 Elements of Performance Management Success for Any Aspiring Business. Planning and goal setting.. Management and employee involvement.. Monitoring and feedback.. Development and improvement.. Reward and compensation.. Which of the following are found in performance management?Effective performance management systems typically include the following three broad elements: goal setting, performance review and a performance improvement process.
Which of the following is the fourth step of the performance success cycle?4. Rewarding. The last step in an effective performance management cycle is rewarding. This is where leaders provide rewards and recognition for employees' efforts and success.
Which statements describe why rewards often fail to motivate employees?Which statements describe why rewards often fail to motivate employees? Too much time passes-between the achievement and the reward. Monetary rewards are over emphasized. Motivation is impacted by the use of one-shot rewards.
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