5: define relationship of pay to performance

A key aspect of people strategy is the relationship of pay to performance.

All too often the response here is to resort to job sizing and market competitive pay data. We believe that this risks missing the point.

The market is a fickle indicator and survey results are surprisingly inconsistent. For this reason considerations of internal equity - to support progression, talent management and skills acquisition - should take priority over any rigid alignment against market data.

Widely available information on market pay rates is typically presented in terms of upper and lower quartile pay levels to each side of a market median pay rate.

The tacit assumption is that upper quartile pay represents upper quartile performance. However, these surveys rarely address issues of performance, either at the corporate or individual level.

Companies are left to make that linkage for themselves.

It is our belief that most companies are best advised to align their guaranteed cash pay levels around the market median. The comparator group for this process should include those organisations from which the company tends to recruit its people and to whom the company loses staff. It should exclude organisations from which or to which staff are unlikely to move. Inevitably, that means comparisons for line jobs will tend to be quite narrow while those for support staff will be wider.

If guaranteed pay is well structured and reasonably aligned to the market, performance related bonuses should be used to elevate pay for the best performing staff in the best performing units to the higher end of competitive market pay rates. This alignment will deliver highly competitive pay to the highest performers.

Of course, this begs the question of corporate culture and values. For some, making distinctions between pay for individuals and bonus pools for units on the basis of their performance does not fit corporate values. For organisations like these, some kind of profit sharing arrangement might better serve their concepts of teamwork and collective responsibility.

Others are more aggressive in wanting to build a pay for performance culture. Companies like these, will tend to distribute a high proportion of the available bonus pool to a small number of key staff whose contribution makes the biggest impact to the bottom line.

For more information, please see our click-through guide

There is no one-size-fits-all solution to this relationship of pay to performance - just as there is no single set of best practices that should be followed. Everything depends on the organisational culture, its appetite and capacity to make distinctions on the basis of performance.

Among the key questions in setting this relationship are the following:

• will the current pay structure support strategic goals by attracting, retaining and motivating the right people?
• do people understand what the company values?
• do they know what is expected of them?
• in relation to the things that people do, are there clear indicators for good and bad performance - if so, have these been explained clearly?
• do people need to know what they are likely to receive by way of bonus?
• are managers, ready, willing and able to make and explain hard choices about who should get what?
• if pay needs to be changed, what are the likely implications of introducing a new approach and how will this impact the corporate strategy?

What we know is that failures in setting this alignment correctly, will jeopardise the achievement of the company's goals.

Step 6 >>

top

home - about us - what we do - contact us

site map