The Performance Management Challenge

In previous issues of the Pipeline, we have touted the importance of a performance management program as part of the overall quest for employee and organizational success. In this article we look at a specific correlation in the process which exposes the relationship between compensation and performance, more specifically, the distribution of dollars.

First and foremost, the overall success of any performance management program is the ability of managers to understand and correctly implement such a tool. Appropriate supervisor training cannot be stressed enough! Candidly assessing for the purpose of improving employee performance does not come instinctively to most managers and business owners. If a goal of a positive/beneficial experience for employee and employer is desired, then it is imperative to start with a well-defined program and a comprehensive training initiative.

So, How Important is Compensation?

The initial response we hear most often is, "pay is the driving factor in a person's performance!" Well, it turns out that pay is not as important as one may think. Most research has indicated that employee satisfaction and recognition for a job-well-done is often all that is takes; salary increase often comes in second on the list.

There are many other methods of recognizing outstanding performance. However, we can discuss those in a future article. This writing will dive deeper into the compensation-for performance-continuum of HOW pay is distributed; which may be of greater significance than the amount of increase itself. Dick Grote writes, (How to Be Good at Performance Appraisals, published by Harvard Business Review Press), the amount of the raise is less important than its size relative to raises given to other employees. Even a modest pay raise can be highly motivational if the employee is told that it's the largest raise of anyone in the department and the increase is directly proportional to the employee's level of performance (appropriately documented, of course).

Let's look at an opposite tactic - a genuine "de-motivational" tactic that is often found in both private and public sectors today. Grote refers to this method as the "peanut-butter approach". This spreads raises around evenly and thinly, out a misguided notion of "fairness". This mindset is almost always perceived by employees as unfair. This tactic often leads to the loss of top talent and the over-retention of poor performers. It is extremely difficult to maintain high levels of performance and motivation; to "go above and beyond", if your raise is equal to those who just meet expectations!

It is critical for managers to understand the importance of conducting a thorough, non-biased and accurate performance management review - again, training is the solution. The distribution of dollars (if available) should be based on a high to low performance rating. Top management establishes a "pot" of dollars available for salary increases and works with the management team to distribute the dollars based on performance.

By embracing this methodology when compensation dollars are in play, you will acknowledge and further motivate top-performers. Additionaly, you will encourage those in the middle to correlate an increase in positive performance with recogition and a possible increase in earning potential. These employees should be targeted to increase their performance by taking on greater responsibilities, acquiring new skills, accomplishing initiatives/goals identified by their managers. Everyone is the beneficiary of this approach within the larger context of organizational success.

Hopefully, poor performers can be motivated to become an active participant in the organization's progress or be encouraged to consider their need for a career change.