Is the question of how to make pay decisions without annual reviews and ratings preventing you from modernizing performance management in your organization? Let me explain how to make merit pay decisions without traditional classifications such as meets expectations, exceeds expectations, etc.
The three main factors in making pay decisions are the merit budget, market pay data, and the employee’s performance effectiveness. You likely have the first two factors in place:
1. Annual Merit Budget: Just like any other business cost, a yearly merit budget is established.
2. Market Pay Data: Most organizations benchmark compensation competitiveness against market data, to establish a pay structure.
The third factor is having a process to measure and assess performance to help determine merit increases.
3. Employee Performance: Work Results and Observable Behaviors.
- Work Results represent what gets done: demonstrated job proficiency is the accomplishment of job responsibilities and work.
- Behaviors are observable actions that represent how an individual conducts themselves. Behaviors can be guided by stated or implied competencies and organizational values.
Performance Levels and Example Merit Increase Recommendations:
Read my last article on how to use the Employee Performance Continuum visual model performance without ratings.
Guidelines when making pay decisions based on On-Target versus Off-Target Works Results and Behaviors:
Consider larger increases for:
- “Upper Right” performers paid in the lower range of market.
- Employees who have made a significant/measurable impact on the organization.
- Employees needing a market adjustment.
Consider smaller increases for:
- Employees already in the upper salary range dimension.
- Consider bonuses to supplement merit pay as a reward for top performers close to or in danger of exceeding your salary cap limit.
Consider significantly reduced, or no increase, and performance actions for:
- Off-Target Behaviors: A pattern of value-detracting behaviors where the employee demonstrates observable and unexpected actions that detract from overall performance effectiveness and value. Identify the negative impact of the Off-Target behaviors: Does this employee’s actions lead to disruption, deplete the time and energy of others, undermine team effectiveness, and/or slow the progress of work?
- Off-Target Work Results: The accomplishment of responsibilities and work goals are less than you expect. Often the work of these individuals is reassigned to more competent and reliable people.
- Competence Issue: Although the employee makes an earnest effort, and despite time and support, they cannot perform in the current role.
- Motivation Issue: Can accomplish the work, but is not making a full effort or is inconsistent.
When identifying employees whose Work Results or Behaviors are Off-Target, ask yourself, “Would I hire this person today?” If the answer is “no, I would not hire this person today,” then move the person up or out. Do not reward this type of performance with an increase in pay. Instead, allocate that money to employees whose performance is “On-Target.”
For more instruction on how to use the Employee Performance Continuum to make pay decisions see this video on how making pay decisions without ratings.
- The essential step in making pay decisions is ensuring that performance is accurately measured. Provide guidelines and training for managers for measuring performance. Twice yearly, use a process that provides the opportunity for input from peer managers and the second-level manager to ensure the direct manager’s view is informed and balanced.
- Move to the system for ongoing, two-way actionable feedback and coach forward conversations to drive and align performance, but do not make the mistake of abandoning the practice of assessing and tracking employee performance.
- Avoid spreading your merit pool. Instead, spend the money on your high accountable employees. Identify at-risk employees and intervene to course correct performance. Avoid rewarding the person who produces results, but whose behavior is Off-Target.
Question: Have you developed an approach to making pay decisions without ratings? If so, please share your process.