Use variable compensation to retain top performers

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LAS VEGAS – “If you don’t do anything else this year, strengthen your performance management system and train your middle managers to use it effectively,” advised compensation specialist John Rubino, president of Rubino Consulting Services at Pound Ridge, NY

Evaluating and effectively rewarding employee performance is the cornerstone of everything HR professionals and managers are expected to accomplish. However, many organizations are not doing it correctly, according to Rubino, who presented a concurrent session at the annual conference and the SHRM 2021 exhibition.

The problems are twofold, he said:

  • Lack of consistency in the thinking and application of management throughout the organization.
  • A mismatch between employee performance appraisal and compensation rewards.

Rubino urged HR to structure financial rewards in the form of variable incentive compensation linked to employee goals, which should reflect the goals and direction of the organization.

“Tie goals from the top of the organization to the bottom,” he advised. “Link department goals to business goals, then link them to individual goals.”

Explain to employees that goals cascade down from the top and have employees write their own goals that reflect departmental and company goals, he suggested. These goals can be changed when employees discuss them with managers, but they should help employees internalize the goals and objectives of the organization and understand how their own jobs fit into this mission.

Fallacy of merit-based pay increases

“Stop saying you pay for performance when you mean you split a 3 percent pay rise on merit among your employees,” Rubino said. “These programs are demotivating, pitting colleagues against each other for a small merit increase distributed on a zero-sum basis.”

Worse yet, merit-based pay increases often become a right within organizations, Rubino said. Instead, variable-based incentive pay – in the form of bonuses – “rewards the best employees you want to keep and allows mediocre workers to leave because they don’t receive a guaranteed pay rise” on merit. ” This produces big distinctions of rewards between those who produce and those who don’t, he explained.

To counter perceptions of compensation entitlements, managers need to ask, “What have you been doing for me lately?” I’ve already paid you for what you did last year, ”Rubino said.

He believes that salaries, or base salary, should ideally be linked to labor rates set by the local market, with performance being rewarded with variable pay. To get there, companies can take the first step by granting profit-sharing bonuses “so that employees get used to receiving lump-sum payments large enough to be a real incentive,” he said. The remuneration structure can then evolve towards individual variable remuneration based on objectives.

When all employees are fully part of a variable compensation structure, “expect incentive payments to be 9-12% of the cost of base compensation,” Rubino said. While it may seem costly, the reward for improved performance may more than offset the costs of variable compensation programs, he noted.

In terms of retention, variable pay can “retain the best employees who really add value by leaving the company for a competitor who offers an additional base salary of 10%”.

Employee evaluation forms

Employee performance review forms shouldn’t have a lot of checkboxes, Rubino said. Forms should be kept “as simple and straightforward as possible, while capturing the essence of performance”.

Keep assessment levels to a minimum of three or four performance gradations (eg, goals not met, goals met, goals exceeded, featured artist).

Fewer checkboxes also allow for flexible narrative performance descriptions.

“My favorite form of evaluation is a retelling of the employee’s performance history,” Rubino said. “The story continues and evolves, as corrections are made throughout the year.”

Train your managers

“Your middle managers will do or destroy everything we do in HR,” said Rubino. “Spend time training managers. If they are not effective in their job, which should primarily be to motivate and evaluate the performance of their direct reports, make them individual contributors again, as long as they are effective in that role.

“There is no permanent right to be a personnel manager,” he stressed.

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