Let’s start from the point of view of Total Reward professionals:
“The design of the performance related pay plan is the key to its success”.
Performance related pay plans can be likened to Coach Kitch Christie behind the Springboks. Kitch Christie is renowned for his 100% win record from 1994-1998, most markedly when South Africa won the 1995 Rugby World Cup. A well designed performance related pay plan driving performance can do just the same thing. Despite the costliness of these plans, the reward for companies is far greater as they direct and motivate performance more than any other existing factor. As such, Total Reward professionals are adamant to implement these plans.
Due to disagreement between parties and varied opinions, performance related pay plans are often not designed to extract the full potential from employees. There is, however, a blueprint one can follow- one that we suggest as a “must have”.
The following is a step-by-step method for implementing a performance related pay plan that all Total Reward professionals dream of:
Steps for implementing the perfect pay plan
- Use a good grading system e.g. Paterson Points to determine pay targets:
Market comparators should be utilised to determine pay targets relative to the market industry. For fairness and competitiveness, target pay should be set on par with, or above market norms. Benchmarking each position and determining the pay target for each, serve as the starting value from which the incentive plan will commence.
- Set the Total Reward mix or proportion
The pay proportion refers to the proportion of base salary and target performance incentive value. The pay proportion will vary by industry and job type. Roles based upon customer acquisition may have a proportion of 50% base salary and 50% target incentive, where a role that is less focused on customer acquisition may have a 70% base salary and 30% target incentive Total Reward proportion.
- Determine incentive Total Reward ranges
Differentiate between top performers and the rest of the organisation and budget for high-flyers. Since you ultimately want to attract, retain and motivate those talented individuals that are hard to come by, you also need to compensate them accordingly. On average, companies pay these performers on the 90th percentile. This in itself is a performance motivator.
- Determine the point of entry
What is the minimum performance standard you are willing to compensate at? This level needs to be determined for a set pay level, after which, performance related pay incentives kick in.
Specific tasks of importance must be set out so that they can be measured accordingly. This ultimately guides Total Reward and plays a significant role in the Total Reward plan. Often, companies are unsure which metrics to include since some should merely be expectations of the job. However, employees receive a set salary for fulfilling the basic requirements of their job. Those performance activities that are going to roll in the money for your company are actually what need to be measured.
Each performance metric, as explained above, needs to be accompanied by a set of criteria that dictate the level achieved as well as the timeframe. For example, a goal of acquiring 3 new JSE listed companies on the customer base in a period of a month may be the criteria set. An employee that only manages to acquire 2 JSE listed companies as customers has performed in a sub-standard fashion and should therefore not be rewarded above the set Total Reward rate. An employee that acquires 5 JSE listed company customers should be rewarded the incentive amount for not only meeting the performance standards, but an additional rate for exceeding them.
- Link performance to Total Reward
The different ways of linking performance to Total Reward are: commission-based, quota-based and a link. Commission Total Reward generally rewards a percentage of gross profit, revenue or specific monetary reward per sale. Quota Total Reward pays the incentive for reaching the particular goal and payout may differ according to scale, below and above the performance level. A link creates a relationship between 2 measures.
A common error in performance Total Reward pay plans is that companies often skip the previous steps and start here. This is a fatal error since the preceding steps serve as the actual basis of the Total Reward plan, without which, the plan is destined for failure.
- Ensure that all involved parties are on the same page
All employees should be communicated with, regarding the Total Reward pay plan in order to know their role, the purpose of the system and what the benefits are.
- Measure the success of the Total Reward plan
In order to establish whether the Total Reward plan is successful, it is important to measure it continually. This will allow for tweaks to be made on the way, rather than creating one colossal unsalvageable mess.
The aforementioned steps guarantee the optimal design for a performance Total Reward plan but did not include the other end of the spectrum- the ethos that lies behind it. This part of the debate will now be discussed.
The point of view from the employees: “The ethos of the Total Reward plan is the key to its success”
Workplace practices have evolved in such a way that a high value is placed on employees, so much so, that employees now wear the pants. For the sake of attraction, retention and motivation, organisations strive to give their employees everything they could want- flexible working arrangements, tailored benefits, even playrooms! As the motto goes- although roughly paraphrased- a happy employee equals a happy company. Tried and tested methods of this way forward have proven that this does in fact hold true. With the modernising world, causing a change in past mentalities, one of the greatest trends in human resources is now diversity and inclusion. With organisational initiatives seeking to treat employees in a preferable manner, to hear their voices and encourage their contributions, it has now become an expectation on the part of employees to be treated in a manner congruent with today’s trends. This means that your pay-for-performance program could actually be offensive to them.
The employee perspective: How a simple pay for performance program led to an unhappy employee
Let’s take this case as an example… A company spent a lengthy amount of time coming up with performance standards where outstanding performance would be highly rewarded. The Total Reward department determined a market data base by consulting market data. They decided that superior performers could be rewarded higher than the market level. Despite its non-malicious intention, the program resulted in misconstrued perceptions by the employees. Rather than viewing performance pay as recognition for a job well done, they perceived it as a demand to do more. They questioned the reason for having to reach such targets and attributed it to the company’s distrust in them.
With such backlash, the company took the time to explain the true purpose of the performance program, demonstrating the pros of it and what its function is capable of achieving. This allowed the employees to understand their part and how greatly they may benefit from a job well done.
Regarding the case above, it is clearly evident that the Total Reward plan would be unsuccessful if the ethos behind it was angled in a negative conduct. In other words, a positive undertone and the way the Total Reward plan is delivered is of great importance to employees.
The relationship between the employee and the company in current times is about reciprocity.
If a company displays trust in employees by leaving them to work independently, employees will reciprocate by doing great work. If a company provides employees with a great working environment and suitable benefits, employees will reciprocate once again. Employees that feel their employers are understatedly implying “I don’t trust you” will naturally feel demotivated and will not strive as hard to achieve- what is the point after all, since they are of little value to the company anyway?
So who wins the debate of ‘Total Reward plan design’ or ‘the ethos behind the Total Reward plan’? And the verdict says… it’s a tie.
A balance of the two is necessary for success. A well-designed Total Reward plan is crucial for motivating performance. Without it, there would be nothing to structure and guide performance. At the same time, desirable performance can only be achieved if the ethos behind the Total Reward plan is positive in nature, encouraging support and buy-in from the individuals that are key to its success- the employees themselves. They are, after all, the oil that keeps the engine running.
Dr. Mark Bussin
Chairman, 21st Century