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Pay for Performance is Good but Not Enough

18 July, 2017

Most of us have recently finished annual salary reviews and are now busy working on our KPIs. I am guessing about half of your organisations are taking a look at your performance management and pay for performance practices. I hope the following thoughts are therefore timely and helpful.

Let’s start with the word “performance”. This term is almost as worn out as “love” or “our greatest asset” or “passionate.” We badly need a refresh. So here’s my suggestion:

Don’t think performance… think value, contribution, impact.

Wherever you use the term performance in your management or HR conversations, consider what you mean by “performance”. Are you thinking of achievement against KPIs? Are looking back at the last review period? Or are you looking at the present or the future in terms of a person’s contribution to business performance?

I like the term contribution… like a retail or F&B company, the term “contribution” is often used to refer to branch/store profit, i.e. its contribution to the profit of the region or district or brand profit. A person’s performance is ultimately their contribution to organisational performance. If we forget that, we have lost sight of the purpose behind performance management.

Talent Value

Two large multinationals I have spoken with recently—one based in Tokyo and one based in Manila, Philippines—are using the term “talent value” in place of, or in addition to, performance. Talent value is a good term, as it gets outside the box of KPI achievement in the past. If you ask an investor which investments have had the best past returns, they can easily tell you. But ask them which are their favorite investments today, and you will get a different list. Missing from the “favorite today” list will be investments that had great past returns but have gone into decline or have inflated PE ratios (price to earnings, i.e. they cost too much for what they give you). Their favorite investments today, however, would include some lesser-known companies with low PE ratios (good returns compared to their cost.) In speaking with the HR leaders using the concept of Talent Value, they are thinking of people much the same way as the investor would talk about their favorite current investments.

Finally, do we pay for performance, or do we pay to retain high performers? We should consider whether our reward philosophies are “pay for performance” when we are actually paying to retain people with needed talent value, part of which is performance.

And what is the best predictor of talent value, or contribution? Yes, past performance against KPIs is an important part of it (so to that extent, I don’t mind continued use of ratings..) but going forward it is competence that makes a person valuable over the span of a career. Competence is what a person brings to your organisation and it’s there whether KPIs are easy or difficult, or whether the manager review is fair or unfair. Competence–relevant to the work to be done, the problems to be solved–is what best represents value.

Let’s continue to train managers to manage performance. But let’s also teach managers to define needed talent value in terms of relevant competencies – what the role requires in terms of knowledge, skills and attitudes and traits. Yes, this gets into industrial psychology, and competency frameworks take a lot of work. But we must, in my opinion, make the term “competency” just as common as “performance” in our business vocabulary.

Business performance is ultimately measured in dollars. Talent value, however, starts with competency and ends with individual performance, i.e. individual contribution to organisation performance. We in HR are in the business of creating business value through talent value. Managing performance is the manager’s job, as the manager is accountable for his/her area’s results. But in HR we are on point to acquire, develop and retain competency, and to equip managers to develop it and turn it into performance.

Let’s also teach managers to be coaches. Outside coaches are really helpful for top leaders, but too expensive for the mid-levels. We therefore must equip all management to lead and coach others.

As for HR, let’s select and promote on competence. If we can identify, for a role, the necessary competencies and then ensure goals and performance are being managed for accountability, then we are getting close to managing talent value.

Pay for Performance

So what do we do with our merit matrix? It is a beautiful creation, perfectly allocating scarce salary budgets to the right people. Do we seriously need to question use of a salary increase guideline with performance rating down the left side and range position (compa-ratio) across the top? Should we abandon these fantastic tools with percentages managers are advised to give their employees, to help ensure a strong link between pay and performance, and to improve what we call internal equity? My answer: Yes, if we can create something designed for retaining talent value.

When expanding the pay philosophy to pay for “talent value” or past/present/future value or contribution or impact.. we must rethink the traditional performance matrix, or rather get beyond it. It could be as simple as using the merit matrix (backward looking performance) as step one, then advising managers to apply a forward looking lens to determine talent value. Instead of rating, I suggest the following scale:

Top – business/mission critical talent. Must retain. Business would be negatively impacted without this person. These roles tend to be higher level, single-incumbent roles, but could also be members of small but highly important teams.

Mid – Important or enabling talent. Individuals could be replaced but not easily. Loss of these individuals would be disruptive but have little or no long-term effect on the business overall.

Low – These people are useful, steady workers in enabling roles that could be outsourced or performed by contractors, or are otherwise non-essential to business success. Talent value focuses on short-term productivity, quality of work and general attitudes.

The above ratings are not performance ratings, but are in terms of importance to the business and impact of separation, i.e. importance of retention. Pay and retention are directly linked. Higher pay retains talent, all other factors being equal. Paying at a higher market level such as 90th percentile means that other employers cannot match their salary, and the incumbent would need to take on a much bigger role elsewhere to make the same money he or she is currently making.

Put simply, let’s replace “pay for performance” with pay for talent value, or pay for retention, at least in our pay system designs. As for labels and optics, pay for performance still sounds good and sends the right message. But the reality is that we need to consider more than performance.

For more, see my other blogs on this topic, and check my Training Calendar about my classes on Transforming Performance Management or Managing Performance Without Ratings.

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