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Compensation Calculations

This article accompanies Rethinking the Review.

Wednesday, July 31, 2013
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One of the chief arguments against abolishing traditional performance reviews relates to compensation. Specifically, companies ask, how can they effectively calculate salary increases and bonuses without a ratings-based approach?

That was one of the challenges to be overcome at Schaumburg, Ill.-based Motorola Solutions Inc., when Senior Vice President of Human Resources Shelly Carlin proposed a ratings-free performance-review process.

"Motorola had created an almost formulaic connection between performance ratings and compensation, specifically the annual bonus," says Carlin. "As we set out to sell the idea to the executive team and the employee population at large, we had to ask ourselves how pay would work in a world without performance ratings."

To answer that question, Carlin and her team devised the Annual Bonus Plan, a two-part process encompassing a business-performance-factor bonus and a discretionary award. While the former is awarded to virtually every employee -- with the exception of severely under-performing individuals -- the latter is an extra bonus amounting to as much as 40 percent more than the business-performance-factor bonus. It is given only to the company's top 25 percent performers.

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The obvious question is how those individuals are identified in the absence of performance ratings. According to Carlin, it's remarkably easy. Managers are instructed to use their judgment to determine their best overall contributors based on their performance against pre-established goals, along with how well they demonstrate the desired behaviors laid out in the Motorola Solutions Leadership Model. The names of those individuals are then submitted to the leadership team for approval.

We've found that managers don't need a label or a rating to identify their best performers," says Carlin. "They know who they are by the contributions they make every day."

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