A Disconnect Between Pay and Performance

A new study finds just half of employees believing their managers' pay decisions fairly reflect employees' performance. While some employees are naturally inclined to believe they're undervalued, experts say employers and HR still have work to do to better link performance to pay.

Monday, September 29, 2014
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It seems the struggle to make a strong connection between pay and performance continues.

Towers Watsons' Global Workforce Study, which surveyed more than 32,000 employees from a range of industries around the world, found less than half of the workers polled reporting a clear link between pay and performance.   

The study also revealed that just 50 percent of these employees feel their managers are effective at fairly reflecting performance in their pay decisions -- a finding that begs the question: Why are half of managers not doing a better job at connecting their employees' performance to their pay?

The short answer is that "it's hard and it takes time," says Jim Kochanski, a Raleigh, N.C.-based senior vice president and performance and rewards practice leader at Sibson Consulting.

In addition to having a full-time individual-contributor job and managing staff, many managers "also have little training on how to set goals and measure performance," he says.

This problem is compounded when managers' employee reviews aren't, in turn, evaluated by their supervisors, adds Kochanski.

"So, if they do a lousy job, they can get away with it.", in some cases, managers may simply lack the financial wherewithal to hand out significant salary increases, says Laura Sejen, global practice leader of rewards for New York-based Towers Watson.

"We've been looking at [companies] offering pretty modest merit-increase budgets for many years running," says Sejen.

"So, put yourself in the shoes of a manager with pay decisions to make," she says. "On average, people tend to do their jobs well. Some do better and some do worse, but on average, most of your employees fall into what I call the 'steady Eddie' category."

As such, she says, "it becomes difficult to have these conversations with these steady Eddies year after year, it becomes difficult to tell them their merit increase is only about 2.5 percent or 3 percent, because that's what's required to be able to give more to star performers."

Conversely, the true top talent within the organization -- fewer in numbers but certainly as critical to success -- can become disgruntled when they feel the company defines "high performer" a bit too loosely. As such, employers must be careful to clearly delineate the all-stars from the average employees -- and communicate as much to the workforce, says Kochanski.

"It takes leadership resolve to [get] all managers to do the difficult task of letting the majority of employees know they are not among the highest performers," he says. "Many employers shoot themselves in the foot by creating inaccurate expectations that most employees can get a full merit or bonus, which then does not leave any money for the true high performers."

Many managers may not be provided with the tools or resources they need to make these determinations, "to differentiate to the extent the organization may want them to with respect to pay for performance, whether it's an inadequate performance-management system or a lack of training," says Sejen.

While these challenges are very real, the pay-for-performance disconnect is exacerbated by the perceptions of managers as well as employees, says Katalin Takacs-Haynes, an assistant professor of strategic management at the A. Lerner College of Business and Economics at the University of Delaware.

Employers and HR must make sure managers are "measuring actual performance, not perceived performance," says Takacs-Haynes.

For example, she says, some employees may be very efficient at their jobs, and able to complete tasks in less time than worse-performing employees, who may be seen as spending more time on the job and actually appear to be working harder.

At the same time, "some employees think they perform better than they actually do. These employees would likely report that their pay is disconnected from their performance, even though it might be aligned."

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Ultimately, for HR leaders looking to fix this disconnect within their organizations, "it comes back to education and training," says Sejen, "to make sure managers are really clear as to what to do in this area.

"A lot of organizations -- probably a majority -- have some form of calibration they do with respect to performance rating. Across the organization, individuals do performance reviews and make the decision about [a given employee's] rating," she says. "We always recommend there's some kind of cross-unit calibration that occurs," to help ensure the way managers evaluate employees is "as similar as possible" throughout the organization, to create a consistent performance-review process and, ideally, a true merit-based system that accurately rewards employees.  

For example, "say you only want about 10 percent of your employees to earn the very best performance rating," she says. "You can use this calibration process to make sure it's clearly 10 percent. This empowers HR to go back to [managers] and say, 'We need to revisit how we're doing this.' We can't have 20 percent of employees in the highest category; we have to get that number closer to 10 percent."                           

"One of the best things HR can do" to aid the improvement of differentiating pay is to "shine [a light on the process] by measuring and making visible what is really happening," says Kochanski.

For instance, "one HR group [at a client company] created a scorecard showing the percentage of employees rated high in each group, and put [an item] on the leadership-team-meeting agenda about explaining why some groups had 80 percent rated as high performers while others had only 5 percent or 10 percent [in that category]," he says.

"Doing this creates accountability and leadership norms."

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