Using Compensation to Motivate Performance

Editor's Notes

• #3: Intros
• #4: BAMBOO 
• #5: BAMBOO 16 elements of engagement, satisfaction, and performance The building blocks of high performing people, cultures, and organizations
• #6: BAMBOO Input elements are what you need to get work done: Objective (know where you’re going) Alignment (doing work that fits) Plan (knowing what to do/how to move forward) only 6 in 10 employees know what is expected of them at work (Gallup, State of American Workplace Report 2017) Space (having autonomy to work) Contribution (making an impact) 56% employees expressed that the opportunity to use their skills and abilities was a very important contributor to job satisfaction (2017 Employee Job Satisfaction & Engagement Executive Summary) Score (measuring progress) Momentum (being in motion) Investment (you have skin in the game) While only 30% of employees strongly agree that their manager involves them in setting their goals at work, those who do are 3.6 times more likely than other employees to be engaged (Gallup, State of American Workplace Report 2017)
• #7: BAMBOO
• #8: BAMBOO Leadership (someone who believes in us, challenges us, and shows us the way) Relationship (having connections with people you care about) Our research revealed that just 30% of employees have a best friend at work. Those who do are seven times as likely to be engaged in their jobs, are better at engaging customers, produce higher quality work, have higher well-being, and are less likely to get injured on the job. In sharp contrast, those without a best friend in the workplace have just a 1 in 12 chance of being engaged. (Gallup) Environment (surroundings that support and enable our efforts) culture, cues, ecosystem If you create a great place to work, great work takes place. Renewal (restoration and balance)
• #9: BAMBOO Identify (knowing your capabilities and believing in yourself; how you see yourself) Growth (mastery & progress both personally and professionally) 59% of millennials say opportunities to learn and grow are extremely important to them when applying for a job. 44% of Gen Xers and 41% of baby boomers say the same about these types of opportunities. (Gallup, How Millennials Want to Work and Live, 2016) Meaning (finding fulfillment/doing work that serves a purpose) Value (feeling appreciated, valued, and adequately compensated) Total rewards (rewards, recognition, compensation)
• #10: PAYSCALE Comp is necessary to attract, retain, and motivate talent. Employees are motivated when they are engaged within the organization. Employers need to build a solid foundation with compensation to encourage a high level of engagement and motivation. We do however recognize it is not comp alone that leads to engagement; but it is a primary influencer
• #11: BAMBOO About 88% of employees are not engaged or actively disengaged at work. The economic consequences of this global "norm" are approximately $7 trillion in lost productivity (Gallup) Alfred Lin, former COO and chairman of Zappos explained, “Zappos was built on the simple premise that to have happy customers, we need happy employees. To have happy employees, we need a great company culture. The success of Zappos demonstrates the linkage between company culture and employee engagement to company success. Our motto of ‘Deliver Happiness’ for customers and employees was also good for our business and investors.” (Harvard Business Review, The Impact of Employee Engagement on Performance) Indeed, 77% of organizations that prioritized employee engagement reported a considerable impact on customer satisfaction as a result 
• #12: PAYSCALE 
• #13: PAYSCALE Here at PayScale, we conduct a survey every year called the Compensation Best Practices Survey or CBPR. Where We ask over 7,000 HR managers, HR leaders, business leaders and employees about how they are doing compensation and questions related to employee engagement. What you see here is data from our 2017 CBPR. When we conducting this survey we found a gulf between how employers think employees feel about workplace issues, and how employees actually feel. We call this the corporate chasm. There is a disparity on both pay practices and feeling valued in the workplace. Let’s talk about what we are seeing here: -When it comes to pay, only 20 percent of employees said they were paid fairly, whereas 44 percent of employers said their employees were paid fairly. -Employers were more inclined to say that their employees were appreciated at work (64 percent), whereas only 45% of employees said they were appreciated at work. -Pay transparency – only 25 % of employees said their company had a transparent pay policy, versus 31% of employers said this. -The key point here is that employers consistently have healthier views of employee engagement levels at their companies. Whereas Employees have more dissatisfied views than their employers assume. Employees who are feeling undervalued in terms of compensation are often feeling undervalued, period. This is suggests that Pay is the cornerstone. When pay isn’t right, all other gestures of appreciation can ring hollow.
• #14: BAMBOO But let’s be honest, real life is never as straightforward as value in, value out. Employees might invest time, great ideas, and leadership skills, and so they expect compensation to match. The employer may think that a salary sets the scales in balance, but value is all about perception. An employee might not feel valued with a paycheck alone. But perhaps health insurance, a 401k with company match, and a culture with balanced time and popsicles in the breakroom freezer can add to the value. But it’s important to be transparent with that value. 
• #15: PAYSCALE Going back to the CBPR report we have additional support that shows us Most people don’t know how well they are paid, and when people don’t know, they most often think they are underpaid. In a PayScale Study of 71,000 employees we found that nearly two-thirds of employees who believed they were underpaid were actually paid at market. In fact, 35 percent of employees who believed they were underpaid were actually paid above market. This says to us that it is not necessarily about paying more, but about being more transparent. Talking with employees about how employees are paid in the first place. We will talk in a few monments about what level of transparency might work for your organizations, but Lack of transparency can lend to speculation, which could turn to resentment, and this can have far reaching consequences: in fact, 60 percent of employees who said they were underpaid also said they intended to look for a new job. It can be surmised that The lack of any transparency around how pay decisions are made is really making things worse for employees. The only thing worse than feeling underpaid is having no idea why. What is even more interesting is that the study also found that 82 percent of employees felt satisfied at their company even if they were underpaid, as long as they knew the reason why. What we can see is employee engagement is the cornerstone for employee engagement and it must be coupled with good communication, and the employee feeling valued
• #16: PAYSCALE We are going to be discussing pay communication, but before you communicate, you need to determine what level of transparency is right for your organization. There are some CONSIDERATIONS for determining transparency Workforce demographics and expectations – going from what to Whoa might not be expected Cultural norms – does the organization philosophy and culture support giving the where, but not the why? Staff and manager sophistication – do you have a managerial team that can support that message and do so consistently? Time for communication training Exactly what do you intend to share, when, how, and why? Org status and successes Third party study Comp plan exists Comp plan details Comp strategy and/or philosophy Moving to greater transparency means that you will need to get buy in from executives and help develop communication around the change You cannot go at this without support and buyin from your executives.
• #17: BAMBOO 
• #18: BAMBOO Compensation = an exchange of value, not just money On an employee-by-employee basis, does each individual feel valued? Some employee value drivers (what employees bring to the exchange) Experience in industry Experience in market vertical Experience in adjacent markets Experience in discipline Experience in adjacent disciplines Product and competitor knowledge Level of education and more Some employer value drivers (what the employer brings to the exchange) Pay PTO Benefits Travel Culture Work Flexibility
• #19: BAMBOO Managers are on the frontlines when it comes to compensation conversations Only 19% of organizations feel very confident in their managers’ abilities to have tough conversations about pay, let alone the ability to recognize when an employee is feeling underappreciated Training is vital for managers to understand holistic compensation (value exchange) “Go talk to HR” undermines their authority and damages employee trust/engagement Manager Communication Toolkit Compensation plan talking points Compensation plan information Details for each employee they supervise Tips for each type of conversation theymay have
• #20: BAMBOO HR’s role: get the program ready, continue communicating updates to the executive team and train the management team Executives’ role: approving the compensation plan and communicating it at a high level to the company, carry out the manager communication duties to their teams Managers’ role: understand the program, communicate the information to their employees and seek support from HR if needed Employees’ role: encouraged to bring questions back to their managers or HR This will empower employees and boost engagement
• #21: PAYSCALE CPBR 2017 - 49 % of organization are aiming to move up the pay transparency spectrum in 2017. If your organization falls somewhere lower on the spectrum than you’d like to be, here are some things you can do to immediately increase pay transparency in your organization. Work with your senior leaders and executives to Develop a compensation philosophy and strategy and share this company-wide. Address what you plan to reward with compensation (performance, tenure, acquisition of skills) Build a compensation plan with reliable data - Perform a market study to find out how your organization compares to the market. If you’ve conducted a market study, let your employees know that you analyzed the markets where you compete for talent, developed a competitive market strategy, and benchmarked your jobs. You might also share more details about the results, including areas of the organization that are currently lagging the market or next steps. Help your employees and managers by defining SMART goals for you employees. To tie performance to compensation, you need to have good goals/metrics.
• #22: PAYSCALE 
• #23: PAYSCALE What should a pay performance plan achieve? It should ensure that Employees are paid fairly, consistent with the value of their contribution to their employers. Employees feel they are being treated equitably when strong contributors receive the largest rewards and poorer performers receive little or no reward. Provide adjustments that bring pay from its starting point at the date of hire to wherever it ought to be, at the appropriate pace, and then maintain it at the level that reflects both ongoing performance & changes in the labor market. And finally it should motivate higher levels of performance. Hopefully oyu have the ability to use those budget increases as investments that drive employees.
• #24: PAYSCALE Now as we all know outside of base pay there are many different types of incentives/pay, cash-non-cash ways to reward performance. There are some more typical ways to connect performance and pay, such as with a merit increases, and some less typical ones, such as equity. The options range from monetary to non-monetary. Team Incentives, project incentives, individual incentives Mix may vary by industry, size, org phase (startup…), location (urban/rural), functional area, level… etc. Have a good reason for the mix, tailor for workforce, be consistent.
• #25: PAYSCALE As I have mentioned We just wrapped up our compensation best practices survey which was sent out to HR leaders, business leaders, Finance/Operations professionals and employees a couple of months ago. In relation to base pay We found that 19 % of organizations budgeted base pay increase of 4% or greater. 20% of organizations said that the highest pay increase given to employees was greater than 15%. 24% of all organizations plan to give increases in 2018. Thus we see that
• #26: PAYSCALE 2018 CPBR data: What were the main reasons for raises in 2017? The top five reasons remain unchanged from last year’s Compensation Best Practices Report: performance, retention, market adjustment, cost of-living adjustment and internal pay inequities (not compliance-related). Employers seeking to be employers of choice will do well to link their pay raises to performance and market rates for their jobs. Today’s savvy high performers don’t only want to see that they are paid well for their efforts. Their satisfaction is driven most by feeling the approach to pay is fair and transparent at the organization, not how much someone is actually paid. They are also much more informed about the value of their jobs in the market and they are often approached by recruiters about new job opportunities. The rising number of online sources to which employees can now turn for pay information has made employees confident in approaching their employer to ask for a raise. Basing pay increases on quantifiable reasons isn’t just good for your pay brand; in some states, it’s required by law.
• #27: PAYSCALE In 2017, three of the top five ways of recognizing performance were monetary. The number one way was with base pay increases (54 percent). Recognition was also featured prominently in organizational strategies to reward performance. [2017 CBPR findings below] CBPR - Top-performing companies are more likely to reward high-performing employees with monetary rewards. They exceeded typical companies in all monetary rewards, especially goal-based bonuses (35 percent vs. 28 percent) and bigger base pay increases (58 percent vs. 54 percent). Our study also found that top performing companies are more likely to allocate some type of budget to variable pay instead of leaving it unbudgeted. Only 19 percent of top performing companies have no budget for variable pay. If you chose to reward with item outside of base pay, will depend on a number of factors. How literal are you with your budget? Who gets to see the budget? If things aren’t in the budget, do you tend to spend money on them anyway? Do you have an established variable pay plan already? Resources to reference: Do stock options motivate performance -https://www.shrm.org/hr-today/news/hr-magazine/pages/0315-employee-stock-options.aspx
• #28: PAYSCALE 2018 CBPR data Seventy-one percent of organizations offer some form of variable pay (bonuses, commissions, etc.) Interestingly, the number of organizations offering spot bonuses decreased year-over-year from 46 percent to 39 percent while individual incentive and hiring bonuses increased, 67 percent vs. 64 percent and 34 percent vs. 27 percent, respectively. We also asked about some additional types this year and found that 39 percent offer employee referral bonuses, 30 percent offer companywide bonuses and 22 percent offer profit sharing.
• #29: BAMBOO Rewards don’t have to be monetary Rewards don’t have to be scheduled Be creative and personalize incentives
• #30: PAYSCALE Now there are always challenges around any type of change. Typically with pay for performance the largest challenge is budget Additional challenges can be seen with poor goal setting and unclear definitions of what is considered “high performance”
• #31: PAYSCALE If you intend to link performance-with-pay, then you must talk about it and consider it up front. If you aren’t able to give substantive raises to your highest performers, consider including performance-based incentives and/or rewards as their own line item. Let’s talk about what might work depending on your budget situation.
• #32: PAYSCALE The nice thing about a merit matrix is that it provides an easy, visible framework for rewarding performance. That can aid in your communication about performance to employees, especially during compensation reviews. One of the questions HR has is whether the merit matrix is still the way to go when it comes to acknowledging performance with pay. The answer is that it depends. -One consideration is do you have enough budget to meaningfully differentiate pay increases for top performers? According to PayScale,s 2017 CBPR, 31 percent of organizations budgeted a 3 percent increase. But a 3 percent increase may not be an effective tool to encourage high performance. Sometimes, depending on how many ratings you have, a merit matrix can significantly differentiate pay for your highest performers. In this example, you see that the highest performers who are low in range receive that mystical 7 percent increase, while those who merely meet expectations receive increases that are a full 3.1 percent lower. At the top end of the range, high performers receive almost double what average performers receive. In this case, I’d say that the 3 percent budget is allocated well-enough to appropriately differentiate the top performers. If your top performers only differ from your average performers by a percentage point or two, they may not feel appropriately recognized for their contributions. Think through… But if you have a modest budget … see next slide Differences in pay need to be large between top vs. other performers For the merit matrix to be effective, you have to make sure it’s used to ensure equity and it is meaningfully differentiating performance. Merit increase is the starting point - it does protect employees purchasing power given inflation. But if you don’t have enough budget left to reward “performance” - who will employees be motivated? When you use a merit matrix - you are seting a % increase for each level of performance - but you also need to consider whether your target salary for an employee is based on the median of the labor market. You have to consider what’s an employee’s current pay when determining increases. With the merit increase, the employee’s pay could still be under his true value in the market.   Make sure differentiation is large enough between top vs. other performers Consider an employee’s current pay relative to the market Bring red-circled employees within range first High performers who are green-circled may or may not receive a base pay increase – consider lump sum bonus Consider employees’ position in range and performance We’re looking here at a sample merit matrix. Know that these numbers are not being pulled from your organization, they are just examples. So how does a merit matrix work? A merit matrix at a high level takes into account an organization’s total budget for increases, let’s say 3%, and then looks at the distribution of all employees in terms of their performance and their position in their range. From there it makes a recommendation for each employee’s raise based on those two things – performance and position in range. (And, it stays within the organization’s entire budget). Let’s take a look at the top left hand corner of this matrix. This is an employee who is below the minimum of the range and exceeds performance expectations. Because of this, they received the largest increase possible. If an EE “does not meet expectations” - 0% increase. One of the great things about a merit matrix is its ability to identify employees who may be a flight risk. In the top left, the employee who is paid below range and a top performer is considered flight risk – meaning they are at risk of being poached away by your competitors because their pay is low, but they’re performing well. The key is, you want to keep these people and ensure they continue to be a top performer for you, not your competitors, so special attention (and additional budget) may be allocated to those folks. The inverse of that, in the bottom right corner, is the overpaid underperformer. These employees are above range, but their performance is below expectations. This situation can be caused by a variety of factors – for example, if a company gives across-the-board increases, regardless of performance and job market value, then at some point the more tenured employees begin to fall well above range. Whatever the reason for the overpayment for a low performer, this is a group you’ll want to keep an eye on.
• #33: PAYSCALE If you have a modest compensation budget, or need to put more into the variable costs instead of fixed costs, you can consider some other options: -Price your jobs competitively to the market and use some budget to ensure folks are in range. On some cadence that fits the speed of your business, re-evaluate your jobs relative to the market. Give market-based increases for those positions where the market shows a steady upward pattern. -Complete your internal evaluation (pay equity, compression) to make sure you are paying fairly across the organization. Use budget as needed to fix potential issues. -Invest more of what was typically your budget increase to an incentive pay pool. Set goals and priorities that align to your business goals, and pay out against those goals on a cadence that makes sense for your business. The advantage to having more to draw from in the incentive budget is that you pay out when people perform. Technically, the costs are variable and if you set your goals well you’ll have excellent return on your compensation investment. In terms of performance management, because the payout is based on goal-attainment, a performance rating is technically superfluous (for compensation). https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/incentive-pay-mix.aspx https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/bonus-incentives-gone-bad.aspx Pay Mix"If you put a lot of pay at risk, you have a lot more risk of dysfunctional and unethical behaviors," said Mark Blessington, president of sales management consulting firm Mark Blessington Inc. in Asheville, N.C. An incentive plan with a mix of, say, 95 percent base pay and 5 percent incentive pay is unlikely to lead to bad behavior "because the additional money to be made by engaging in those behaviors is not worth the risk of getting fired or worse," Blessington noted. "If a problem with incentives is going to occur, it will likely involve positions with much more pay at risk—say, a 50/50 split between base pay and incentives—because there is more to be gained by gaming the system." Paying attention to the pay mix is particularly important when designing incentives for customer-facing positions. "Companies need to be very alert to any positions that touch the customer and have a high amount of pay at risk," Blessington said. Can the company really justify that amount of pay at risk in those situations? Is the incentive creating a strategic advantage, or is it creating an ethical and financial risk for the company? Ways to reward employees during merit freezes by using Variable pay: Recognition programs. Ranging from simple items like certificates to rather large monetary awards, recognition programs are a great way to offer praise to employees. When kept simple, they allow for the flexibility of immediate action. For example, an on-the-spot program could be created to reward employees who went the extra mile when it came to safety compliance during an unanticipated project. Awards could be a gift certificate to the company store and a personalized thank you note signed by their direct supervisors. Bonuses.These payments can have a large impact on employee performance and should be tied to important company initiatives. Recruitment bonuses, for example, are an excellent way to expand a candidate pool while encouraging company loyalty and retention. When implementing a new bonus program, don’t forget to consider the impact of taxation on the final take home pay.
• #34: PAYSCALE
• #35: PAYSCALE Communication and setting expectations is super important. Organizations have found that if they make a formal communication about the salary increase or bonus budget, it is best to announce what employees can expect to get on average. This will set appropriate expectation among the majority of employees and increase the chance that high performers will feel recognized properly if they receive more than average. Another important aspect of being honest with employees is to communicate clearly that budgeting a certain amount for the year for compensation increases, bonuses, promotions does not mean that it all will be spent. The idea is that compensation costs should be managed just like other budget items, they spend only what can be justified and supported by business results. PAYSCALE Given that there are all sorts of ways to reward performance, you’ll want to consider what will make the most sense for your business. When you design an incentive compensation program or want to change your existing one, you’ll want to do a few things: Survey employees regarding the incentives they would value.  Explain to employees how the incentives work, including what level of performance is necessary for them to benefit.  Check in with employees regularly to gauge their satisfaction with the plan.  Interview employees who are leaving the organization voluntarily to find out if the incentive pay program had  anything to do with their decision to leave.  Keep upper-level management apprised of how the plan is working. Number one reason incentive programs fail is that HR did not seek employee input, so no one understood what motivates workers Make sure your performance goals are clear and realistic. If the goals are unrealistic, employees may engage in unethical behavior to reach these targets, while endangering customer satisfaction. Picking the right metrics is extremely important. For example, a retail store manager might earn an incentive based in part on improving store operating margins. One way to achieve that is by cutting staff or not delivering appropriate pay to those workers. That behavior on the part of store managers could lead to strong bonus payouts in the short term, but it could also damage customer satisfaction over the longer term if service levels suffer. To motivate performance, also make sure that the goals are based on your work cycle. Make sure the incentive plan isn’t too aggressive that you encourage the wrong behavior from employees in order to meet targets. The performance standards should be objective; not changed midstream. Make sure to train managers – if your plan is one that does not reward employees who are already paid above market even though they meet expectations, managers will have to explain this to employees and be brought on board with your plan. Incentives require diligent monitoring, even when they appear to be operating as intended. Especially for customer facing roles, you need to know how employees are achieving their results, and make sure their behavior isn’t going to damage long-term business performance. https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/bonus-incentives-gone-bad.aspx https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/wells-fargo-claws-back-millions-from-former-execs.aspx
• #36: PAYSCALE There are a few best practices that exist around goal setting. To tie performance to compensation, you need to have good goals/metrics. Organization level goals feed into department/team goals, which feed into the individual level. We want each individual EE to have line of sight into how their efforts contribute to the success of the org. For example, if the organizational goal is to increase revenue, then the goal for the sales department would be to increase the number of contracts by 10 per month, which would mean the individual employees in sales would need to have a goal tied to that – say, double the number of cold-call dials they make daily in order to obtain more accounts. SMART goals; those that are specific, measurable, attainable, relevant and time-bound KIS(S) – Keep it simple! Don't make the goals so overly complex that employees are unclear on what they should be doing. If the goals are too broad, then employees won’t show a depth of effort in key areas. Really any goals you set should be foundational– i.e. if they achieve these goals, they’ve achieved their job. 
• #37: BAMBOO The best way to begin establishing performance goals comes down to these four elements, according to Gallup’s research over the decades. First, managers need to collaborate with employees to establish goals. Employees can take ownership of their job expectations and perform at a higher level. Second, clearly articulated, or defined. There should be no guesswork on the part of the manger or the employee. Third, we should aim toward excellence. No one is fully motivated when they’re asked only to do the bare minimum like showing up on time or meeting a deadline. Finally, set according to their innate strengths. Employees don’t usually spend most of their time on tasks that they don’t enjoy or aren’t good at. Don’t set goals surrounding such tasks, or at least don’t make those the only goals and objectives. Play to employees’ strengths as well to encourage them to do their best work on projects they are personally invested in.
• #38: BAMBOO Takeaways and next steps
• #39: BAMBOO Takeaways and next steps: Inquire about performance management processes Connect with your employees about what motivates them Examine your organization in the context of the 16 elements of engagement; are you laying the foundation for engagement? Check that your compensation plan aligns with your goals for employee engagement and performance Identify conversations about compensation you need to have with your employees Prep toolkits for your managers to use when communicating with employees Carry these strategies forward into your organization’s culture
• #41: BAMBOO