Except for union employees with multi-year contracts, automatic annual pay increases are fast becoming obsolete. Many companies, and federal agencies such as the Department of Defense, are moving to a process known as pay-for-performance. In the jargon of the human resources people this concept is often referred to as P4P.
As with many corporate policies, pay-for-performance has benefits and negative consequences. Still, many companies believe that P4P benefits the company and the employee. Following are the most important positive and negative features of pay-for-performance.
Benefits of Pay-for-Performance
It makes sense out of pay increases – All too often employees are unhappy with their pay increases and claim that raises and reviews are based on unsubstantial factors such as how well the manager likes them, office politics, and the like. When employees believe this is so, they are feeling that pay raises are inconsistently granted. When pay-for-performance is the policy, there is one standard for everyone and it is based on metrics for the job the employee has. For, this means that the more robust the performance review is, the higher the raise will be.
To work properly, managers must measure performance accurately, and as objectively as possible using metrics. For example, a real estate office handles commercial leasing. For continued employment, an agent must sign 5 leases in a month. For each lease signed above 5, an increase in salary of 1.5% is given as a raise. Some companies may cap increases at a given percentage and offer a one-time bonus if the cap is surpassed. This rewards the employee for a stellar performance but doesn’t bake the reward into an annual base salary.
P4P Helps Attract the Top Talent – Maggie Overfelt of CNBC recently wrote that for millennials;
“Knowing exactly what is expected from them also ranks highly in new job expectations, according to a survey conducted by Qualtrics, a Provo, Utah-based survey software firm; and venture capital firm Accel Partners (a Qualtrics investor). The results of the survey were provided exclusively to CNBC.
Nevertheless, research performed by WorldatWork continues to show that the best performers are motivated primarily by money. One finding by researchers was;
“…people with a high need for achievement and higher feelings of self-efficacy prefer pay systems that more closely link pay to performance.” This is a nearly perfect description of some of the things that make millennials tick. When asked for performance review feedback, millennials were positive about P4P.
What makes this so important is millennials are currently the largest generation in the workforce. By 2025 they will make up 75% of the United States workforce.
P4P Helps Make Administration of Raises Easier – When compensation and performance are linked employers often discover that it makes the integration of pay increase data into their payroll systems easier. It ends the need for HR or Payroll team members to take special steps to manually insert pay increase information into the payroll system.
Negative Consequences of Pay-for-Performance
It is Hard to Give an Objective Review – yet objectivity is the key to a successful P4P plan. This why using metrics is so important as they can be objective and evenly applied. When employees view a review process as unfair, the qualities of trust, cooperation, and being a team member is lost.
When the P4P Process is Unclear, Employees May Be Confused – To work well, managers must be precise in what makes up the rating system being used. Some employers rate competency and others rate on success towards meeting goals. But, if the performance rating system doesn’t spell things out, there can be trouble. For example, a company’s review process is based on competency. A sales associate works tirelessly throughout the year to meet specific performance goals which she exceeds. However, she receives a lower rating on her performance review than she expected. A metric she failed to reach concerned communications with other employees, so she wasn’t a team player, a highly valued trait at this company.
It is easy to understand why she went away angry, disappointed, confused, and unmotivated. In short, employees must be informed exactly what standards apply to them in the review process.
Pay Can Dominate the Importance of Reviews – Employees find it difficult to separate the issue of compensation from the contents of the review. This means that helpful comments concerning the positive and negative aspects of an individual’s job performance are obscured by the amount of a pay increase or the lack of one. To avoid this, some employers separate the performance review from a salary discussion, Often there are months separating the two discussions.
Clarity in expectations of management, metrics to measure performance, and objectivity throughout the process is vital to P4P administration.
At the end of 2015, 30 of the Fortune 500 companies got rid of performance reviews entirely. While there is no formal review process, ratings still exist. But, employees can’t see them. These ratings are subjective, conducted in a manager’s mind, and lack employee input. These companies have made a mistake as the review process is important to an employee who always wants to know where they stand in the eyes of management. For this reason, companies should have a formal performance review management system.
Automating the Review Process
One way to increase transparency in the review process and make employees more content with the review process is by automating it using a Service as a Software (SaaS) vendor. Most are based in the cloud allowing managers access to the review process anywhere they have an internet connection.
Much of the process is automated using information collected from time cards, production reports, sales reports, and other instances where metrics are kept. The best companies easily integrate the performance management review system with payroll and HR systems.
When a company uses a third-party SaaS to manage its performance reviews it also eliminates complex and insecure spreadsheets that often lead to errors.
The most important feature of a pay-for-performance system is that, when done correctly, every employee knows what the performance metrics are based on (goals or competencies) that justify the decisions that affect their pay. It is a transparent process and employee performance review feedback is almost always positive.
Contact Reviewsnap today if you’re interested in learning more about how we can help you complete pay-for-performance.