Pay for performance is much more than pay 

Employees consistently rank base pay as the most important part of the employee value proposition (EVP), so it’s little wonder so many companies have adopted a pay-for-performance philosophy.

But that doesn’t mean employers are good at delivering on that philosophy in a way that supports overall HR strategies. And even the ones that do get it right aren’t maximizing the benefits of pay-for-performance if they ignore other factors that inspire and engage employees, including painting a compelling picture of long-term career paths and opportunities.

Almost half (47 per cent) of employees say fair and competitive compensation would have the most impact on their work situation, according to the 2017 Mercer Talent Trends global study of 400 senior executives, 1,700 HR professionals and 5,400 employees from 20 industries and 37 countries.

Linked to that is a growing expectation, particularly among younger workers, of greater transparency about how their pay, including bonuses and incentives, is calculated.

Taken together with the results of Mercer’s 2017/2018 Compensation Planning Survey of nearly 500 employers — which suggest some Canadian employers plan to take advantage of improving economic conditions to make strategic investments in top talent — this makes it critical that employers get this investment right.

At a time when overall salary increase budgets remain under pressure, simply offering top performers higher salary increases than average employees — in some cases, nearly double — risks creating holes in other parts of the Employee Value Proposition, undermining HR and overall business goals.

Many organizations struggle to get this balancing act right. It’s not enough to ask: “Do we pay top performers more?” Organizations also need accurate measurement to know if pay decisions are having the desired impact, and be able to look employees in the eyes and be fully transparent about how those decisions are made.

Less than half of the companies practising pay-for-performance assess the alignment between performance ratings and compensation decisions, according to the Compensation Planning Survey.

A lack of measurement is surprising when Canadian employers say that two of the top three factors influencing compensation budget decisions are concerns about employee retention — cited by 69 per cent of survey respondents, and concerns about talent attraction, cited by 59 per cent. Employers that don’t keep retention and attraction goals front and centre for measurement will not be able to allocate budgets in the most effective way.

A lack of measurement is surprising when Canadian employers say that two of the top three factors influencing compensation budget decisions are concerns about employee retention — cited by 69 per cent of survey respondents, and concerns about talent attraction, cited by 59 per cent. Employers that don’t keep retention and attraction goals front and centre for measurement will not be able to allocate budgets in the most effective way.

Getting the compensation piece right is critical to business success, but compensation strategy won’t be effective if it is disconnected from overall talent strategy. Other key factors driving the effectiveness of talent strategy have nothing to do with compensation but with the overall culture.

High among these is the growing desire of people to work with the best and brightest. That’s understandable, with 40 per cent of employees expecting their workplace to become even more team-based over the next two years, according to the Talent Trends Study. Workers know that as performance measurement becomes more dependent on achieving team goals and increased collaboration, their own compensation and promotion prospects will be affected by the quality and performance of their team.

This makes the role of managers even more important to the effectiveness of performance management. Strong people managers can help to attract, nurture and retain top talent. They can help to set individual and team goals, and inspire and motivate employees to achieve them. And they can create development plans for employees and make sure they are given appropriate opportunities to benefit from those plans.

Receiving good feedback on performance is another high priority for employees. They want discussions that focus on their development, but only one in four believe their organization is doing enough to keep their skills relevant, according to the Talent Trends study. The lack of development and career progression are the main reasons given by three in 10 employees who say they are planning to leave their organization despite being satisfied with their role.

This poses a significant problem for 82 per cent of companies that are increasingly focused on building talent from within, rather than buying it from outside. So too does the finding that more than a quarter of employees — mostly millennials — don’t see a long-term career at their current employer.

Although headlines suggest millennial workers change jobs on average every two years, employers can slow this churn by taking a holistic approach to employee rewards and doing a better job of communicating the total reward proposition.

Unless employees perceive their own “promotability” and understand the rewards available at the next level, they may come to believe there is no path forward at their existing employer, looking elsewhere for a better experience.

Further complicating performance management is the growing trend toward personalization of the employee experience. While pay for performance remains important to most workers, organizations are finding that no single employee value proposition can resonate with all their workers now that there are as many as five generations in the workplace, each with differing expectations of what their job should provide.

Increased personalization of the Employee Value Proposition is more than just a way for organizations to create what the Talent Trends study identified as a growing expectation among employees for “a workplace for me.” It’s also a way for organizations to optimize the workforce and achieve goals more efficiently and effectively.

One way to achieve this is through flexible work options. Today’s employees increasingly want to integrate their work and personal lives to “make work work” by fitting it into their own unique situation. Overwhelmingly, the preferred way to do that is through time off — meaning having more of it, the flexibility to spread it out, or working fewer hours for less pay.

Companies have started to adapt to this new reality, but while nearly two-thirds of them already offer some elements of flexible work, only half say it is a core part of their employee value proposition, according to Talent Trends. Meanwhile, one-third of employees say they have had a request for a flexible work arrangement turned down, and one-half feel that working part-time or remotely would negatively affect their promotion prospects.

As the economy improves, a growing number of companies will be able to offer competitive compensation and benefits to desirable employees. But for a pay-for-performance philosophy to be successful, employers need to think about more than just money. Emphasizing compensation rewards at the expense of non-compensation rewards will ensure that any HR strategy falls short, no matter how much money is thrown at top talent.

By marrying HR strategies with a culture that employees find attractive and responsive to their needs, employers can turn pay-for-performance into a winning strategy — for the organization and employees.

For more information, visit www.mercer.com/en-ca
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