Article originally published in the Philadelphia Business Journal on June 30, 2015
As CEO, do you know if your employees are satisfied with your organization’s performance management and compensation system? Have you ever been concerned about the effectiveness of your company’s managers in assessing the performance of their employees or how effective they are at allocating salary increase dollars?
As a writer, speaker and advisor on effective leadership, I receive many comments from employees on issues that are important to them. Some employees rarely get feedback from their manager on how they are performing. Others comment that their manager could be much more effective at assessing their performance, or are uncomfortable in holding this conversation with them. Many employees are never told how base salaries and salary increases are determined, or work at companies that don’t sufficiently differentiate pay based on the performance of employees.
Some employees feel that their managers “manage up” well, but are not effectively leading their direct reports, or are not team players with their peers. A few employees work for tyrants, and can’t understand why the senior leadership of their company tolerates this behavior. Many employees feel that forced rank-ordering or informing employees that they are A, B or C performers is counter-productive, and are aware that some leading companies are abandoning this practice. Other employees feel that there are insufficient salary dollars allocated to bring top performers to a salary level reflective of their performance and contributions to the company.
The performance management and compensation system of my company had a few of the characteristics outlined above. The opportunity to improve the system occurred when I was appointed president of one of the company’s operating divisions. I convinced the other two operating division presidents that changes were needed, and we received approval from the CEO to design a new system.
Working with the HR department and with the assistance of outside advisors, we made changes to the system, which we tested with a focus group of employees that included upper, mid-level and first line managers, as well as individual contributors. The focus group reviewed and commented on the new system being developed during a number of iterations, and the input by the members of the focus group was key to making the new system a success. We followed this process because we felt that the best way to design and implement a new performance management and compensation system was to involve employees so they would have ownership in its development. Our new system was still in place with only minor modifications some 15 years later when the company was sold.
So, what were the key elements of the new performance management and compensation system?
Managers were trained in all aspects of the new system, including informal periodic sharing of performance feedback with their employees, in addition to more formal annual feedback. Performance was assessed on achievement of business and personal objectives. Managers were also assessed on the effectiveness of their leadership and management style. As part of this process, all employees were asked to assess their own performance.
In addition, 360 degree interviews were conducted with the manager’s direct reports to get a sense of the effectiveness of their management and leadership style, tone and culture within their organization. These types of interviews were also conducted with the individual’s peers to learn about their teamwork and collaborative skills while working on issues that impacted the entire organization. As CEO of the company, I also underwent a 360 review conducted by the chairman of the board with my direct reports. This was some of the most valuable feedback I received to improve my performance as chief executive officer of the company.
Our company did not force-rank employees, nor were employees told they were A, B or C performers. The performance assessments were written in prose, which was more effective than just “checking boxes” that described levels of performance. Employees were informed if they were meeting expectations and coached on how to improve their performance. This was done periodically throughout the year. Employees who fell short of expectations and did not improve over time left the company.
Salary ranges and midpoints of jobs were benchmarked with peers at other companies using market survey data. Performance criteria were defined for the midpoint and for the 75th percentile of the salary range. To be paid at the midpoint, an individual’s performance had to meet the definition of midpoint performance. To be paid at the 75th percentile, performance had to meet that definition. To be paid above the midpoint, the employee had to significantly exceed expectations on a sustained basis over time. If an individual was being paid high in the range, they would need to sustain that performance each year, or their salary increase would be less than the annual salary structure movement, and they would slip back in the range.
When employees were promoted they would start their new job with a salary increase, but were placed lower in the salary range of their new job, compared with their place in the salary range of their previous job. Delays in filling open positions and adherence to the definitions of midpoint and 75th percentile performance usually provided more than sufficient salary dollars to make proper decisions about each employee’s salary increase. However, if there were insufficient salary dollars to reward all of the high-performing employees within a unit, approval was granted to exceed the salary budget, but only after the manager of that unit demonstrated the need. The last thing you want to do is give a less than earned salary increase to a high performer. You might lose them.
When an employee shared that they were not happy with what they were paid, they were told that they were compensated competitively based on market survey data, and that if they wanted to earn more, they had to improve their performance or get promoted to a higher paying job.
There is no reason why your company’s performance management and compensation system should not be transparent and easily understood by your employees. It will remove any doubts that they are being treated in a fair and equitable manner. This allows employees to focus on their job and not compensation issues. It will also help to retain top performers. Companies where this occurs will perform better over the long run.
Stan Silverman is a writer, speaker and advisor on effective leadership. He is the Leadership Catalyst at Tier 1 Group, a firm of strategists and advisors for preeminent growth. Silverman is vice chairman of the board of Drexel University, a director of Ben Franklin Technology Partners of Southeastern Pennsylvania and former president and CEO of PQ Corporation. Follow: @StanSilverman. Connect: Stan@SilvermanLeadership.com. Website: www.SilvermanLeadership.com
