Picture of Employee during her annual review.

It’s Time to Take a Serious Look at How You Evaluate and Compensate Your Employees

Article originally published in the Philadelphia Business Journal on June 26, 2018

What is your company’s approach to assessing the performance of its employees, sharing feedback with them, and compensating them properly for their performance? Do you and your employees think that your approach is effective? What changes would you make?

In June 2015, I wrote an article to guide business leaders in how to improve their compensation and performance review system based on the work we undertook at my former company, PQ Corporation. This is an update of that article. Adobe Systems followed a similar path when they revised their employee review system in 2012.

For years, many employees at PQ felt that the employee performance review and compensation system was not effective. 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. This was key to making the new system a success. We wanted to involve employees, so they would have ownership in the new system, which remained 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?

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. Managers gave informal periodic performance feedback to their employees, in addition to more formal annual feedback.

360-degree interviews were used to get a full picture of an employee’s performance

Annually, 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.

After I was named CEO of the company a number of years later, I continued to undergo a 360-degree review conducted by the chairman of the board. This was some of the most valuable feedback I received to improve my performance as chief executive officer.

Employees were not force-ranked

Our company did not force-rank employees – one of the best ways to adversely impact collaboration and teamwork. We did not want employees competing for salary increase dollars.

Employees were informed if they were meeting, exceeding or falling short of expectations and coached on how to improve their performance. This was done periodically throughout the year. We parted company with those employees who fell short of expectations and did not improve.

Compensation system was fully transparent

Salary ranges and midpoints of jobs were benchmarked 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 of performance.

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.

How the performance review and compensation worked was explained to all employees in a very transparent way. There was no need to keep anything from them. This significantly increased the trust level between manager and direct report.

The response to the age-old question: I am not happy with my compensation

When an employee shared that they were not happy with what they were paid, they were told that they were compensated commensurate with their performance, and that if they wanted to earn more, they had to improve their performance or get promoted to a higher paying job.

Of course, the effectiveness of any performance review and compensation system depends on a fair and realistic assessment of an individual’s performance.

Were there sufficient salary increase dollars for promotions and to pay top performers?

Delays in filling open positions and adherence to the definitions of midpoint and 75th percentile performance usually provided more than sufficient salary dollars in the budget to make proper decisions about each employee’s salary increase.

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 lesser salary increase to a high performer. You might lose them.

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 doubt 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, helping your company perform better in the long run.

Stan Silverman is founder and CEO of Silverman Leadership. He is a speaker, advisor and nationally syndicated writer on leadership, entrepreneurship and corporate governance. Silverman earned a Bachelor of Science degree in chemical engineering and an MBA degree from Drexel University. He is also an alumnus of the Advanced Management Program at the Harvard Business School. He can be reached at Stan@SilvermanLeadership.com. 

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