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How to make Compensation Decisions without Performance Rating


Communication is the cornerstone of employee satisfaction. if you’ve opted to give managers discretion when setting pay, then it is necessary to train your managers how to communicate their decisions effectively and motivate employees.


Most of the organization still in believe in pay-for-performance model where compensation decisions are tied directly to employee performance ratings. The model emphasis simple rule: rate every employee, give those in the top-scoring bucket a healthy raise and generous bonus , give the next group a smaller increase and so on keep on reducing the percentage of hike in each case. This is clearly visible as fact on the surface which seems to be fair, transparent and justifiable. However few industry professionals still debate the merits in eliminating the performance ratings particularly forced rankings. This has put ample of pressure on HR professionals to rethink their company’s performance management processes.
Though these HR professionals are ready to embrace a world without ratings, one big questions which stops them in their mindset is “what do we do about Compensation”. The challenge ahead is keeping the wheels on your compensation plans moving forward once we have decided to pull down the linchpin. Needless to forget employees show up to work each day for pay and if we decide to fundamentally redesign how to determine their pay base, then clear plans needs to be clearly communicated.


Compensation Strategy without Rating


Companies keep on exploring new strategies and trying to implement as pilot project to see the positive outcome or results. Here are three tried strategies along with tips to address employee concerns in case of ratingless compensation strategies. :


1. Prevalent Market Rate : Market range is a approach where the company decides to choose percentage of target pay i.e 12% above MRP {Market Reference Point}. Here when market rate rises, employee salaries is also hiked by using commercial salary data as reference point to keep (MRP) up-to-date and making adjustment in salaries based on current market data. Hence when employees are promoted they move to new salary slab and employees are paid same as their peers, regardless of the outcome of performance review.

Merits

  • • For many organization this is fairly radical change since pay isn’t tied to performance.
  • • Needless to mention pay for performance isn’t always necessary to motivate employees, as here promotion is motivating factor for employees to give their best shot.


2. Autonomy to make pay decision : In this approach manager is given autonomy in deciding pay decision based on allocated budget. Here manager discretion is responsible in determining the pay/bonus of direct reportees , where any approach can be used to set budgets, including annual increases, based on market rate or mix of both the approaches. This approach has been most favourable one amongst company that have moved away from rating systems. While this sounds like managers can always play favoritism role , it is still best vantage points to evaluate how performance should be translated into pay base.

Merits

  • • Employees are motivated with pay -for-performance
  • • Managers have wide discretion to reward high-performers.


3. Make use of Shadow Rating : In this case management conducts rating exercise which is not shared with employees. Here employees are scored or ranked purely for purpose of determining compensation. Performance will obviously influence the rating and ranking but there is no explicit link with it. This pure manager discretion in rating is collectively review by management and calibrated across employees. Salary increases and bonuses are also bucketed by score, preventing extreme pay variance.

Merits

  • • Managers have discretion to rate and rank the employee within certain guidelines
  • • Calibration meetings force managers to justify decisions taken to increase pay hike after rating.


How to put into practice


Most of above mentioned methods can be used in variations or in combinations in order to mitigate drawbacks. To design the best approach for your organization, you first need to determine your priorities along the dimensions of transparency, financial incentive, fairness, and managerial influence. There is no single answer, as it is very culture dependent. But here are several important considerations, no matter which approach you choose.


  • • Communicate your new process and the reasons behind it. Otherwise, there can be a perception that eliminating the performance review/rating was an easy way for management to stop giving raises.
  • • Make the compensation process separate from any formal review or performance discussions. If your goal is to eliminate ratings from your compensation process, then you need to decouple the processes themselves. Put at least a month of distance between them.
  • • Diligently review manager decisions to prevent unconscious bias. Whether it’s having a manager’s manager review, conducting training sessions, hosting read-across / calibration meetings, or all of the above, you should consider how to teach and monitor your managers.

Last, ensure that you and your managers are continually communicating how promotion and compensation decisions are being made. Communication is the cornerstone of employee satisfaction. For example, if you’ve opted to give managers discretion when setting pay, then train your managers how to communicate their decisions effectively and motivate employees. Otherwise, you run the risk of failing to make meaningful change and looking less competent in the eyes of your employees.

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