The Willis Towers Watson Talent Management and Rewards Pulse Survey was just conducted in October and November 2015 (right when most of their survey participants were deep into performance review and merit pay decision-making). Let's take a look at how traditional, MBO-driven pay-for-performance is faring.
Among other things:
- Only 20% of North American companies report that merit pay is effective at driving higher levels of individual performance.
- Only 32% report that their merit pay program is effective at differentiating pay based on individual performance.
The numbers are pretty dismal, don't you think? There's a lot to talk about just these two items -- let alone the survey's other telling findings -- but I thought I'd focus on an area where improvement is clearly possible, as I mentioned in my most recent Compensation Cafe article, "Strategic Job Descriptions Anyone?"
Stuck with an "outdated" pay-for-performance paradigm that doesn't pay for performance as far as these companies are concerned, almost two-thirds of the survey participants say their managers are turning to a more behavioral assessment of employee contribution. These managers are assessing an employee's demonstration of the knowledge and skills required in her/his current role -- even though less than half of these managers have performance management programs designed to take knowledge and skills into consideration.
The report from Willis Towers Watson describes this as " . . . a broader, more forward looking view of performance when making decisions about merit pay." Instead of limiting their assessment to past performance (aka MBO results), managers are assessing potential for future contributions. To do this, they are looking at the knowledge and skills that their employees demonstrated as they wrestled with business challenges during the year.
(Lest we get lost in misleading terminology, hold on to your hats. Willis Towers Watson is not referring to the "skill-based pay" that can be a form of pay-for-performance even more time-consuming and moribund than our current problematic version. Nor is it referring to competency-based pay, which involves a full-blown remake of your pay-for-performance philosophy to base it on employee development.)
Curious about what these knowledge and skill performance indicators can look like? Take a look at the McKinsey research reported in, "Strategic Job Descriptions Anyone?" for examples. No, performance indicators are not as succinct as salary data, but these examples are far from being "soft," vague or unscientific. You'll see examples of manager knowledge and skills that have been deemed -- through statistical testing using big data -- to be reliable influencers of company success.
Need I mention that this doesn't mean that you can just cut and paste them? Of course not. Take a look at this research and others like it, to help you think through how to upgrade your pay-for-performance approach.
You know what they say about people who do the same thing over and over again, but expect different results? Who needs the same old, painful pay-for-performance struggle when you can introduce practices that have been proven to address your company's business needs?
Hoping no one's noticed that you're skipping compensation communications? Ask around! Then base your 2016 strategy on the popular ebook, Everything You Do (in Compensation) Is Communication @ www.everythingiscommunication.com. Margaret O'Hanlon, CCP collaborated with Ann Bares and Dan Walter to create this DIY guide to compensation leadership. Margaret is founder and Principal of re:Think Consulting. She brings deep expertise in compensation, communications and leadership to topics like the CEO Pay Ratio and performance management discussions at the Café. Before founding re:Think Consulting, Margaret was a Principal at Willis Towers Watson.
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