Workplace Perspectives: Variable Pay vs Merit Pay

Workplace Perspectives: Linking variable and merit pay to

organizational performance

Teodora GorskiManaging Director MENA

The KPI Institute

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Performance

Management (PM)

PM system

architecture

Implementing pay for

performance plans

Individual PM Architecture

Individual PM

assessment

Compensation

and reward

systems

Merit pay

Challenges in

working with pay for

performance

Variable pay

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AGENDA

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QUESTIONS ABOUT PERFORMANCE

MANAGEMENT

1. What is performance?

2. What is performance management?

3. Does your company use performance management?

4. What's your opinion about performance

management?

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TERMS & TOOLS LINKED TO “PERFORMANCE”

• Budgets

• Communications

• Dashboards

• Discussions

• Forums

• Goals

• KPIs

• Meetings

• Objectives

• Performance reviews

• Plans

• Projects

• Reports

• Rewards

• Scorecards

• Targets

• Technology

• Training

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… Plenty of tools already in use in most organizations…

…we need to use them in alignment through a PerformanceManagement System.

Better structure, alignment, integration and use of what is already inplace is the answer to improve performance management practices.

The World of

KPIs


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PERFORMANCE MANAGEMENT

Performance Management =

taking action based on the results of the evaluation to ensure targets

achieved.

1. The overarching discipline that deals with performance.

2. Reflects the approach one entity has towards performance

3. Includes sub-processes such as:

The formulation of a plan;

Actively monitoring implementation;

Readjusting the plan;

Performance measurement;

Capability development.

13The World of KPIs


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PERFORMANCE MANAGEMENT SYSTEM ARCHITECTURE

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ORGANIZATIONAL LEVELS

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Strategic

Individual

Operational

Team

Strategic / organizationalperformance management

At strategic level, performance management deals with the achievement of the overall organizational objectives.

Operational / departmentalperformance management

Is in the realm of operational management, serving the achievement of operational objectives.

Although aligned with corporate strategy, it has a functional focus, using tools such as dashboards and scorecards.

Individual performance (IP) management

The traditional level at which performance management is used in organizations isthe individual level, looking at the performance of employees in the context of theorganization in which they work.

The Pillars of KPI Architecture


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BASIS OF IMPLEMENTATING PAY FOR

PERFORMANCE PLANS

1. Get managers buy-in

2. Create and implement a performance

management system architecture

3. Ensure employee acceptance

4. Set clear goal definition and unambiguous

performance measures that are clearly linked to

employee efforts

5. Implement individual performance plans

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INDIVIDUAL PERFORMANCE MANAGEMENT

ARCHITECTURE

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Performance/ Expected Outcome

Competences

Performance Criteria

Behaviors

Quantitative

evaluation/

measurable

Qualitative

evaluation/

observable

Qualitative

evaluation/

observable

Key Elements Of The Individual Performance Plan


2014


19The World of KPIs

1. Key Performance Indicators (KPIs) - A measurable expression for the

achievement of a desired level of results in an area relevant to theevaluated entity’s activity. (The KPI Institute)

2. Behaviors - Specific ways of acting within the organization, linking

decisions and actions

3. Competencies - Sets of knowledge, skills and abilities.

Key Elements Of The Individual Performance Plan


2014


20The World of KPIs

Individual Performance Scorecard


2014


21The World of KPIs

Competency framework


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22The World of KPIs

Behavior framework


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INDIVIDUAL PERFORMANCE ASSESSMENT

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1. Performance assessment/review meeting

2. Self-assessment

3. 360 degrees

Assessment techniques


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Performance assessment meeting

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Completion of the Individual

Performance Plan

Feedback

Collection and analysis of

individual results

Assessment meeting

Feedback and re-alignment


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ASSESMENTS TECHNIQUES: Individuals

• Employee self-assessment is a

technique that combines the

use of the performance review

form and the performancereview meeting.

• It is recommended that the

employee completes his

performance review

approximately two weeks in

advance of the performance

review meeting with the line

manager.

Employee Self-Assessment

Source: http://www.whatmakesagoodleader.com/Performance-Appraisal-Forms.html

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http://www.whatmakesagoodleader.com/Performance-Appraisal-Forms.html


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ASSESMENTS TECHNIQUES: Individuals

• A tool which offers employees

the opportunity to receive

feedback from their managers,

colleagues or subordinates.

• Followed by improvement

initiatives and new feedback

after a certain period of time

based on progress.

• Alternatives, such as 720

Feedback, refer to giving

feedback after the primary

feedback.

360 Feedback

Source: http://www.chrmglobal.com/Qanda/86/1/What-is-720-degree-appraisal-.html

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http://www.chrmglobal.com/Qanda/86/1/What-is-720-degree-appraisal-.html


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COMPENSATION AND REWARD SYSTEMS

U.S. Merit Systems Protection Board, 2006

27The World of KPIs

• Seek to trigger the desired behaviors and results at individual level in

employees;

• If implemented correctly and accepted by employees, such acorrect system will stimulate employees to become better

performers and reach the set targets;

• A culture that supports performance-based pay;

Requirements:

• Granted funds;

• A strict performance assessment system;

• Periodic assessment system;• A monitoring system meant to ensure

fairness;

• Adequate training for managers and

employees.


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QUIZ

28The World of KPIs

Employees receive permanent pay increases (i.e. raise)

May vary in amount from period to period

Bonuses do not increase employees’ base pay and

therefore are not permanent

Pay between the best and the worst performer is often not

large

Attractive from the company’s point of view because one-

time cash reward links pay to performance but does not

increase fixed labor costs

M

V

M

V

V


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MERIT PAY

Source: Park, S. and Sturman, M. C. (2009), The relative effects of merit pay, bonuses, and long-term incentives on future job performance, Cornell University, available at::http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1008&context=cri

29The World of KPIs

• Merit pay, compared to other forms of pay-for-performance,

permanently increases employees’ base pay.

• The difference in merit pay between the best and the worst

performer is often not large

• Rewards from a merit pay plan may not be strongly associated with

job performance ratings.

= A form of reward in which individuals receive permanent pay

increases (i.e. raises) as a function of their individual performance ratings (Heneman & Werner, 2005).


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VARIABLE PAY

30The World of KPIs

• It is viewed as a means of aligning the interests of employees with

those of employers.

• Variable pay for performance programs can be viewed as anapproach to the creation of a compensation strategy that will

assist an organization in defining its core values

• Succeeds in motivating people and create the belief that good

performance will lead to higher pay

= Direct compensation that does not become a permanent part of base pay/salary and which may vary in amount from period to

period.


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VARIABLE PAY

31The World of KPIs

• WorldatWork study regarding the effectiveness of variable pay among 958

managers, showed that 70% of the respondents consider variable pay as

being important to the success of their organizational competitive strategy.

• PayScale surveyed over 4000 companies in 2012, concluding that the strive

for performance is the most important reason why companies offer bonuses.

• Abosch & Malague (2010) support the emerging usage of variable pay

systems in one of their studies, showing its evolution in time.

0%

20%

40%

60%

80%

100%

Years: 1990-1999 Years: 1999-1999 Year: 2009

The evolution of the variable pay plan


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CHALLENGES IN WORKING WITH PAY FOR

PERFORMANCE 1Which negative behaviors are associated with performance

based pay? Allocate the correct number in front of each

statement.

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Match Description No. Behavior

Establishing lower targets than the realistic

level estimated as possible.1 Gaming

Looking after the achievement of own

targets, without consideration of the

implications for other areas in the

organization.

2 Sandbagging

Disregarding environmental and safety

considerations in the process of meeting

targets.

3 Tunnel behavior

Influencing results through unapproved

means to ensure target achievement.4

Unethical

behavior


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REMMUNERATION SYSTEMS

Source: http://www.ascentgroup.eu/en/ramona-bosinceanu/blog/remuneration-systems

33Generating ValueFrom Using KPIs

http://www.ascentgroup.eu/en/ramona-bosinceanu/blog/remuneration-systems


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BONUS SYSTEMS

The Philippine GovernmentThe Performance-Based Bonus (PBB) is a bonus system which rewards theperformances of the employees working for the Government.

Source: http://www.gov.ph/pbb/

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http://www.gov.ph/pbb/


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BONUS SYSTEMS

The Philippine GovernmentThe system was introduced in 2012, aiming at rewarding employees more fair.

Source: http://www.gov.ph/pbb/

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http://www.gov.ph/pbb/


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BONUS SYSTEMS

Tesco

Source: http://files.the-group.net/library/tesco/annualreport2013/pdfs/tesco_annual_report_2013.pdf


http://files.the-group.net/library/tesco/annualreport2013/pdfs/tesco_annual_report_2013.pdf


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BONUS SYSTEMS



Tesco



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BONUS SYSTEMS

Tesco


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PAY FOR PERFORMANCE & KPIs

Source: https://www.youtube.com/watch?v=u6XAPnuFjJc

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https://www.youtube.com/watch?v=u6XAPnuFjJc




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REFERENCES

• Abosch, K. and Malague, M. (n.d.). Getting it right- Paying for performance through

variable pay. Available at: http://www.aon.com/attachments/thought-

leadership/GettingItRight.pdf

• Greene, R. J. (2011). Rewarding Performance: Guiding principles; custom strategies.

New York: Routledge. p219-236

• PayScale. (2013). Strengthen the link between pay & performance. Available at:

http://www.blr.com/webdocdownloads/Webcast-Materials-2013/Payscale-10-13.pdf

• Park, S. and Sturman, M. C. (2009), The relative effects of merit pay, bonuses, and

long-term incentives on future job performance, Cornell University, available at:

http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1008&context=cri

http://www.aon.com/attachments/thought-leadership/GettingItRight.pdf

http://www.blr.com/webdocdownloads/Webcast-Materials-2013/Payscale-10-13.pdf

http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1008&context=cri

Web: http://kpiinstitute.org/http://www.smartkpis.comhttp://www.purposefulidentity.com/http://www.balancedscorecardreview.comhttp://www.integratingperformance.comhttp://www.performancemagazine.org/http://elearning.smartkpis.com

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http://www.smartkpis.com/

http://www.purposefulidentity.com/


http://www.balancedscorecardreview.com/


http://www.integratingperformance.com/


Workplace Perspectives: Variable Pay vs Merit Pay

Business

Transcript of Workplace Perspectives: Variable Pay vs Merit Pay