Approaching Pay from a Non-Mechanical Perspective

Today, in part two of our series, we’ll look at how to approach pay from a non-mechanical perspective.

As soon as we stop trying to solve pay for performance issues by toying with the design and start focusing on managing the human side of it, then we are on the road to success. The human side is a rich and complex area. Let’s look at a few important ideas.

Manage Expectations
One of the biggest problems organizations have with pay for performance is that employees are disappointed with the results. They may be at the top of the salary range; they may be getting a very large reward – that doesn’t guarantee that they won’t be disappointed. The way to avoid disappointment is simple: manage expectations. If employees know what their performance is on an on-going basis and understand how it will impact pay, there will be no unhappy surprises. HR’s role is to teach managers that managing expectations is a critical element of the pay for performance system and they should coach them on how to do so. The focus needs to be on managers having good conversations with employees, and keeping them apprised of their performance level and what that is likely to mean in terms of reward.

Leave Room for Judgement
As soon as we realize that pay for performance cannot be a mechanical system based on objective measures, then we feel more comfortable stressing the importance of judgment. This means giving managers room to put value on how a goal was reached, not just on the fact that it was reached. It opens us to rewarding hard to measure attributes like teamwork. We measure where we can, but we don’t exclude elements of performance just because there are no simple measures. Judgment allows a manager to give rewards that he/she thinks are fair, all things considered. If he/she thinks they are fair, then there is a strong basis for a conversation with employees about why they received the reward they did.

Don’t Set Rewards That are Too High
Men’s Wearhouse believes in the power of small incentives. In Hidden Value by Jeffrey Pfeffer and Charles O’Reilly, Men’s Wearhouse CEO George Zimmer argues that large amounts can “overwhelm the intended spirit” of a reward. The award should not be so high that people depend on it or so large that people are encouraged to do the wrong thing.

The point of a reward is to signal what is important and to celebrate success. Pfeffer argues we rely too much on pay. We act as if it can do our managing for us. Pay should simply provide a way to reinforce what the manager is already doing.

In fact, one of the main goals of a pay for performance strategy should be to facilitate conversations between managers and their employees. If we are concentrating on the conversation, then we are on the right track.

Build a Foundation of Trust
When employees trust the company, then it is much easier to run an effective pay for performance program. Thus training managers about pay for performance can not just cover goal setting or compensation policy, it has to teach them the importance of trust.

Trust involves keeping promises and demonstrating a commitment to fairness. The literature on organizational justice argues that the process and the outcomes need to be seen as fair, and there needs to be an opportunity to appeal decisions.

Investing in trust is a way of investing in performance.

Next Wednesday we’ll wrap up with part three in this series, with a look at how technology factors in.