Separate Pay Reviews From Performance Feedback
Is your business is still doing an end of year employee performance and salary review? In some industries it is still considered the norm, but it has not been considered best practice for quite a while now. There are many good reasons why you might consider a better approach this year.
Why It's Time To Change
It's not the 1980's anymore, and just like big hair and shoulder pads, the world has moved on from the big once a year performance review. It's no longer fit for purpose.
It is now widely acknowledged that more regular conversations, focused on outcomes and deliverables are more effective in engaging people in their work. These outcomes conversations are a fundamental part of The H Factor system.
Employees today have an expectation of greater engagement and participation in achieving business goals. High frequency outcome conversations help employees take ownership of their accountabilities, and enable an honest conversation about the issues and challenges of achieving the desired results.
Honesty enables better decisions. If you link a conversation about performance with a conversation about compensation, it undermines the honesty - on both sides.
Employees are less likely to be honest about poor performance if they fear it will impact their compensation. Worse, they are actually less likely to address issues if they fear that raising them will be used against them. Likewise, managers are less likely to acknowledge and address the constraints on an employee's performance in areas such as their own leadership, clunky systems, business processes, and/or capacity bottlenecks.
There are so many factors that determine a person's salary, including the employment market conditions, inflationary pressures, business and economic conditions, their experience, and their qualifications. Then there's the conditions of the employer's workplace, including the physical environment, the systems and processes, their approach to flexibility, and the level of goodwill they nurture in the employment relationship itself.
People want to feel like they receive fair pay for the work that is expected from them, the experience they bring, the working environment provided, and the support they receive from their manager and/or the organisation.
Does your salary review calculation consider all of these variables? Even if it could, what weighting would you give the different aspects, and why would the employee feel that is a fair and reasonable process?
Research shows that once a person feels their pay is fair, increasing compensation is far less effective in retaining them. The other factors, especially the level of goodwill nurtured in the employment relationship, are far more effective in motivating them and driving their performance.
You can see there are many good reasons why best practice has shifted away from an annual appraisal and salary review process. Most telling perhaps is the increased complexity and sophistication of the modern employment relationship. This is often most evident in professional work environments where people are heavily invested in their careers.
Breaking The Habit - What To Do Instead
Change is difficult, and requires a little preparation. On the other hand, all of those one-on-one conversations required a heavy investment in time and energy, so why not use that preparation time to set the new way forwards?
Review existing salaries to what you believe to be the current market rate consistent with the outcomes of each role and the organisation's expectations of performance against those outcomes. Acknowledge the variation, and communicate the change and time-frame to each individual.
Most workplaces are already having more frequent performance conversations between managers and employees. Keeping these separate from salary conversations is important for all of the reasons mentioned above. If you are not yet having these frequent review conversations, then The H Factor can help you with implementing that process.
Use an appropriate formal performance management process where necessary to ensure that the required performance standards are clear and that there is a fair process for monitoring and documenting each persons deliverables.
The H Factor system is designed to nurture a performance culture in an organisation. It takes care of the process of documenting the outcomes, tracking the deliverables, and capturing the 'way things are done' in the organisation.
However you approach managing performance, it is important to be aware of the National Employment Standards and Fair Work requirements.
In addition to having frequent performance conversations at the one-on-one level, engage in an open dialogue with your team about business conditions, and the organisation's performance. You don't necessarily have to share the full results, but you can share some KPI's with the team and engage them in helping to understand the barriers, challenges, and successes along the way. The key here is to be honest - an employer who always says things are tough and challenging without ever acknowledging success merely creates cynicism.
Engage with external parties, such as recruiters, HR consultants, and industry bodies to understand what is happening in the employment market. Share that information with your team, and also share with them whether you think an increase is reasonable, the level of the increase (if any), and how you think the situation will change over the next 12 months.
Set a review date from which all salaries will be updated. Apply the change to all employees at the same time, so that everyone knows where they stand. With this approach you have the opportunity to budget for the change, so that you can understand the business impact.
Establish new criteria that trigger an individual's salary increase, for example attaining new qualifications, developing new experience, leading others, and/or achieving productivity targets.
These changes enable a shift away from having to manage individual personalities and negotiations, to a process that enables you to instil a culture change. You begin the foundations of a performance culture based on shared understanding of what performance looks like, mutual aspirations for growth and development, and a shoulder-to-shoulder approach to achieving business objectives.
Find out more about how The H Factor enables leaders to shift their focus from the administrative issues to the people aspects that improve the human experience of work.
H Agents write about the joys and challenges of entrepreneurship and managing people.