Action Insight Inc

Within a short period of time, the argument began over whether the two should be linked and, if so, to what extent. One facet of that ongoing debate is whether the size of pay increase differences make a difference and whether increasing pay for good performance is a motivator for even better work the next year.

The questions become 1) is pay a motivator? and 2) should performance appraisals and salary increases be are forever linked, or that should they be totally remote from each other?

In reality, given the difficulty in measuring intangible performance contributions to a company, pay for performance is difficult and there is little evidence that pay motivates individuals to higher levels of performance.

Motivation

Herzberg’s motivation theory focused on two factors, Motivation and Hygiene. Hygiene factors such as pay if perceived as unacceptable lead to job dissatisfaction, if perceived as acceptable lead only to a state of no dissatisfaction. Hence, a large raise may result in a temporary euphoria, but would not lead to job satisfaction.

Motivation factors are present in the job itself. They include such things as opportunity for recognition, achievement, and growth. Hence, a leader that recognizes employee efforts and helps employees achieve and grow can help improve satisfaction, as long as pay is perceived as fair.

Thus, regularly spending time with employees focusing on development and achievement adds value.

Performance discussions and salary reviews should be done in separate meetings at different times of the year. In addition, performance discussions should be a combination of specific examples of past performance and include a forward-focus, with the ultimate goal to increase future productivity.

Separation

Current human resources thinking holds that it's probably best for companies to separate performance appraisals from salary reviews – at least hold them at different times of the year – and to use the appraisal discussion as a way of helping employees grow both as persons and as corporate contributors. Hence, it should be much more than a report card of past performance.

Though it should be acknowledged that the compensation element will always be present, to some extent, in performance appraisals, they are two separate and distinct issues, and if you do both together, all a lot of people will hear is the money.
If the employee has expectations and if the merit increase is not commensurate with those expectations, then you have a disgruntled employee.

Expectation-based

Pay and performance feedback are separate issues. Performance is based on expectations, while compensation is typically based on the state of the economy, the economic health of the business, and the employee's level of contribution to the company.

Let’s start with the performance development part of the process. Organizations should have a performance discussion system in place to use on a consistent basis throughout the year to assess employees' progress toward achieving specific corporate goals and performance expectations.

Performance Development has two purposes – to appraise past performance and assess future potential. What are the employee's promotional opportunities, what skills need to be developed, and what is necessary to help the employee?

Most managers forget that part. After all, not everybody is going to be president, but does the employee need training, mentoring, counseling, or some other kind of assistance to meet his/her goals? Showing sincere interest in each employee is one area leaders can use to develop employee loyalty.

Report cards?

You're always looking forward, a report card (of past performance) is always good to have from a legal perspective for a termination, but we want to measure employees' progress. With a strong system, you can help people progress.

For example, helping an assistant manager who has aspirations to become a manager develop the skills and competencies he/she needs to achieve his/her goal.

A performance discussion is intended to set expectations and/or reiterate them. It's a time to review a job's duties and responsibilities, and review the goals of the corporation and the individual.

As a company, the only way we can reach our goals is to help employees reach their goals. To do that, we need to understand their goals. What do we as a company need to do to meet your goals? And, that's not just professional goals, but their personal goals. We need to talk about personal goals.

Communications tool

If nothing else, performance discussions open the lines of communication between employees and supervisors and help them set mutually agreed upon goals.

Having face to face discussions has become particularly important in an age when much corporate communication is done by cryptic voice or e-mail messages. Heavy use of technology seems to significantly limit the amount of time spent actually talking with employees.

How leaders and employees communicate is important as well. Communication should be a two-way practice, handled with supervisors who are trained in performance discussion techniques and understand it’s an ongoing process.
Appraiser training

The important part is the training you give your appraisers, because if it's not done properly, the whole thing will fall on its face.

Training is absolutely essential. You want open communication and you want feedback on a daily basis. What if the employee is just average, but thinks he/she is superior? If a supervisor gives a surprise at an appraisal discussion, the supervisor hasn't done his or her job.

Supervisors should learn how to include employees in the discussion process in such a way as to provide the average performer a way to self-identify development needs. Often, supervisors don’t have time to prepare for regular discussions, yet these discussions need to happen. The performance discussion system should provide a method for the supervisor and employee to have a meaningful discussion about how the employee has handled actual events against a set of clear expectations.

Compensation reviews

Compensation reviews are another matter. In a compensation review, the goal is to establish the employee's value to the corporation, based on their duties and responsibilities, potential, and their own financial goals.

If employees have a great performance review, they're going to expect a great compensation package, and that might be difficult. They may view themselves and their worth higher than the company does, hence dissatisfaction.

Any number of factors can come into play in compensation review, including the company's economic health and how much it can prudently afford to pay, as well as the employee's skill level, responsibilities, and longevity– not only with the company, but in their current position.

Some companies have a salary range for various positions that can take experience, seniority, and skill levels into account.

But increases are frequently based more on the economy and how the company's doing than on actual performance. Most leaders try to give larger increases to higher performing employees, and smaller increases lower performers.

Many still link performance appraisals to additions to base pay, but in other places it has been replaced by variable pay or profit sharing. They're fairly effective in improving employee performance. And, adding commissions on sales gets better performances.

Moral: Employees need to know they are cared about. Employees need to be praised and recognized for quality work. Have a regular forum for discussions with their supervisors, along with coaching on how to develop skills and competencies. Compensation obviously needs to be at least fair for the work being done.