Employees seek reward for their efforts and so regular pay reviews are an important element for any organisation to ensure employees maintain an appropriate level of remuneration.
Traditionally pay and performance reviews are carried out concurrently because organisations seek to drive a high performance culture, so it is natural to set goals and link reward for achievement. Often this takes the form of a bonus or pay increase. In addition, many organisations hold these two activities together as a time-saving measure for busy managers who have multiple reviews to complete.
In the long run, a pay increase may partially help to retain top employees and a negligible or nil pay increase may assist poorly performing employees to reassess and change attitudes. However, it is the honest feedback and one-to-one conversations that really provide the meat in the sandwich.
Can these conversations effectively occur if the pay review is coupled with the performance review discussion?
We agree with Fortune 500 Company, Lear Corporation, which introduced separate pay review and performance review processes in 2014 with great success, according to their Chief HR Officer Tom DiDonato.
1. The pay review will overshadow the importance of the performance feedback
Picture this traditional June performance and pay review between Bob (Manager) and Tom (Employee) at ABC Pty. Ltd.:
As you may imagine and have probably experienced, the key messages of: keeping the customer happy; personally apologising etc. are likely long forgotten by the end of the performance review when Tom’s salary increase expectations are exceeded (Unlikely), met (Possible) or not met (Highly likely) and Tom leaves the review demotivated and not carrying the key messages, or the meat in the sandwich, away with him.
Meanwhile, Bob the Manager also finds the whole process thoroughly depressing. The market is tight so even though all of his team of six work hard, he can never give them the pay review they probably deserve, he tries to give them positive feedback but knows this just frustrates them further.
By separating the pay review from the performance review, employees are more able to genuinely listen and take on feedback and supervisors are more comfortable giving constructive feedback without fear of resentment.
2. A concurrent process works against cooperative problem solving
In order for pay and performance reviews to work effectively, the ratings must be objective and fair. This simply does not apply in many organisational cultures. Pay for performance can actually have a negative influence on an employee’s productivity and lead to an unhealthy competition among employees who need to collaborate. If the process is seen as unfair, core company values such as trust, cooperation and teamwork can go right out the window.
3. Success is its own reward
Even if an employee’s performance is outstanding, the company must have the capacity to pay. Unfortunately in current economic times these two factors may not correlate, i.e ABC Pty. Ltd., may have seen sudden increases in supplier costs or a competitor take market share, factors completely beyond Bob and his team’s control.
Organisations can reward good performance in ways other than cash. A McKinsey Quarterly (2009) survey found that assuming employees are paid satisfactory base salaries, non-financial rewards can be very effective in motivating employees, for example manager recognition, leadership development or exciting new projects can also provide increased job satisfaction.
To conclude, consider if your organisation will benefit from separating the pay review and the performance review processes. Will a split actually help to jointly achieve motivated, engaged employees and a high performance culture?