How to Deal with Compensation Without Ugly Performance Reviews

May 7, 2013 - 9 minute read - Posted by

We all know that everyone hates performance reviews, they are archaic, and there is a tone of research showing that companies will do much better without them. Many empowering companies like Linkedin and HootSuite have eliminated traditional reviews from their performance management process. However, when we are taking our clients away from traditional reviews and helping them transition to a continuous performance management process, the question of how to deal with compensation comes up often. In this blog, I will discuss how to deal with compensation when you eliminate the archaic performance reviews from your organization. I’ve taken the concepts from the leading book on this topic, Abolishing Performance Appraisalsby Tom Coens and Mary Jenkins.

If you asked your managers and employees what they think the purpose of reviews was, most of them would say that the reviews determine their compensation – putting a $ amount on their performance. I have to admit that I also shared the same view. What I was resisted against the most was the idea of not having a standardized method such as competency ratings to determine any increase in pay; while on the other hand, I was not a fan of the traditional review process as I found it very subjective. Many companies are going through the same thought – we all know that performance reviews are demoralizing to both employers and employees, however, it seems like we are all stuck in a rut as we do not know what the alternatives would be.

It is very common to make the assumption that if your employees do not see a reward for their contribution; they will not be motivated and will feel unappreciated. When we think about reward at the workplace, the first thing that pops in our mind is financial reward, whether it is in the form of a bonus or gift card. What Coens and Jenkins’s found is that pay incentives can improve your employees’ performance under specific circumstances – in the short run, when the task are simple and do not require lots of efforts and when the work is mostly quantitative and not qualitative. We have also heard from authors like Daniel Pink that autonomy, mastery, purpose is the real motivator. I’ve shared Daniel’s Pink talk below and I recommend you watch it if you haven’t done already. Another popular organizational behaviour model, called MARS, identifies four factors that influence the behaviours and performance of your employees: motivation, ability, role perception and situational factors. Note that financial reward is not one of them!

Many employers believe that by giving pay incentives, it will increase the motivation of the employees. Alfie Kohn, the author of Punished by Rewards, argues that rewards actually destroy intrinsic motivation. A test was conducted with 20 children: 10 of them were given $5 to test a puzzle while the rest was asked to play with the puzzle if they wanted but no financial reward was offered. The adults left the children in a waiting room giving them the choice to either play with the puzzle they just did or do whatever they want. The children were secretly filmed and the outcome was that nine out of the 10 children did not touch the puzzle at all while the 10 who were not given any financial reward earlier kept playing with the puzzle. The conclusion to take from this experiment is that rewards can undermine the intrinsic motivation of your employees and you definitely want to avoid it.

Another well-renowned theory that is closely related to motivation and pay increase is Frederick Herzberg’s motivation and hygiene factors. He believes strongly that money is not a motivator, but rather it is a powerful de-motivator when people are not being paid a fair salary. A survey conducted by Development Dimensions International found that pay actually came fifth in the reasons why people left their jobs. What employees want is to be engaged at their workplace whether in the form of more varied work and more challenging work. This survey proves the point Herzberg advocates for – the true motivators for employees are achievement, recognition, work itself, responsibility and advancement. On the other hand, salary is part of the hygiene factors with work conditions, good computer, nice chair, free coffee, status, company car, relationship with coworkers etc. What is the importance of understanding hygiene factors and motivators is that motivators are what will help you retain your employees and improve their performance while if you only offer hygiene factors to your employees, they will improve their performance only in the short run, but start to lose interest in their work in the long run which ultimately leads to high turnovers.

So far we have talked about why you should not link compensation with your performance reviews. The big question is how to pay your employees appropriately and fairly if you don’t have use the reviews and appraisals as your guide? Here are the steps you can take:

  • Pay your people well enough to recruit and retain those who can best contribute. Match your compensation to that of the market and keep the wages current with market changes and inflation. You want to give your employees enough to cover their main expenses such as mortgages so that they do not have to worry about their financial situation. By paying your employees fairly, people will tend to worry about pay less, thus taking the focus away.
  • Design a pay structure that is closely linked to the market value. For example, the market suggests that an employee with a bachelor degree, 5 years experiences, and a set of specific skills is worth around $70,000. Explain to your employees that you are basing your compensation on their market value i.e. an entry level employee can understand what she needs to accomplish to reach a higher compensation grade.
  • Enable your employees to find meaning in their work. By providing complex work climate where you are supporting employees to accept challenging projects, your employees will be motivate to work towards your organization’s goals. With effective coaching sessions and real-time feedback, your employees may want to improve their skills in order to undertake more challenging projects. By improving themselves as professionals, their market value will increase and so will their compensation.

In this blog, I wanted to share with you that paying people enough salary is important but it is not the money that will make your employees blossom at your organization. It is certainly difficult to change your whole compensation structure not to be linked to the performance reviews and appraisals. However, with the inflow of freshly graduated Gen Y employees coming into the workforce, you want to take a proactive role in creating a work environment that motivates your employees to strive for excellence because they want to and not because they have to.

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