Managing Employee Performance and Reward Concepts Practices Strategies

Managing Employee Performance and Reward Concepts, Practices, Strategies 2 nd edition

Performance and reward system review and development 1. Framework for performance and review system development 2. System requirements 3. Review of current practice 4. Strategic alignment recommendations 5. Rehearsal 6. Roll-out

Framework for performance and reward system development

1. Requirements (for strategic success) Competitive strategy and key success factors Structure and culture Performance factors (desired results, behaviours, competencies, attitudes, psychological) Performance and reward strategy 2. Review (of current practice) Strengths Weaknesses Extent and urgency of required change 3. Recommendations (for better practice) Performance management practices: Performance units Criteria Monitoring, measurement, assessment Feedback and development Reward management practices: Reward mix (intrinsic, extrinsic, financial) Remuneration mix (base, benefits, short-terms incentives, long-term incentives) Remuneration level 4. Rehearsal (to test recommendations) Preview: Cost-benefit modelling Piloting Planning: Preparation Roll-out sequence and time frame (What? When? Where? Who has accountability? ) 5. Implementation: Communication Training Ongoing monitoring and evaluation Roll-out

System imperatives Performance management: 1. Communicate 2. Monitor and measure 3. Provide feedback 4. Develop Reward management: 1. Attract 2. Retain 3. Motivate 4. Develop

Review current practices Purpose: 1. Identify strengths and weaknesses (misalignment) in addressing business strategy, success factors and human resource strategy 2. Establish extent of misalignment (or ‘gap’) and urgency of needed change 3. Identify areas where change or improvement is required Review methods: • Attitude surveys • Questionnaires • Focus groups • Quantitative (HRIS) data: – Staff turnover, exit interviews – Recruitment levels and quality – Productivity, cost and quality levels – Returns per payroll dollars spent

The human capital management scorecard ‘Hard’ measures Source: Fitz-enz (2000), 111.

Diagnostic employee attitude survey (Likert scale) Circle the response that best describes your response to each of the following statements: Disagree strongly Disagree somewhat Neither agree nor disagree Agree somewhat Agree strongly I am motivated to help this firm be successful 1 2 3 4 5 The criteria by which my performance is assessed are appropriate 1 2 3 4 5 The overall package of pay and conditions here is a good one 1 2 3 4 5 There is a strong link between my earnings and my own performance 1 2 3 4 5 There is a strong link between my earnings and the firm’s performance 1 2 3 4 5 I am clear about the performance goals of the business 1 2 3 4 5 We are paid competitively compared to similar jobs in other firms 1 2 3 4 5 My pay is fair compared to other jobs inside this firm 1 2 3 4 5

Prescriptive questionnaire For each pair of statements, tick the response that best describes your preference. Tick only one box per pair. I would like the performance and reward management system to have the following characteristics: Option A Prefer A over B No strong preference either way Prefer B over A Option B Performance measurement based on results Performance measurement based on behaviours Performance appraisal by fellow employees Performance appraisal by the supervisor Performance management linked mainly to pay Performance management for development purposes Pay according to job importance Pay for what each person contributes in the job Pay progression based on seniority Pay progression based on personal competencies Pay based on equal pay for jobs of the same size within this organisation Pay based on rates in outside organisations Variable pay linked mainly to individual performance Variable pay linked to the performance of my work group

Illustrative review findings and diagnoses

Alignment What is it? Alignment is the fit between human resource practices and (1) business strategy; (2) organisational context; and (3) people to which these practices are applied Alignment with what? The organisation: Business units: Work teams: Corporate strategy Structure Culture Life-cycle stage Roles/occupations: Production and service employees (full-time, part-time, permanent, casual) Technical employees Professional/knowledge workers Line managers Executives Business strategy Product/service markets Technology Work organisation KSA requirements Individual expectations and needs: Demographic factors Psychological contract Reward expectations Reward valence Process Project Parallel

A basic model of strategic alignment COMPETITIVE STRATEGY MANAGEMENT or WORK CULTURE ORGANISATIONA L STRUCTURE HRM SYSTEMS, including performance and reward management

Aligning strategy, structure, culture and practice: (1) traditional mechanistic cost defender Espoused psychological contract Relational Desired attitudes Desired behaviours Results Performance unit Performance criteria and measurement Performance monitoring Feedback and development Motivation; commitment Membership; task Individual quantity or productivity; cost; long-term market share Individuals; business units; whole organisation Individual behaviours; results Supervisor Tell and sell; counselling Non-financial rewards Base pay structure Pay progression Individual incentives Collective STIs Collective LTIs Pay level Few Pay scales; narrow job grades Annual seniority or merit increments; scale or grade promotion Piece-rates; commissions; merit raises; non-cash recognition Cost-based gainsharing; selective profit-sharing Executive share bonuses Below market median (with high attention to internal equity)

Aligning strategy, structure, culture and practice: (2) high involvement organic quality defender Espoused psychological contract Balanced; semi-relational or semi-transactional Desired attitudes Desired behaviours Results Performance unit Performance criteria and measurement Performance monitoring Feedback and development Motivation; commitment Membership; task; citizenship Collective quality; long-term market share Work teams; parallel teams; business units Hard competencies; behaviours; results Self, peers and customers (180 o) Tell and listen; mentoring Non-financial rewards Base pay structure Pay progression Individual incentives Collective STIs Collective LTIs Pay level Intrinsic; developmental; social Broad grades Skill-based pay Commissions; merit bonuses; recognition awards Multi-factor goal-sharing Share bonus or purchase plans Around market median (with moderate attention to internal equity)

Aligning strategy, structure, culture and practice: (3) high involvement organic prospector Espoused psychological contract Transactional Desired attitudes Desired behaviours Results Motivation, short-term commitment Task, citizenship Performance unit Performance criteria and measurement Performance monitoring Feedback and development Individuals, project teams, business units, whole organisation Soft competencies, results 360 o Problem-solving, coaching Non-financial rewards Base pay structure Pay progression Individual incentives Collective STIs Collective LTIs Pay level Intrinsic Broad bands Competency-based pay Commissions; discretionary bonuses Team and/or business unit goal-sharing Share options, profit-sharing Above market median (with low attention to internal equity) Individual and collective short-term contribution, timeliness, creativity, successful risk-taking.

Detailed recommendations (1): performance management approaches Use results where: • Ends (results) can be more accurately specified and measured than means (e. g. management work; project teams; targeted research work; foreign exchange and equity trading) • Work group performance is more important than individual performance Use behaviours where: • Means (behaviours) can be more easily specified than ends (results) • Work is individualised but routine and thus possible to specify a single best sequence of task behaviours plus desired organisational citizenship behaviour (e. g. routine service work; administrative work) • There is ongoing opportunity to observe individual’s work behaviour (e. g. constant supervision)

Detailed recommendations (1): performance management approaches Use competencies where: • High performance is based on underlying abilities, values and attitudes rather than technical knowledge and skill (high-discretion service work; emotional labour) • Work is non-routine and discretionary (e. g. managers, knowledge workers) • Individual and group results difficult to quantify/attribute (e. g. knowledge workers, exploratory research, customer service work, teachers, health care workers) • Traditional job assignments have been replaced by broad, fluid and largely self-managing roles • The organisation wishes to change its culture and employees’ values and attitudes (and beliefs) Balance all three where: • Work inputs, activities and outcomes can all be specified/measured to some degree and are all important (e. g. routine work requiring high quality/precision, CSOs/call centres, teaching, general management roles)

Detailed recommendations (2): reward practice and level Basic mix: • • Financial Developmental Social Intrinsic

Detailed recommendations (2): reward practice and level Detailed mix: • How much importance should be placed on base pay? • How should base pay be structured? • Does the nature of the work lend itself to skill- or competency-based base pay? • What role should benefits play? • How much emphasis should be placed on performance pay? • Can the organisation afford cash incentives? • Should incentives be individual or collective? • Should incentives be cash or equity-based? • How should incentives be tailored to meet employee needs and expectations? • What proportion of employees’ total pay should be performance-linked and ‘at risk’? • What use should be made of non-cash incentives?

Detailed recommendations (2): reward practice and level Level: • Above market median (> 50 th percentile) • Below market median (< 50 th percentile) • At market median

Detailed recommendations (3): setting targets for total pre-tax remuneration mix Two basic rules: 1. The higher up the organisational hierarchy, the greater the proportion of total pay that can be performance-variable 2. The higher up the hierarchy, the greater the proportion of total pay that can be linked to organisational performance

Detailed recommendations (3): setting targets for total pre-tax remuneration mix Group Base pay and benefits Individual and collective STIs Organisational LTIs Process worker 90% 7% 3% Administrative 90% 7% 3% Professional/technical 85% 9% 6% Supervisor 80% 10% Senior manager 60% 20% Executive 40% 30%

Rehearsing proposals Basic rehearsal questions: • • • Will they address current weaknesses? Will they support the organisation’s success factors? Will they elicit the desired behaviours and results? Will they address employees’ needs and expectations? Are they timely? Are they realistic and manageable? Are they going to be affordable? Are the proposals well integrated? Are the proposals legally compliant?

Rehearsing proposals Rehearsal/modelling methods: • Financial modelling/forecasting (best case; worst case): Expected costs Additional payroll costs Training costs Administrative overheads Staff turnover costs Recruitment costs • Pilot study/studies Anticipated benefits Productivity improvement Quality enhancement Production cost savings Net profit

Roll-out Implementation agenda/action plan: • • What changes? Why? Where? Who and how? What order? Pace of change? Estimated ‘shelf life’?

Roll-out Implementation issues: • • • Identify and empower change advocates/champions Involve managers and line employees at all stages Resource the changes Prepare the way for change Communicate and explain the changes Train managers in new processes Anticipate problems Expect resistance Be prepared to modify policies in light of experience Review and revise