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

Performance and reward system review and development Framework for performance and review system development System requirements Review of current practice Strategic alignment recommendations Rehearsal Roll-out

Framework for performance and reward system development

(to test recommendations) Preview: Cost-benefit modelling Piloting Planning: Preparation Roll-out sequence and time frame (What? When? Where? Who has accountability?) Implementation: Communication Training Ongoing monitoring and evaluation Rehearsal (to test recommendations) Competitive strategy and key success factors Structure and culture Performance factors (desired results, behaviours, competencies, attitudes, psychological) Performance and reward strategy Strengths Weaknesses Extent and urgency of required change Roll-out 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 Recommendations (for better practice) Review (of current practice) Requirements (for strategic success)

System imperatives Performance management: Communicate Monitor and measure Provide feedback Develop Reward management: Attract Retain Motivate

Review current practices Purpose: Identify strengths and weaknesses (misalignment) in addressing business strategy, success factors and human resource strategy Establish extent of misalignment (or ‘gap’) and urgency of needed change 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: There is a strong link between my earnings and my own performance 1 2 3 4 5 Disagree strongly Disagree somewhat Neither agree nor disagree Agree somewhat Agree I am motivated to help this firm be successful The criteria by which my performance is assessed are appropriate The overall package of pay and conditions here is a good one There is a strong link between my earnings and the firm’s performance I am clear about the performance goals of the business We are paid competitively compared to similar jobs in other firms My pay is fair compared to other jobs inside this firm

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: Variable pay linked to the performance of my work group Variable pay linked mainly to individual performance Pay based on rates in outside organisations Pay based on equal pay for jobs of the same size within this organisation Pay progression based on personal competencies Pay progression based on seniority Pay for what each person contributes in the job Pay according to job importance Performance management for development purposes Performance appraisal by the supervisor Performance appraisal by fellow employees Performance measurement based on behaviours Performance measurement based on results Option B Prefer B over A No strong preference either way Prefer A over B Option A Performance management linked mainly to pay

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? Individual expectations and needs: Demographic factors Psychological contract Reward expectations Reward valence Roles/occupations: Production and service employees (full-time, part-time, permanent, casual) Technical employees Professional/knowledge workers Line managers Executives Work teams: Process Project Parallel Business units: Business strategy Product/service markets Technology Work organisation KSA requirements The organisation: Corporate strategy Structure Culture Life-cycle stage

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

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

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

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

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 Above market median (> 50th percentile) Below market median (< 50th percentile) At market median

Detailed recommendations (3): setting targets for total pre-tax remuneration mix Two basic rules: The higher up the organisational hierarchy, the greater the proportion of total pay that can be performance-variable 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 30% 40% Executive 20% 60% Senior manager 10% 80% Supervisor 6% 9% 85% Professional/technical 3% 7% 90% Administrative Process worker Organisational LTIs Individual and collective STIs Base pay and benefits Group

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): Pilot study/studies Productivity improvement Quality enhancement Production cost savings Net profit Additional payroll costs Training costs Administrative overheads Staff turnover costs Recruitment costs Anticipated benefits Expected costs

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