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The basic rule of pay-for-performance? You can’t pay for performance unless you can measure performance on a consistent, credible basis, says consultant Paul R. Dorf, Ph.D., APD.
Workplace compensation is essentially a supply and demand system, says Dorf, who is managing director of Compensation Resources, Inc. Supply has been strong, and that has meant small or no raises, but that is starting to change.
Numerous studies say that about 60 percent or more of employees would look at another job as the economy improves. Plus, people who delayed retirement are now considering retiring—their 401ks have come back in value. Demographically, the Baby Boomers are starting to retire, and there aren’t sufficient workers coming along to replace them.
So there’s going to be a reversal of supply and demand, says Dorf. That means employers should:
You must develop programs that allow you to:
You Need Professional Help
Most organizations have an accountant, an attorney, and an insurance agent, says Dorf, but many companies haven’t done much with getting professional assistance with compensation, and that’s going to be increasingly important.
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Dorf uses the acronym FARM to outline the goals of compensation planning:
Focus employees on achieving key business objectives. For example, says Dorf, sales people like to work within their comfort zone—they want to sell products they are comfortable with, to customers they know, at the lowest price they can—but that isn’t necessarily what the company wants. The company may want to sell new products to new customers at higher prices. Compensation can help with that focus.
Attract qualified and quality employees. We have seen companies that were so poorly organized that they were truly bottom feeding with no idea of what they needed, says Dorf.
Retain staff who contribute positively to overall company performance.
Motivate and engage staff to achieve higher levels of performance.
Everyone wants to be “competitive,” but few define what that word means, says Dorf. You need a formal statement of your company's position on compensation that:
Defining Position on Pay for Performance
Here are the important questions when assessing your pay for performance, says Dorf:
Is Measuring Performance Once a Year Enough?
Think about this, says Dorf: You’re in charge of sales, and each of your salespeople has a bogie or target of $12 million in sales for 2012. Are you going to wait until December 31 to look at their performance?
Of course not, says Dorf. You’re going to be looking on a much more frequent basis—probably at least monthly. Are the sales you need for the month closed? Are the sales you need for next month in the pipeline? Are you at the goal of $1 million a month?
And it’s really the same for any job, Dorf says—performance evaluations need to be done more frequently than once a year.
Performance Management Challenges
Some of the issues managers face in trying to implement pay for performance:
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