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A Balancing Act: Employee Performance and Compensation

April 18, 2012

Article courtesy of SBAM approved partner AdvanceHR

Assessing and improving employee performance does not come instinctively to most managers and business owners. At the same time, human resource managers in small organizations often are too swamped with time-sensitive administrative tasks to be of much help in this regard. Regardless, since an organization’s success ultimately hinges on the performance of its “human capital,” managers must take the lead.

A new and somewhat mis-titled book by Dick Grote, How to Be Good at Performance Appraisals (published by Harvard Business Review Press) offers a succinct and practical treatment not only of the appraisal process, but the broader topic of performance management. Grote had a successful career with several blue chip large corporations before launching his Dallas-based performance management consulting business. His insights are applicable to organizations of all sizes.

Of particular interest to many smaller organizations is Grote’s perspective on the role of compensation in driving performance. He suggests managers often attribute too much motivational power to dollars, which can be frustrating when there is not a surplus of cash to fund generous raises.

How Important is Pay?

“Just how important is compensation in influencing individual performance? Not all that much, it turns out,” Grote writes. More important than the amount of a raise, according to Grote, is its size relative to raises given to other employees. Even a modest pay raise can be highly motivational if the employee is told that it’s the biggest raise of anyone in the department.

Grote decries the “peanut-butter approach” to raises ? spreading them around evenly and thinly, out of a misguided notion of “fairness” ? a practice he deems “manifestly unfair.” The tactic, he warns, leads to “the loss of top talent and the over-retention of bottom dwellers.”

Even more detrimental than the “peanut butter approach” would be the lack of a compensation policy and schedule for compensation reviews. Worst-case scenario: An employee asks his supervisor for a raise, and the supervisor, with no system (or training) in place, either:

 1. Tells the employee she can’t approve a raise until she consults with her own supervisor before reaching a decision, thereby revealing the limits of her authority and thus diminishing her credibility as a supervisor, or

2. Makes a snap decision to grant a raise, signaling that compensation levels are subject to the whim of supervisors — or the employee’s level of assertiveness in demanding more.

Responding to a Pay Raise Request

Having an effective performance evaluation system in place reduces supervisors’ chances of being put in this tight spot. Still, if an employee asks for a raise outside of the structure of an established performance evaluation system, the following steps may result in the best outcome, suggests Grote:

Thank the employee for bringing the issue to your attention, and give him or her a date by which you will respond to the request.

Allow some time to elapse between the request and the response. This is critical to manage the process thoughtfully. It is also particularly important if you plan to give the employee a raise; holding the meeting hastily risks creating the misperception among other employees (some of whom, it can be assumed, will learn the outcome) that “the way to get a raise is simply to ask for it.”

When the time to respond has arrived, hold two separate meetings, at least one week apart, with the employee: The initial meeting to discuss the employee’s job and how it can be made more valuable to the company, along with the employee’s performance, and the second meeting to discuss your decision on the amount of the raise.

Why hold two meetings? “Each issue is so important it’s important not to mix the two,” Grote writes.

Why not? The employee, in most cases, is primarily focused on whether a raise is to be granted, and by how much. But it is for the long-term good of the organization and the employee to keep the focus initially on the non-financial dimension.

When employees are encouraged to think about how to make themselves more valuable to the organization, the focus shifts. As they see their ultimate earning potential in the larger context of the business’s success, they may take on greater responsibilities, acquire new skills and other initiatives deemed appropriate by their supervisors.

The supervisor’s actual verdict on the pay raise itself, while important, puts pay raises in the subsidiary role of being the consequence of larger organizational progress, and not the tail that wags the dog.

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