The Way We Manage Employee Performance Is Changing, but Is the Way We Look at Pay Changing with It? About the Authors

The way we manage employee performance is changing, but is the way we look at pay changing with it? About the authors

Flavia D’Alo is a Partner in Human Katharine Stanley is a Manager in Capital Consulting at Deloitte, Human Capital Consulting at Deloitte where she specialises in Human with over 10 years experience in the Resources Transformation and Human Capital space in both corporate Technology (‘HRT&T’). Flavia has 30 HR and advisory roles. Katharine has years experience in the leadership of recently advised organisations from the business transformation programs resource, technology, consumer goods across multiple industries including and health industries. Katharine holds minerals and mining, technology, retail, a Master of Business Administration and medical. Flavia is passionate about and is passionate about working with integrated management systems and clients to define and realise their HR process redesign, people strategy, Transformation and Technology goals. business leadership, organisation cultural development, organisational Andrew Or is a Senior Consultant in change management and enterprise Human Capital at Deloitte with over 5 technology systems, which lead years of experience in HR operations businesses to high performance. and Human Capital consulting including HR transformation, performance Andrew Hill is a Partner in Human management implementation, strategic Capital Consulting at Deloitte and workforce planning and organisation leads the HRT&T team, reporting design. Andrew has worked in a directly to the head of Human Capital number of industries including Australia and is matrixed into Deloitte’s government (federal and state), higher Global Centre for HRT&T expertise education, consumer goods, oil and representing the Australian practice. gas, mining and not for profit. Andrew is an expert in best practice HR transformation and shared services Elzaan Pienaar is a Consultant in and has recently advised organisations Human Capital Consulting at Deloitte from the resource, consumer goods with experience in Talent Management and construction industries. Andrew and HR Transformation programs specialises in HR transformation, HR from strategy development to design strategy, shared services design, HR and execution. Elzaan has experience systems implementation and business across 3 main industry sectors process re-engineering. including public sector (federal and state), financial services and health sciences. Elzaan has specific expertise in helping organisations re-design their approach to Performance Management and has successfully supported a number of organisations through implementation. Contents

The need to effectively link performance and pay 1

Considerations 1. Performance reviews should not be linked to base salary increases and different approaches to base salary delivery should be considered 3 2. Variable incentives and a flexible remuneration framework can be used to reward and drive performance 6

Conclusion: Employee impact 9

Acknowledgements 11

End notes 12 1

The need to effectively link performance and pay

Companies are increasingly implementing new approaches to drive employee performance and contribution as traditional performance frameworks are falling short. The link between pay and performance is often used to improve performance but what happens when traditional performance approaches are challenged? 2

Background into new approaches to performance frameworks Recently a number of companies (including Deloitte) have reinvented their performance framework after realising that traditional approaches are not driving the desired employee performance and contribution outcomes1.

Overall, there is a greater emphasis on transparency, simplicity and continuity in the process focussing on the employee experience and the ‘how’ (i.e. employee contributions, impact and behaviours) of achieving organisational outcomes.

Shifts we are seeing in performance frameworks

From To

Cumbersome annual performance Frequent, quality performance ratings and calibration that do not conversations between managers accurately measure performance and all team members

Conversations based on a single performance grade that often Coaching conversations focused on has minimal bearing on future individual development employee performance

High HR compliance efforts to Conversations focused on personal facilitate the performance review growth and alignment of employee process objectives to business growth

Reactive performance feedback More frequent and ‘live’ feedback that has minimal impact on and coaching during achievement employee performance and development of organisational outcomes

Some organisations are even reducing 2. Variable incentives and a flexible the use of ratings2 (a major input to remuneration framework can be used to determining employee remuneration) reward and drive performance and are de-coupling the link between performance conversations and financial Scope reward for performance and individual This paper seeks to provide a leading point contributions. of view on effectively linking employee performance and remuneration by So, we know that performance frameworks providing key considerations on where to are changing, but are we changing our start. This paper does not seek to provide approach to remuneration with it? technical remuneration advice or guidelines on how to effectively link performance With this in mind, what are the ratings to remuneration (i.e. X% increase if considerations to effectively link best rating is ‘meets expectations’). practice performance frameworks and remuneration to drive workforce productivity? We seek to unpack this question through 2 schools of thought: 1. Performance reviews should not be linked to base salary increases and different approaches to base salary delivery should be considered 3

Performance reviews should not be linked to base salary increases and different approaches to base salary delivery should be considered

Why do we say this? Research suggests that even if employees were able to decide how much they should earn, they would probably not enjoy their job more. In addition, the association between salary and job satisfaction is very weak and research indicates that base salary does not increase employee performance after a certain point in time. Despite this, most organisations still persist with utilising base salary as a means to drive organisational performance. 4

Where can you start?

Why do organisations still do this? We Define and clearly communicate Align employees’ salary to the right believe organisations persist with this what base salary consists of to market indications to eliminate mechanism for a variety of reasons ensure common understanding and base salary as basis of concern including the following: transparency We can’t forget that base salary • Culture: Current salary arrangements Establishing or adjusting base salary is a ‘hygiene factor’ and should are rooted in the organisation and any can be challenging as it must consider compensate employees fairly for their change will risk demotivating and / or a vast array of factors including role work efforts. It is important that salary disruption to employees requirements, industry and market activity. bands are mapped to relevant and • Implementation cost: Changes to all Base salary should be clearly defined and accurate market data points, outliers employee salary arrangements can articulated in remuneration strategies and are refused and employees are paid result in a large time and monetary cost other relevant communication to promote within 10% of your organisation’s transparency, fairness and trust. target salary band point (e.g. 70-75 • Perception: Further to the associated percentile). Consider increasing implementation cost, organisations We define base salary as the amount of employees’ base salary annually in line often perceive the resources and effort money that an employee receives for a with CPI changes and market activity. required to implement these changes role prior to tax implications, additional as too high and do not achieve the bonuses, commissions and deductions. required result

However, different approaches to base salary delivery should be considered to effectively drive organisational performance.

Do not increase base salary to reward Separate performance and contribution or encourage additional performance discussions from remuneration contribution as it is ineffective over time discussions with employees Continuously increasing base salary to Research has shown that discussion reward additional contributions from around remuneration often triggers an employees will not only be ineffective emotive response which negates open but will also be unsustainable for the and honest discussion. Instead, separate organisation. Base salary should therefore these discussions and have a conversation not increase based on performance or around supporting employees to reach promised to be increased if trying to retain their potential. Talent review discussions employees who hand in their resignation should shift towards a greater focus as the association between salary and job on enabling employee growth and satisfaction is weak. development rather than focussing on the monetary reward. Ensure managers understand and have the right information to support your remuneration strategy and to have effective conversations. 5

Publish base salary bands to promote Offer employees bespoke contracts transparency and fairness and base salary conditions Publishing base salary bands for roles Offering your employees bespoke pay can manage expectations and help packages with the option of scaling up or employees understand how their base down their base salary for other benefits, salary changes between roles. With could increase employee engagement the rise of company review websites and empowerment. This gives employees (e.g. Glassdoor), salaries are no longer control over reward types and the risk completely confidential, and this increases they can take for short term incentives. pressure on employers to be more transparent. It is important to consider that salary bands work where there are no outliers and all remuneration decisions adhere to the prescribed bands with mechanisms in place to manage outliers on a continual basis. A comprehensive cost impact, review of relevant industrial relations frameworks (e.g. EBAs) and other dependencies (e.g. contractual changes) is critical to understanding the actual business impact that remuneration changes would have on the organisation. If it is not feasible to align all employees to their relevant salary bands, be honest and communicate the intended approach (i.e. phased implementation) you will take to ensure alignment over time. 6

Variable incentives and a flexible remuneration framework can be used to reward and drive performance

Why do we say this? Annual remuneration and performance meetings are a time intensive process often focused on scaling an employee’s performance to fit to a distribution curve. Coupled with a robust performance framework and frequent feedback conversations, short term incentive programs can drive higher levels of performance rather than fixed salary increases. Companies are starting to base remuneration decisions on the competitive value of an employee and real-world market conditions. Research states that intrinsic motivation is a stronger predictor of job performance than extrinsic motivation. If organisations want to motivate their workforce, they need to understand what their employees really value and tailor the remuneration strategies around this.

Overall, variable incentives could reward more than employee performance. It can reinforce positive behaviours and employee contributions which drive business growth on a regular basis. 7

Where can you start?

Implement a diverse and fit for Allocate ‘fixed’ short term incentives purpose remuneration and reward for employees to draw from. Provide strategy. Consider the use of long leaders with authority to distribute a term equity to connect employees to pool of incentives in a way that drives long term organisational goals high performance A robust and fit for purpose recognition We know that short term incentives are and reward strategy will require more effective at driving performance full review of existing performance than fixed pay. This can be supported frameworks. It is important to consider through: employee’s overall perception of • Providing a pool of incentives in which fairness of remuneration, in terms employees, teams or functions can of the pay value and pay fairness. To be rewarded from upon achievement achieve sustainable long term business of a well defined set of individual and performance, long term incentives / or team objectives. This can also be (‘LTIs’) or equity could be considered for in the form of broader reward and incorporation into middle management recognition incentives that connect and above positions. This encourages to what motivates individuals and / or employees to demonstrate the right are based on outcomes impacted by behaviours and commitment to long individual or collaborative efforts term goals. LTIs can also be used in • Ensuring leaders are trained in how conjunction with short term incentives to use a dynamic remuneration and base salary. framework and when to reward individuals to ensure fairness and equity and minimal bias. 8

Reward contributions throughout Enable managers to allocate the year instead of annualised bespoke incentives to recognise and remuneration driven by distribution reward employees at their discretion curves On average, employee reward and Removing annual distribution curves recognition amounts do not drastically forces organisations to consider how to differ annually. Empowering managers reward employees throughout the year – to deliver bespoke ways to reward especially for outstanding high performers and recognise employees in their / potentials who may be driving additional team at their discretion could increase business growth or coaching others to individual team member’s motivation reach their full potential. Incentives can be and performance. A comprehensive paid on a quarterly, monthly or half yearly business impact assessment is basis pending frequency of performance critical to understand the implications check points and the organisation’s (including financial) of any changes. performance framework.

Link variable incentives to reward Ensure leaders have the knowledge employee impact that drives business and capabilities to facilitate effective growth using multiple data points remuneration discussions Identifying the critical quantitative and Shifting away from annual performance qualitative data points which drive evaluations toward a process of continuous performance can help you to determine coaching and improvement requires a new variable incentive outcomes for employees. role for managers. Managers will not only Consider data points beyond performance need to have the capability to facilitate such as behaviours that support the effective discussions but also understand culture and contributions that enable the organisation’s remuneration framework additional organisational growth. As and how to communicate it effectively. such, there is a need to clearly define the Focusing on this will enable leaders to have characteristics of high performance and productive, yet less formal conversations contribution unique to your organisation. about performance and remuneration that will drive performance. 9

Conclusion: The employee impact Remuneration and reward strategies should focus on continuous, dynamic and bespoke mechanisms tailored to the organisation and its people. 10

The research How we can help Research shows that employees are Deloitte has established expertise motivated by autonomy, mastery and and experience in re-designing purpose. Intrinsically motivated employees and implementing a new employee are three times more engaged then performance experience. We also have extrinsically motivated employees. experience supporting clients effectively link pay and performance. The risk Remuneration strategies that focus We utilise our deep expertise in HR and primarily on the use of extrinsic rewards people strategy, culture transformation run a serious risk of diminishing, rather and HCM technologies to design and than promoting, intrinsic motivation. develop a tailored and well rounded performance solution that considers The implication remuneration impacts and enables business strategy. Consider ways to effectively balance extrinsic and intrinsic motivators within the remuneration and reward strategy. The values and behaviours that will be rewarded will ultimately drive productivity and determine the effectiveness of your remuneration practices. Therefore, these elements should require careful consideration. Being transparent around remuneration practices within your organisation can also support the development of a trusting and engaged workforce. Finally, technology and analytics can help you make the right remuneration decisions within the context of your organisation’s culture and remuneration and reward strategy. 11

Acknowledgements The authors would like to thank David Brown, Kate McDonald and Rob Jack of Deloitte for their valuable contributions to this article. 12

End notes

1. Global Human Capital Trends (2014) Engaging the 21st-century workforce, performance management is broken, Deloitte

2. Global Human Capital Trends 2016, Deloitte

3. Reinventing Performance Management (2015) Marcus Buckingham and Ashley Goodall

4. Turn traditional performance calibration discussions into talent discussions that focus on succession planning and supporting employees reach their potential (2016) Basil Sommerfeld and Borbala Kiss This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this publication, rendering professional advice or services.

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