Most modern organizations have become more innovative in terms of their attraction and retention strategies.
This has been increasingly due to shareholders’ aggressive demand to be on top of the league in their businesses or at least to aspire to get there. Heavy investments have been made in marketing, technology, hiring state-ofthe-art advisors, etc. After making all these investments, they still seem to be struggling with maintaining their market share, profitability, and more importantly, high performing talent, which they may have actually invested, trained, and become competent in.
Several attempts have been made by seasoned HR professionals to introduce innovative HR and employee engagement initiatives, and these have achieved limited measured success. As businesses have matured, so have employee expectations, in terms of both monetary gain and other forms of individual recognition.
Money matters and HR professionals often struggle to maintain this balance and often end up making high-impact compromises on this scale. Job security, individual progression, and career aspirations are prime “drivers of employeeship” and must be firmly aligned to enhance shareholder returns, significantly increased business profits, and a strong business bottom line, which are all “drivers of employership.” Gone are the days when remuneration practices were “guaranteed as fixed compensation,” irrespective of how business has done. In today’s highly sophisticated business era, only those with a proven high-performance record of accomplishment survive the battle in the global corporate jungle.
Therefore, it has become imperative to align business performance to employee rewards, and these are inseparable. The only enabler to ensure success is to find a strategic measurement framework that drives enterprise performance and directly dovetails itself into employee performance. Over past decades, the balanced scorecard has successfully been deployed by global, regional, and local organizations who have demonstrated proven success of this alignment. This in turn has given compensation strategies an entirely new face lift, and HR professionals be forced to raise the bar in terms of repackaging compensation payouts through fair, objective measurement aligned to an organization’s financial ability to bear the payout cost. Most successful HR professionals follow simple, sequential steps, and these have often given high returns on an organization’s people investments. We call this an “integrated performance pay quadrant.”
1. Align enterprise and individual performance
It is imperative for employees to have a straight-line view as to how their individual performance is aligned to that of the enterprise. The balanced scorecard is a proven methodology that seeks to identify and cascade performance measures from the overall enterprise to the departmental and/ or functional level. Now, departmental measures are converted into individual performance measures, beginning with department/functional heads and subsequently cascaded to lower levels of management. It is important to note that the balanced scorecard is an enterprise wide performance management system and not an individual performance management system. Most times, it is here that HR professi onals lose the essence of balanced scorecard measurement and dilute it to individual performance scorecards, impacting the “direct line of sight of employees.”
To build ownership for organizational performance, this is a pitfall that must be avoided, as it simply encourages silo thinking of employee performance, impacting the integration of organizational, team, and individual performance. Employees then tend to assess performance payout linked to only their individual performance, irrespective of how the enterprise has performed. This further deteriorates into irrelevant, self-centered individual-performance discussions between bosses and employees and often ends in employees getting labeled as not having enough perspective or ownership of enterprise performance and success.
2. Deploy an integrated performance management framework
Organizations that have deployed a balanced scorecard framework at times fail to integrate enterprise performance with HR owned employee performance management systems. These tend to either be executed as parallel systems or be interchanged among themselves, often leading to mismeasurement, data inaccuracies, and miscalculated individual performance payouts. It is important to note that the design features of both enterprise and employee performance management have a few common elements and must be integrated at the first go. These elements are:
- Defining measures across financial performance, customer, process, and organization
- Identifying and agreeing on appropriate units of measure (UOM)
- Ensuring a logical cascade process, including target setting and actual measurement
- Integrating performance reporting to ensure ownership for increased business leverage.
Once the above broad elements are commonly finalized, only then must additional design elements unique to both be built on formats, forms, owners, processes, special projects, automation, and reporting mechanisms, among others.
This ensures consistency, uniformity, and common understanding of performance across the organizational hierarchy. Further, it facilitates the building of employee ownership and nurtures a performance-driven ethos to excel at individual-employee levels, ideally translating into enhanced enterprise performance. HR must, in parallel, deploy an effective employee engagement and communication process on both performance systems and immediately address any employee queries. More importantly, it should seek the assistance of departmental/ functional heads especially to address queries outside the realm of employee performance management. At times, HR tends to guesstimate business answers that may be misrepresentative of enterprise performance and winds up misrepresenting or misunderstanding the linkage of enterprise and employee performance, and affecting the final performance payout.
3. Dovetail into an overall compensation strategy
Performance pay is a measurable outcome, not an end in itself, and is one of the components of an overall compensation framework. Delineation must be made between fixed and performance pay compensation strategies before deployment. The performance assessment outcome of an integrated enterprise and employee performance management process is linked only to performance pay, which HR must communicate effectively at the outset. Employees often mistake or have a limited understanding of two key compensation terms, increments and bonus, a.k.a. performance pay. First, increments are a function of inflation, cost of living, and the organization’s decision on its competitive market positioning, and are independent of the performance pay.
Second, performance pay is a function of how the enterprise and employees have performed against agreed measures and achieved related targets. Put together, both constitute an overall compensation framework for an organization. From a shareholder’s perspective, a balanced scorecard is a “business enabler” that assists in driving target achievement for the enterprise and its subsequent ability to generate a greater pool of funds that are allocated to performance pay. From the internal HR’s perspective, the employee performance management system uses this allocated pool of money for individual payouts for different levels of employee performance. At times, while designing performance pay models, the HR misses this important linkage to enterprise performance, and while employees are paid out based on their individual target achievements, this does not corroborate with enterprise
Cascading the BSC to align enterprise & individual performance
Employees often mistake or have a limited understanding of two key compensation terms, increments and bonus, a.k.a. performance pay performance and sends mixed signals on the overall performance ethos.
Payout mechanism linked to BSC and IPMs
Globally, compensation trends have become aggressively aligned to performance pay. Larger amounts based on enterprise performance have been budgeted to reward high performers and send a strong signal to non-performers.
These practices have led to healthy internal competition between employees in order to excel at a strategic as well as tactical level of role execution through mutually aligned enterprise and individual performance measures. Talent attraction & retention strategies are being enhanced by sharing significantly larger amounts of performance pay, especially at the senior and middle management levels, to internally incubate leaders of tomorrow. A balanced scorecard does not drive the amount of performance payout directly; however, it brings into focus a measurable, data-oriented measurement process of achieving enterprise targets to generate enhanced profits. The HR must use this tool effectively to dovetail its compensation strategy to reward employee performance. The key is to find the right balance between how much to pay and an organization’s ability to do so.
4. Simplify and innovate payout mechanism
Employees take ownership for performance only when they are able to visualize how much they are able to earn on target achievement. It is important for HR to set this “line of sight” firmly in the beginning itself, along with a defined payout mechanism that is simple to understand, easy to deploy, and employs a database. A balanced scorecard is a proven success in this regard, as long as it is implemented in its true original style of measuring enterprise performance first and then dovetailed into employee performance through tightly defined cascades of performance measures. Matured compensation strategies related to performance pay have to abide by a few basic tenets of performance-based payouts. These are:
- Individual performance measures are defined across four balanced scorecard quadrants–financial, customer, process, and organization. Ideally, the number of individual performance measures must be 6–8 per position. These performance measures are a direct cascade of the enterprise performance measures.
- Overall payout is based on both enterprise and employee performance. Higher weight is given to enterprise performance at the senior and middle management levels, where the ratio is split as ~60:40. These levels of management have a greater impact on enterprise performance and a longer term view of business.
The key is to find the right balance between how much to pay and an organization’s ability to do so
At the junior management level, this split reverses between enterprise and employee performance to ~30:70 as performance measures defined at this level of management are more focused on individual delivery and execution.
- Payouts are built around target achievement of the defined individual performance measures, based on a weighted average and the cumulative score linked to a 5-point appraisal rating scale derived from the Likert methodology
- The amount of performance payout is linked to the annual cost to company (CTC) of the employee.
- Significantly higher amounts are given as employees climb up the ranks, from the middle to senior management level. The market benchmark is as follows: senior management ~30–35% of annual CTC, middle management ~20–25%, and junior management ~10–15%
- Ideally, the above principles broadly apply across revenue, nonrevenue, and support functions. However, progressive organizations do customize parts of the payout mechanism to bring in functional premiums as appropriate to their business strategy and overall market competitiveness.
As a best practice, nuances of payout mechanism should be revisited ideally after every two years to ensure relevance to existing business dynamics, assess market competitiveness in terms of talent attraction and retention, and more importantly, determine if it is actually rewarding the different levels of individual performance. Lastly, in today’s technological era, faster automation and ease of data access play an important role in building employee ownership. The HR must make an effort to deploy payout calculators and individual employee levels so that they are able to review for themselves the progress they are making on their target achievements. High performance achievers demonstrate a significant degree of self-assessment, and deploying simplified calculators at individual levels motivates them to excel further.
Performance pay must be leveraged to significantly enhance enterprise performance and simultaneously build employee ownership. It is imperative that enterprise and employee performance are firmly dovetailed in order to ensure higher shareholder returns. Most organizations do not get this right first time around, it takes some time through regular implementation, and diagnosis before this is institutionalized. Balanced scorecard is a facilitative performance measurement tool that intends to strategically lend direction to enterprise performance. The HR must play its role to integrate it into the overall employee performance management process. A fine balance needs to be achieved, and more importantly, maintained to ensure that employees are rewarded in line with improved success of the enterprise.