Tips for Successful Performance & Compensation Reviews

Julie Taylorson
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January 16, 2021

A good performance review processes facilitate conversations between employees and their managers. While this might seem like overkill for people that are great at communicating, it’s important to remember that for a lot of people, it’s a muscle that they don’t use regularly. So, a system that encourages discussion, whether it’s every day or once a year, can have long-term positive impacts on manager-employee relationships.

Not only are regular reviews important for employees, but companies also gain valuable feedback from conversation too. By getting feedback from your employees, you can see where your company stands, as well and understanding how the employee feels. Are they getting the help they want or need? Are they going to go the extra mile? Is it time for a raise or a promotion? How do team members generally view the Company? Encouraging honest feedback can be a benefit to the organisation.

Despite the improved communication, when conducting these reviews, talking about money with your employees can be uncomfortable. Even when you’ve got good news to share, a generous bonus or a well-deserved promotion, assigning a number to the value of someone’s work is tough. After a challenging 2020, many groups may find this is a difficult topic, especially if there is nothing available in the form of rewards.

Performance Reviews

  • Do performance evaluations separately. Compensation should be linked to performance, but it is recommended discussing the two topics separately. If you talk about money during the performance review, the review conversation will sound like white noise and your employees will just fixate on the compensation. Instead, deliver the formal evaluation first, focusing on personal growth and development.

 

  • Make sure it is a two-way process. By having a 360-degree system, you can make sure to involve peer reviews as well as a self-evaluation. Have your employees write a self-appraisal prior to the meeting, that way, everyone in the meeting will be prepared to have a constructive conversation, instead of it being one sided. Remember: focus on evaluating their results.

 

  • Check that the person having the review conversation with your employees is a supervisor or manager who has the most contact with that employee and is in the best position to accurately assess day-to-day results.

 

  • Establish goals and metrics for the following year. Setting a clear, pre-agreed set of objectives provides employees with direction. It allows them to be personally accountable for hitting those milestones. Without defined goals, it can be difficult for the employee to be high performer.

 

  • Role definition – It’s important that employees have clearly defined roles. Again, as it relates to performance, how can someone perform their role well, if they don’t truly know what they’re accountable for. The caveat to this is in highly entrepreneurial environment, the role may be fluid, with goals and tasks arising ad hoc.

 

  • Instead of traits, keep the evaluation focused on two things: behaviors and results. Behaviors are actions that you can observe directly—she was always on time, he shows good written communication, she contributes at team meetings and so on. Results are also observable: She achieved her sales quota, he reduced waste by X%, she increased productivity by X amount, he completed his projects on time, and so on.

 

  • Remember that, most of the time, people don’t perform poorly without a reason. If an employee is performing poorly, ask questions and try not to assume you know the reason. Use your performance review conversations as opportunities to find out what are the possible reasons for an employee’s failure to meet standards and expectations.

 

Compensation Reviews

Compensation reviews are managed very differently from one company to another. Smaller private companies commonly have little policy and rely more on the owner’s perspective regarding overall pay and compensation. More sophisticated environments have more established policy and compensation philosophy which is tied to the performance review.

Considerations

  • Internal equity – whilst each person has individual value, it is important to have some balance of internal equity. Ensuring that people within the same or similar role are paid within a range prevents a negative team environment (people do tend to share this information amongst peers). However, the flip side is ensuring that performance is reflected in salary levels.

 

  • Pay band or range. By defining pay bands, it helps ensure internal equity. This is a common practice amongst large companies. The major disadvantage of this is that over time, salaries can lag the market. That means hiring becomes a problem. Maintaining internal equity then requires an increase in salary for a range of employees to keep up with new hires. Whilst costly, it’s important to realize that this might mean your current team are ‘under paid’.

 

  • Tracking the annual progress of employees is a great way compare how salaries are changing each year, what bonusses are awarded and how one employee compares to another.

 

  • Equal pay continues to be an issue, particularly relating to gender. In many environments, female employees are still being paid below male counterparts. Tracking pay is an easy way to measure equal pay.

 

  • Bonus programs are a great way to incentivize employees and come in many shapes and sizes. Are you completely discretionary? This gives you the most flexibility but has the least impact in motivating staff or attracting talent. We recommend having a bonus range target in the form of a % of salary. This provides clarity and motivation. If you award part for individual performance and part for company performance, it ensures some flexibly for tough years. For senior managers, long term incentive programs (LTIP) and profit shares can also provide greater motivation and retention.

 

  • We talked about Retention in detail in our last article and it goes without saying that fair compensation and reward for effort are key elements to retaining your best employees. Overall benefits programs play into this too.

 

  • Benchmarking is one of the most important factors in this process. How can you know if you are paying the right amount, if you don’t have a sense of market salaries? Understanding where your salaries fit within the market and what your competitors offer in terms of bonus and total compensation is essential. You can objectively choose where you want your compensation to be in relation to market ie at the 75th percentile, top of market, below market etc . We suggest conducting an independent review every 2 years.