It’s not hard to recognize the value of rewarding your best employees. People stay when they’re treated right. Simple enough.
The tough part is building systems that make sure performance is tracked and rewarded consistently. If you want to provide bonuses or raises based on an employee’s performance, you need to weave this policy into your compensation management plan.
Without a clear path toward incentives and rewards, employees can feel slighted. Resentment can fester if one employee gets extra compensation for their work on a crucial project but another doesn’t.
Here’s how companies avoid that trap.
How Companies Link Performance and Compensation Management
There are multiple ways to pair compensation management and employee performance. All of them rely on a person’s natural drive to perform at their best so they can receive a greater reward.
Linking compensation management and performance means offering extra compensation on top of the base salary or wage. It’s a performance bonus, raise, commission, or meaningful perk an employee gets after completing a job well.
So what does this look like in real life?
Sales jobs are an easy example. In industries like car sales, real estate, and sales consulting, some employers pay a base wage to their sales associates plus a cut of each completed sale. In other words, a commission.
I know, I know, it’s not common for real estate agents to make a base salary. Or car salespeople, for that matter. But there’s something to be said for providing a reliable source of income in addition to performance-based pay.
Just look at Redfin. This real estate company hires its agents as bona fide employees. They receive a base salary that meets the living wage for the area. Each time they sell a home, Redfin agents receive a percentage of the revenue from the sale as a bonus.
I love the way this model honors a person’s basic need for consistent income while still incentivizing strong performance. Who wouldn’t want to stick with a company like that for years and years?
Another common place to see performance-based compensation in action is the food service industry. Ethical restaurants will pay their servers a competitive base wage regardless of tips. Then, if a server takes excellent care of their table, they can rake in big tips to boost their income.
Office-based companies are less likely to offer bonuses in the form of tips or commissions. Instead, they might hand out a bonus or raise after an annual performance review.
Structured incentive pay systems are another example. For these, an employer outlines specific goals for employees to receive. Once a goal is accomplished, a pre-determined bonus is given.
Some companies give casual incentives. These aren’t tied to pre-set benchmarks. An employer might love the way an employee handles a tricky client and spontaneously provide a $500 Visa gift card.
The problem here is that everyone else in the office will probably feel jealous. They didn’t know there was a $500 gift card at stake. And they don’t appreciate being left out of the reward.
So stay away from casual incentives. Be intentional about tying performance to compensation. Make it as fair and transparent as you possibly can.
5 Tips for Linking Performance and Compensation Management
Ready to improve employee productivity and foster loyalty? With these five tips, you can link performance and compensation management at your company without making anyone angry.
#1. Pick Clear Metrics to Measure Performance
If we haven’t made it clear enough already, we’ll say it again.
When you’re creating a performance and compensation management strategy, use metrics that everyone on your team understands.
In college, my best professors would hand out a rubric at the beginning of each big assignment. The rubric showed the class exactly how to earn a high, medium, or low score on the project.
We could check the rubric as we worked on the assignment, making sure we hit the highest possible standards.
That’s what you need to do with performance metrics for compensation. Take the mystery out of it completely. Create a performance rubric that clearly outlines what’s required of each job position before a person can earn a bonus or advance to the next pay grade.
How to Use a Performance Rubric
The Sadowski Performance Rubric is a helpful framework to begin with. Using this rubric, you can create a table for each job position. The top line features the performance levels and their corresponding pay scales:
- Novice: 1st Quartile (0-25th percentile in the pay range)
- Moving Toward Competence: 2nd Quartile (26-50th percentile in the pay range)
- Moving Toward Excellence: 3rd Quartile (51-75th percentile in the pay range)
- Excellence: 4th Quartile (76-100th percentile in the pay range)
Under each performance level, you’ll see specific job functions for the position featured in the rubric. Each job function works as a metric—a description of the standard an employee must reach to earn a specific salary.
Let’s say you’re creating a performance rubric for a restaurant manager position.
Job Function 1 is Staff Management on this rubric of yours.
Here’s what the description could look like under each performance level for the Staff Management job function:
- Novice: Maintain a positive and smooth-running kitchen and dining room environment throughout the day with guidance from upper management/HR. Help upper management solve any conflicts that arise. Interview job applicants, make decisions about who to hire or fire, conduct performance reviews, and recommend increases in pay with considerable guidance from HR.
- Moving Toward Competence: Maintain a positive and smooth-running kitchen and dining room environment with no assistance from upper management. Confidently help employees solve conflicts with minimal involvement from HR or upper management. Make hiring and firing decisions and conduct performance reviews with minimal guidance from HR.
- Moving Toward Excellence: Use management expertise to improve daily workflow in the front of house (FOH) and back of house (BOH). Implement innovative practices to meet the restaurant’s quarterly goals. Confidently delegate tasks to others as appropriate.
- Excellence: Use leadership skills to elevate restaurant staff—cooks, chefs, servers, dishwashers, and bartenders—to higher skill levels. Identify potential leaders within the team, sharing knowledge and skills to prepare them for elevated positions.
You can see how each metric builds on the last one. Each one offers clear ways for the restaurant manager to improve and advance through the salary scale.
Make sure you play with the rubric to create something relevant to your company. You could also encourage employees by providing a bonus for each metric completed within a specific job function.
For example, we’ll say your restaurant management position has four job functions. Each job function has four sub-metrics for progress. To boost employee motivation, consider offering a bonus whenever an employee achieves a sub-metric within a job description.
So even if they are in the Novice category in one job function, they’ll still be rewarded for Moving Toward Competence in another job function. And once they’ve met each job function sub-metric for a specific category—reaching Moving Toward Competence across all four job functions, for example—they will receive their salary raise.
How to Define Performance Metrics
Here’s what to consider as you create your own performance metrics:
- Define your company’s macro- and micro-level business goals
- Articulate clear pathways/metrics for helping employees across all departments meet these goals
- Stick to 2-4 metrics and 2-4 sub-metrics to track if applicable—for instance, 4 job description metrics with 4 sub-metrics under each one
- Consider providing bonuses for meeting individual sub-metrics and salary increases when a full set of sub-metrics has been met
- Clearly state the amount of each bonus or salary increase
- Provide a timeline for when the bonus or salary increase will be paid out
A note of caution: It’s important to avoid overwhelming your team. Don’t track tons of metrics or tie metrics to things that protect your team’s work-life balance. In other words, don’t reward people who never take sick days, PTO, or parental leave.
#2. Create Transparent Performance Review Policies
Transparency is everything when it comes to performance and comp management.
Employees should know when to expect annual compensation reviews. They should know exactly what will happen during a review. They should know the criteria they’re being evaluated with. They should know what amount of a bonus or raise—or both—is at stake.
A clear and transparent performance and compensation policy helps you avoid potentially destructive situations, like manager bias or jealousy among employees. It’s harder to unconsciously play favorites when there’s a clear-cut policy to follow.
So your job is to put together a bonus and raise policy that outlines every possible detail you can think of. Add it to your employee handbook. Give your team time to read it and ask questions. If they have concerns, take them seriously and make adjustments as appropriate.
Here are a few simple steps to get you started:
- Create a rubric or metric grading system for each job position within your company
- Determine the bonus and salary raise amount for each metric
- Define when employees will be reviewed to see if they’ve achieved the metrics
- Provide a payment timeline for each bonus or raise
- Set a policy review schedule and stick to it
- Keep the team informed anytime the policy is reviewed and updated
Above all else, make sure you consistently follow your policy.
#3. Create Career Development Plans
A career development plan is a roadmap showing where each person is currently and where they want to be in the future. It does four things:
- Takes stock of an employee’s current skills
- Outlines the interests the employee has within the framework of your company
- Identifies personal, professional development goals
- Provides a clear strategy for reaching those goals
Career development plans show your team members that you care about their individual growth and success. To start collaborating on these plans with your employees, set up a schedule that gives each person time during their paid work hours to meet with a supervisor or HR representative.
Make it clear that this is not a performance review.
It’s simply a time for you to present the idea of a career development plan and start putting one together with each person on your team.
Encourage your employees to take a look at the performance rubric as they think about individual work goals they want to meet. Work together with them to identify a strategy to get them there.
The template can be as simple or structured as you want it. Some HR software services offer features that make it easy to create, save, and update career development plans.
Make sure your employees can easily access their plans and make changes as needed.
#4. Help Employees Develop New Skills
You’ve set the performance metrics. You’ve helped your employees identify goals to help them develop the skills they need to advance.
Now how do you plan to help them get there?
Yes, they’ll learn through experience.
But what if they also got the support and education needed to gain the skills outlined in their career development plans?
You can create just such an environment.
First, take a look at all the career development plans you and your employees have put together.
What skills seem to be the most important across your team? Is there a hands-on course you can host during work hours that would benefit everyone in a specific department? Or are individual courses more relevant?
Next, carve out time for your entire team to take a professional development course together. Or, if it’s a better fit, give each employee two or three paid hours a week to work on individual, company-paid professional development courses.
If you’re not sure where to find courses, look to the organizations or associations in your industry. The Association of National Advertisers offers events and courses that educate marketing teams. The National Restaurant Association provides training and certification courses to help advance restaurant employees’ careers.
What does your industry’s association offer? How can you bring it to your employees in the least stressful way possible?
You can even consider offering incentives for each completed course or certification.
#5. Avoid These Pitfalls
As with anything, there are a few pitfalls to avoid when you tie performance together with compensation management.
The first and most important?
Don’t deviate from your policy.
Once you’ve done the work to create a performance rubric and a corresponding policy addressing performance-based bonuses and raises, stick to the documents. If you need to make changes, alert everyone on your team before the change takes effect.
Check your policy and rubrics daily to make sure you’re on track. Put important dates, like performance review days, in your calendar. Make performance and compensation management part of your daily routine.
As much as possible, base all rewards on data. Not on subjective things that can’t be measured. All of us wrestle with unconscious bias, but consider hosting anti-bias trainings to help your managers and HR team look at employee performance more objectively.
Another pitfall to avoid is combining performance reviews and compensation updates in one conversation 100% of the time.
Instead, conduct frequent performance assessments with each employee and keep the compensation-focused reviews limited to once a quarter. Or whatever time frame is outlined in your policy.
Ask them how they feel they’re progressing according to both your performance rubric and their career development goals. See if they’re receiving enough support and training to feel confident in their work.
And finally, make sure you’re spreading the love. Some of the people you hire will have more energy, focus, and drive than others.
That doesn’t mean they aren’t valuable employees. It just might mean that they have responsibilities at home that are heavy on their minds, like caring for young children or aging parents. These employees may have less energy than a dependent-free worker. They may meet goals more slowly than their colleagues.
But they also bring unique insights, experiences, and depth to your company.
In short, it’s important to create attainable metrics that reward these employees as fairly as everyone else.
As an employer, your job is to create an environment where all your employees can thrive.
