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What’s Next for
Performance Related
Pay?
Today's Presenters
Ruth Thomas
Chief Product Evangelist
Vicky Peakman
Director of Social Impact
Today's Agenda
• Intro: definitions and history
• Current practice on performance
related pay (PRP)
• Today’s challenges for PRP/merit pay
• What are the alternatives?
An Intro to
Performance
Related Pay
(PRP)
Defining
PRP
The concept of pay for performance is central to the compensation philosophy of
many organizations and is rooted in the belief that people should be rewarded
based on their individual contributions
PRP is a way of managing base pay by linking salary progression to an
assessment of individual performance
Pay progression based on individual performance ratings only
or
a general pay rise for employees in addition to an element that is linked to
individual performance
PRP can also be delivered through variable pay programs such as STIPs,
bonus, commissions, LTIPs, stock awards and profit share
Poll Question 1: Do you use individual performance
to determine base pay progression?
A. Yes, we only use individual performance to determine base pay progression
B. Yes, we use individual performance and market position (compa-ratio) to determine
base pay progression
C. Yes, we use individual performance and other factors to determine base pay
progression
D. No, we do not use individual performance as a factor to determine base pay
progression
A brief history of PRP base pay progression
Pre 1900’s
1975
“PRP” introduced by
the American
Compensation
Association’s
handbook for its first
certification program
2016
Death knell for
performance review
sounded – which
raises questions on
relevancy of PRP
2020
Behavioral
psychology and
incentive learning
theory led to adoption
of merit pay for
teacher's pay
2022
The era of pay
transparency
Industrial revolution
and advent of
"piecework”
Early 1900’s
Rise of ESG and
“purpose driven pay
for performance”
What’s the
current state
of PRP?
Payscale’s Compensation Best Practices Report 22
We asked participants to select all the reasons that they
give pay increases, both awarded in 2021 and planned
for 2022. For both years, the most selected answer is
performance, followed by market adjustments and
maintaining internal pay equity.
However, in 2022 more organizations are putting an
emphasis on adjusting for inflation and rewarding hot
skills.
World at Work Compensation Programs and Practices Report June 22
Vast majority of organizations continue to
vary base pay increases between top and
bottom performers, with 20% of
organizations citing an increase in the
variation in pay increases between top
and bottom performers in the past 12
months.
Most organizations (53%) publish a merit
matrix for managers to use to determine
actual salary increases. 36% say
managers use it as a guide but have
discretion to deviate if they deem it
appropriate.
“
“
• It’s time to re-think merit pay…Less than
half of employers (44%) say that base
pay programs are successful in driving
higher individual performance.
• A closer look at the factors that
determine base pay reveals a complex
decision-making environment with
organizations reporting that six or more
factors impact base pay.
• Our findings suggest the role of base
pay needs to be redefined for today’s
changing workplace.
Willis Towers Watson Getting Compensation Right Survey 2018
“
“
What are the
challenges
today to the
traditional
merit pay?
• There is much research that highlights how bias plays out in
performance assessment systems. With a direct link to pay this
bias must therefore impact pay allocation.
• Lack of manager capability to set and assess goals that are
difficult but achievable, and drive business value (particularly for
less quantifiable skills or values).
• Annual reviews focus too much on past achievement during
the performance year rather than considering what employees
should do going forward.
Criticisms of
PRP:
Issues with
performance
assessment
• Typically, not enough budget to meaningfully differentiate increases for
top performers.
• Rewards past performance only – need to use pay to not only recognize
the value of an employees’ contribution after the fact but also to future
potential or market value.
• May have a negative effect on teamwork if employees feel they are
competing.
• Limited flexibility or scope to change or respond to market trends.
• Typically, a once-a-year event. In today’s dynamic labor markets is this
enough?
• PRP perpetuates inequality when prior performance increases are baked
into pay.
Criticisms of
PRP:
Issues for
base pay
progression
Pay Equity and Performance
• When you start adding factors that change each year for individuals you quickly lose sight of why
employees are paid differently
• Using current performance to explain differences is difficult, as it is past increases that often explain
them
What are the
alternatives to
PRP?
What do you want
to pay for?
Base
Pay
Market
value
Skill
acquisition
Pay
Equity
Experience
Talent at
risk
Potential
Cost of
Living
Base Pay =
Talent
Insurance
Poll Question 2: Which of these compensable
factors would you like to consider in base pay?
A. Market Value/Talent at risk
B. Potential
C. Experience
D. Skills and skills acquisition
E. Addressing pay equity/compression
F. None of these
Options for
determining
base pay
progression
Segmented base pay budgets
A points system
Pay progression formula (like regression analysis)
Multi-dimensional Merit Matrix
Multi-dimensional merit matrix
Payscale compensation planning
Consider the impact of
pay transparency! “Whatever you decide to pay
for, this needs to be
explained by managers and
understood by employees”
Options for
performance
recognition
Use one-time incentive programs to deliver differentiated rewards, such as
bonuses, commission, LTIPS, profit share to reward outstanding performance
Consider that well-designed recognition programs are also an effective way to
empower managers to create a culture of rewarding performance year-round
Leverage the power of careers. One of the more effective ways to deliver base
pay growth to top performers is through career growth combined with
meaningful market-driven promotional increases
Think more broadly to the overall employee experience (e.g., remote & flexible
working)
Recommendations
Establish what you currently pay for today (and is this effective?)
Consider what you want to pay for (make pay your talent insurance)
Explore options for managing base allocation based on these factors
Model and stress test these options to understand potential impact
Review existing performance-based pay allocation for effectiveness and ROI
Consider other options for recognizing performance
Payscale Resources:
• Compensation Best Practice Report 2022. Take part in our ‘23 survey as well!
• Salary Budget Survey Report
• Compensation Strategy Whitepaper: Responding to Rising Inflation & Cost of Labor
• Whitepaper: How to Manage Pay Compression with Agile Comp
• Pay Transparency Legislation Guide
• Webinar: Navigating Compensation Budgeting Season
Gain a competitive edge in a fierce
talent market while building a more
fair, equitable and transparent pay
strategy
Employee Reported
The world’s largest real-time
salary database
HR Market Analysis
A composite of analyst curated
employer reported survey data
Peer
A transparent & dynamic HR
reported data network
Market Pricing
Pay Equity
Pay Structures
Compensation
Planning
Survey Management
& Participation
Reporting
& Analytics
Total Rewards
Statements
Job Descriptions
Management
Q&A
Feel free to ask any questions in the chat!

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Webinar-What’s Next for Performance-Related Pay?.pdf

  • 2. Today's Presenters Ruth Thomas Chief Product Evangelist Vicky Peakman Director of Social Impact
  • 3. Today's Agenda • Intro: definitions and history • Current practice on performance related pay (PRP) • Today’s challenges for PRP/merit pay • What are the alternatives?
  • 5. Defining PRP The concept of pay for performance is central to the compensation philosophy of many organizations and is rooted in the belief that people should be rewarded based on their individual contributions PRP is a way of managing base pay by linking salary progression to an assessment of individual performance Pay progression based on individual performance ratings only or a general pay rise for employees in addition to an element that is linked to individual performance PRP can also be delivered through variable pay programs such as STIPs, bonus, commissions, LTIPs, stock awards and profit share
  • 6. Poll Question 1: Do you use individual performance to determine base pay progression? A. Yes, we only use individual performance to determine base pay progression B. Yes, we use individual performance and market position (compa-ratio) to determine base pay progression C. Yes, we use individual performance and other factors to determine base pay progression D. No, we do not use individual performance as a factor to determine base pay progression
  • 7. A brief history of PRP base pay progression Pre 1900’s 1975 “PRP” introduced by the American Compensation Association’s handbook for its first certification program 2016 Death knell for performance review sounded – which raises questions on relevancy of PRP 2020 Behavioral psychology and incentive learning theory led to adoption of merit pay for teacher's pay 2022 The era of pay transparency Industrial revolution and advent of "piecework” Early 1900’s Rise of ESG and “purpose driven pay for performance”
  • 9. Payscale’s Compensation Best Practices Report 22 We asked participants to select all the reasons that they give pay increases, both awarded in 2021 and planned for 2022. For both years, the most selected answer is performance, followed by market adjustments and maintaining internal pay equity. However, in 2022 more organizations are putting an emphasis on adjusting for inflation and rewarding hot skills.
  • 10. World at Work Compensation Programs and Practices Report June 22 Vast majority of organizations continue to vary base pay increases between top and bottom performers, with 20% of organizations citing an increase in the variation in pay increases between top and bottom performers in the past 12 months. Most organizations (53%) publish a merit matrix for managers to use to determine actual salary increases. 36% say managers use it as a guide but have discretion to deviate if they deem it appropriate. “ “
  • 11. • It’s time to re-think merit pay…Less than half of employers (44%) say that base pay programs are successful in driving higher individual performance. • A closer look at the factors that determine base pay reveals a complex decision-making environment with organizations reporting that six or more factors impact base pay. • Our findings suggest the role of base pay needs to be redefined for today’s changing workplace. Willis Towers Watson Getting Compensation Right Survey 2018 “ “
  • 12. What are the challenges today to the traditional merit pay?
  • 13. • There is much research that highlights how bias plays out in performance assessment systems. With a direct link to pay this bias must therefore impact pay allocation. • Lack of manager capability to set and assess goals that are difficult but achievable, and drive business value (particularly for less quantifiable skills or values). • Annual reviews focus too much on past achievement during the performance year rather than considering what employees should do going forward. Criticisms of PRP: Issues with performance assessment
  • 14. • Typically, not enough budget to meaningfully differentiate increases for top performers. • Rewards past performance only – need to use pay to not only recognize the value of an employees’ contribution after the fact but also to future potential or market value. • May have a negative effect on teamwork if employees feel they are competing. • Limited flexibility or scope to change or respond to market trends. • Typically, a once-a-year event. In today’s dynamic labor markets is this enough? • PRP perpetuates inequality when prior performance increases are baked into pay. Criticisms of PRP: Issues for base pay progression
  • 15. Pay Equity and Performance • When you start adding factors that change each year for individuals you quickly lose sight of why employees are paid differently • Using current performance to explain differences is difficult, as it is past increases that often explain them
  • 17. What do you want to pay for? Base Pay Market value Skill acquisition Pay Equity Experience Talent at risk Potential Cost of Living Base Pay = Talent Insurance
  • 18. Poll Question 2: Which of these compensable factors would you like to consider in base pay? A. Market Value/Talent at risk B. Potential C. Experience D. Skills and skills acquisition E. Addressing pay equity/compression F. None of these
  • 19. Options for determining base pay progression Segmented base pay budgets A points system Pay progression formula (like regression analysis) Multi-dimensional Merit Matrix
  • 21. Consider the impact of pay transparency! “Whatever you decide to pay for, this needs to be explained by managers and understood by employees”
  • 22. Options for performance recognition Use one-time incentive programs to deliver differentiated rewards, such as bonuses, commission, LTIPS, profit share to reward outstanding performance Consider that well-designed recognition programs are also an effective way to empower managers to create a culture of rewarding performance year-round Leverage the power of careers. One of the more effective ways to deliver base pay growth to top performers is through career growth combined with meaningful market-driven promotional increases Think more broadly to the overall employee experience (e.g., remote & flexible working)
  • 23. Recommendations Establish what you currently pay for today (and is this effective?) Consider what you want to pay for (make pay your talent insurance) Explore options for managing base allocation based on these factors Model and stress test these options to understand potential impact Review existing performance-based pay allocation for effectiveness and ROI Consider other options for recognizing performance
  • 24. Payscale Resources: • Compensation Best Practice Report 2022. Take part in our ‘23 survey as well! • Salary Budget Survey Report • Compensation Strategy Whitepaper: Responding to Rising Inflation & Cost of Labor • Whitepaper: How to Manage Pay Compression with Agile Comp • Pay Transparency Legislation Guide • Webinar: Navigating Compensation Budgeting Season
  • 25. Gain a competitive edge in a fierce talent market while building a more fair, equitable and transparent pay strategy Employee Reported The world’s largest real-time salary database HR Market Analysis A composite of analyst curated employer reported survey data Peer A transparent & dynamic HR reported data network Market Pricing Pay Equity Pay Structures Compensation Planning Survey Management & Participation Reporting & Analytics Total Rewards Statements Job Descriptions Management
  • 26. Q&A Feel free to ask any questions in the chat!