Performance Pay (PP) or Variable Pay is the component of the CTC that is paid to the employees, based on their performance evaluation.
The process can be broken into the following steps:
• Deciding the targets/ tasks to be performed by the employee during the review period.
• Depending on the role and responsibilities of the employee, deciding the percentages of the fixed pay and the variable component.
• Timeliness of the evaluation reviews and payment of PP
The implementation of PP system requires a robust HR set up in the enterprise and high level of involvement of the leaders in the goal setting process and evaluation. It involves a great deal of preparation and performance measurement and evaluation remains an issue in most of the cases.
Once the organization has graduated to PP, despite the difficulties being faced, the journey should go forward. Continuing the journey has many advantages, viz.:
• Even if it is loosely implemented, PP acts as a tool for the managers to show carrot. Majority of the employees do respond to the excitement of PP.
• While graduating to PP is a sign that the enterprise has attained a particular ‘capability maturity’, reverting back to previous system would signal lack of grit on the part of leaders.
• With the growth in the size of the enterprise, PP can be effectively used to achieve the benchmarks in sync with the corporate goals.
• One of the goals of the PP is to retain and promote talented employees and weed out the employees with questionable talent.
• The entire process of planning and monitoring requires a disciplined approach at all levels of the organization. The PP system, thus, can be used as a self-cleaning process to remove lethargies and tentativeness in the enterprise.
Things to remember:
• PP should be implemented only when the enterprise is ready for the level of professional approach its implementation demands.
• PP is not a ‘one size fits all’ mechanism. Different models should be evolved for various cross sections of employees, viz., leaders, middle managers and juniors. The variable component may also vary from, say, 20% - 40%, depending on the assigned role. Some portion of the PP component may be paid annually.
• The leaders should be evaluated more on achievement of long term goals, with reasonable weight on short term targets. At lower level, the PP may be based on short term goals.
• The goals should be both financial and non-financial. In general, it should create value for the shareholders.
• A poor performer may perform better in another set up or under another manager. A talented employee’s poor performance must be examined with a lot of circumspection.
• The manager’s role should be put under scanner, as a team developer and his effectiveness in influencing and evaluating the employees’ performance.
• Where the operational results are seen to be a ‘team’ effort, the reward of PP should be similar to all members of the team.
• The HR function should be geared up and adequately trained, so that they are in touch with the employees.
• The negotiation of the goals should be finalized after copious discussions with candor. This should bring out the quid pro quo of the ‘deal’ and its workability, including the impact of environmental factors on the performance.
• The assumptions made at the time of negotiating the goals should be clearly spelt out. The assumptions may at times require cross-functional commitments. These commitments should be built in the performance targets of the associated departments. E.g. when the sales manager agrees to a target of ,say, 40% increase in sales and if this requires putting up certain manufacturing facilities within a given time frame, the PP of the people involved in procurement and making the machine operative by the given time, should be linked to this.
• The exercise of PP starts from the Board level, who need to specify the performance targets of the leaders. The leaders, in turn, should negotiate the targets with the employees. The steps involved are:
o Annual Business Vision given by the Board
o Forecasting by the business units
o Based on forecasts, annual goals for the leaders given by the Board
o Leaders / managers to negotiate targets with the employees
o The work plan should be a "living document", and it may be reviewed and adjusted at least quarterly.
o KRAs to be crystallized before start of the quarter.
o At the end of the quarter, the employees could submit data based self appraisal.
o The timeliness of the entire process must be maintained, up to the point of the employees getting the PP.
A few of the organizational set up required for administration of PP could be:
• Systems and tools to ensure the Integrity of the measurements, including quantitative and qualitative results.
• Leaders to imbibe, communicate and promote the true value of the system at all levels.
• Top management and the employees, as well, must be able to see the linkage of the PP system with results.
• The implementation of the system should not be made difficult/ cumbersome. It should be blended into day to day working.
In fine, the successful implementation of PP system depends on:
o How best strategies are made and the goals broken down to various functionaries’ levels and negotiations made.
o How best performance data is captured, removing biases, and normalizing for the constraints beyond the employee’s control.
o The essence is to reward the performance, but not to ignore ‘talent’. This requires personal involvement and should not depend on spreadsheets, alone. However, there should be complete transparency in the system.
o How best the essence of the PP is percolated and observed in letter and spirit. This requires copious deliberations and documentations.
o How best the management is able to closely monitor the performance of the new entrants, who are generally negotiated at a higher pay package, so that level of discontent in the existing employees is minimized.
o How excitement is kept alive at all levels and employees also develop passion for the business and not merely keep focus on targets. Excitement is critical to success of PP.
o However, the crux of the success is objectivity and transparency to make the system sustainable and profitable.
