Performance Management: At the Brink of Evolution

and below average performers get more compensation than they should for their performance and by consequence, the top performers get lesser rewards for their performance. Organizations in the US have a 3% salary budget. Ideally, the top performers should get a 6-8%. The only way to accomplish this is by ensuring that the average performers do not get a 3% increase. That's the only way for the math to work. They have to get 1.5-2% increase or maybe get no salary increase but a lump sum amount which is not counted in perpetuity. The last two ratings should definitely not get any increases. That would be the ideal way to distribute the rewards given the returns the organization gets. I'll quote the Sturman2 study since it is a great example of quantifying the economic value from different levels of performance. It states that there is tangible evidence that high

performers give almost 200% returns which justifies the cost they receive. The bottom ratings do not even cover their cost, so it would not make sense to give further increases.

Q. Do you think currently comQ. Do you see companies actually measuring the correlation of performance, pay and business results? What do you think are the results?
A. From a salary increase standpoint, the size of the budget that is established each year does reflect the business results to some extent. Organizations that are struggling to stay in business will obviously not be able to provide a full budget for increases. On the other hand, organizations which are extremely successful will have a slightly higher budget. That is one way I see it happening but it is really subtle.
When it comes to performance bonuses, yes organizations do want a correlation between performance pay and business results as executed through a well-designed bonus payout plan. Increasingly, the bonus payout plans are being appropriately designed to cover quantitative and qualitative goals.
For example, if I am in the IT department, a part of my bonus would depend on company performance, a part on how the IT department performed and a third part would depend on my contribution to the organization. In such a scenario, if an employee is in the bottom two performance ratings, then he/she would not be eligible for bonus. That's how we have seen organizations connect business results to performance.

Data Source:

1. Ernest O'Boyle Jr. and Herman Agunis, The best and the rest: revisiting the norm of normality of individual performance, Personnel Psychology, 2012.
2. Sturman, Trevor, Boudreau, Gerhart, Evaluating the Utility of Performance Based Pay, Personnel Psychology, 2003.

Page: