“The result of bad communication is a disconnection between strategy and execution.”
Chuck Martin, former vice president, IBM
Performance reviews that evaluate based on subjective opinions are giving way to a new form of review based on performance and results.
Yet the most often forgotten is likely
your compensation plan performance review.
Completing annual compensation reviews is such an all-consuming process that most of us need a vacation when it’s over, and eager to shift focus elsewhere. But your compensation plan is a key communication tool connecting strategy to execution, especially in the eyes of your employees and management.
You conclude the review process with the usual graphs, charts and summaries to senior management, but one thing that’s often neglected is whether the compensation plan itself performed well relative to your goals.
As a change, you dive into the data and see how you did by the numbers, quantifiable, and how your compensation plan is one of the key measures to acquiring and retaining employees.
When you set up the compensation planning process, your assumptions influence the decisions you make resulting in certain outcomes.
What if your assumptions were wrong about market movement and how managers would use their budgets and merit increase grids?
Start by reviewing the assumptions:
- Did the merit budget actually move you closer to market?
- Then look at what factors may have influenced that. Manager decisions may have gone differently than you anticipated.
- The ways they used the merit grid and whether they stayed within the budget both could affect your plan’s performance.
- When you gave managers discretion, did they use the full range of merit increases, individual modifiers, etc.?
- There may be other behaviors you can predict and account for with your next round.
- Breaking out your manager population by the factors they have in common (Business Unit/Age/ Line vs Corporate), you may see a difference from group to group in their decisions about merit increases, incentive plan payouts and other compensation factors.
The overarching goal is to design programs that contribute to the company’s financial success (i.e, motivating the right people to stay and discouraging the wrong people). That means comparing actuals to your assumptions about the incentive plan.
- Did the payouts on the incentive plan match what you expected?
- Was your forecast to the Finance department on bonus accruals accurate?
- Looking at the actual numbers will tell you whether you designed an incentive plan that worked in motivating staff to contribute to the bottom line.
Why do a Compensation Plan Performance Review?
Evidence-based compensation management is gaining widespread acceptance, so hopping on that train is a good move. If you think you’re too busy, you may be ensuring that you’re not busy at all in the future.
A rigorous review of your compensation plan’s results may be the last thing you want to do at the end of annual review season. It should be tackled at some point well before the next review cycle begins.
Continuous review, quality improvement and goal alignment will help you prove to senior management that the program you designed is creating more value than it costs, and that you’re an ace at your job.
What could be more important to review than compensation?