The digital age is driving change around the way we work and the types of jobs we do. For the last 30 years, we relied mostly on pay for performance. But in this new world, organizations need to reexamine their approach in line with the transformation of emerging employee expectations.
There’s an inherent challenge in using pay to engage talent, particularly within an environment of restrained wage growth that makes pay differentiation hard to accomplish. That encourages us to look for new tactics that maximize the ROI of compensation spend to ensure organizations allocate to the key talent driving business outcomes, today and tomorrow. At the same time, traditional talent strategies — and by default, pay strategies — require rewriting in order to reskill and engage the people who will help see this evolution through.
How We Got Here
With pay for performance or performance-related pay (PRP) models, we link pay progression to an assessment of the employee’s performance, usually measured annually and on an individual basis. The subsequent rating of performance then drives a merit pay adjustment or even incentive pay allocation. But with many organizations calling into question the efficacy of performance reviews and the accuracy of ratings, this leads us to question if we are at risk of paying the wrong people through PRP.
Another criticism leveled at PRP is the current approach’s inability to drive business performance. Look at most programs in practice and weak pay differentiation, poor employee engagement and low ROI on compensation spend are defining features. This may be because when choosing to distribute pay budgets through a normal distribution curve, most organizations find they end up spending the majority of their budget in the bulge of the curve where the average performers sit. Ultimately, this fails to drive ROI on compensation spend and often leaves inadequate budget to differentiate rewards for high performers.
If you don’t use performance rating to drive pay decisions, what do you do? In the first instance, those organizations who abandon annual performance reviews allow managers to make discretionary decisions. Others still rank employees, with shadow ratings or stack ranking, but don’t share this with employees. As a result, that approach does not sit well with employees’ growing expectations on pay transparency. Now, we see progressive organizations moving to a pay-for-talent approach that broadens the definition of employee value.
Where We’re Going
A pay-for-talent approach leverages different ways of assessing talent. Performance can be part of that, but performance is often just backward-looking. In an agile business environment, you need to recognize the talent required for the next 12 months — those employees with essential skills necessary to deliver business-critical imperatives or those with strongest future potential. Using multiple talent metrics like succession planning outcomes, critical role identification and attrition risk alongside output from continuous assessment processes to drive pay recommendations, you end up with deeper insights into employee value relative to compensation spend.
The approach is also more adaptable, allowing you to identify the different types of talent that exist and the value they bring to your business. This includes those scenarios where an employee may have an essential skill required to complete critical projects over the next 12 months and deserves recognition for that, even if they haven’t been a top performer in the last year.
Making Pay for Talent Work
In today’s fast-moving business world, flexibility is crucial, particularly as we consider other variables like the call for pay equity, increased interest in diversity and inclusion, a revolving door of talent that’s ushering in Generation Z and with it, evolving expectations. Being able to demonstrate transparency and communicate rewards can make all the difference, functioning as a type of talent insurance to mitigate the risk of losing key employees and the recruiting and training costs associated with replacing them.
We see from the changing nature of today’s workplace that traditional merit matrices based on annual performance reviews no longer fit the bill, especially with younger employees used to instant gratification and results. Shifting the mindset toward ongoing assessments and pay-for-talent models, supported by the right compensation management software, we’re able to deliver meaningful decisions that resonate with the workforce and support business goals.
In making sense of this added complexity, we realize that there is no one-size-fits-all solution to compensation, nor will this move take place overnight. Rather, what we see now are options and opportunity. But first, we must revisit existing processes as well as an organization’s culture, to determine how — and if — pay for talent suits the organization, its workforce and its objectives.
That’s the best way to enact change where needed and prepare our compensation strategies for the future of work.