Annual performance reviews can be the perfect platform for employers to identify high performers as well as to note who is showing improvements in their works, or if they are simply reaching necessary quotas or metrics in their work.
What ever the criteria is, a performance review can be used as a baseline to work out any additional compensation the employee can receive due to their excellent performance at work.
Tying certain compensation to performance reviews also gives the employees a certain agency over their own pay. However using the performance review as key to employees’ compensation makes it even more important that the performance review process is set up in a transparent manner, is well KISSed (Keep It Super Simple), and definitions set firmly in place to make sure all evaluation is both fair and void of any personal bias.
Performance reviews as compensation metrics
When setting up compensation in accordance to possible performance review results, the decision on what compensation is defined by the performance review needs to be made before hand.
The entire performance review should be set up so that all employees have an equal chance at gaining said compensation, as long as said compensation is applicable to their job title.
Keeping this information transparent also helps employees in knowing what to expect from their performance review, and how it can positively affect their paycheck long term.
Compensation based on an assessment
Should compensation be tied to a specific assessment within the performance review, how said assessment and it’s criteria are evaluated needs to be very well defined. Not just so that the evaluation is both unbiased and fair, but also so that employees can fully understand how the results of their performance review for that specific assessment can affect their wages.
For example, let’s say that an annual performance review for an employer includes an assessment for personal qualities that is the same – with same criteria and definitions – for all employees within the employer.
The evaluation for each criteria is set up using a simple 5 point scale, which means employees can score:
- Demonstrates integrity, 1-5 point scale
- Professionalism, 1-5 point scale
- Punctuality, 1-5 point scale
- Attendance, 1-5 point scale
- Dress code adherence, 1-5 point scale
This results in the employees being able to gain anywhere from 5-25 points in total for the assessment.
The compensation benchmarks could be as follows:
- 5-10 points – no additional compensation.
- 11 -15 points – 50% of possible compensation.
- 16-20 points – 100% of possible compensation.
The example uses 20 points as the highest possible benchmark, despite the assessment yielding a maximum of 25 points. This gives the employees an advantage in gaining this particular compensation.
Compensation based on criteria
When compensation is based on a certain criteria, it is often tied to completion of a task or objective or for reaching a good mark on said criteria.
This can mean that this compensation is personalized, and therefore makes it important for the definitions of what criteria falls under this compensation very important.
- Let’s say that a compensation is given for each task/objective that an employee finalizes 100% during their performance period.
- This means that the number of tasks/objectives that should be set for all employees for all performance reviews should be a set number, that the support offered to all employees should be on equal terms, and that a periodic performance evaluation schedule should be set in place for all employees to make sure they are all on track with their goals/objectives.
- New employees could receive some sort of proportional task/objective so that they can have a fair chance at this compensation as well, or at least a portion of it depending on their date of hire.
Compensation based on criteria is also something that is effective to increase employees awareness of certain metrics that are parts of an audit.
- Let’s say that all employees in a department have to wear certain safety equipment daily before attending their workstation (safety helmets, goggles, boots, etc.).
- This is a known metric used for safety audits, but this metric has been getting a low score lately as employees perceive their workstations to be safe and the safety equipment to be unnecessary.
- Letting employees know that anyone that receives 95-100% rate on said metric could be the key in increasing the use of safety equipment, despite the employees’ own claim of it being unnecessary, and therefore having a positive result on both workplace safety and accompanying audit as a by product!
Compensation for over all performance review
Tying compensation to the overall performance review is doable, but maybe the most difficult compensation to achieve for all employees.
For smaller employers that use simple performance reviews that are applicable to all employees, this can be an easy way to set up a bonus scheme based on all employees’ performance in their work.
It would be important however to tie the compensation metric proportionally to performance review results, so that there is always a chance for employees to receive at least some compensation – paired with a good action plan and schedule to get the employees on track of receiving full compensation.
But do keep in mind that employees are fallible creatures, and taking away any chance of making an error as it could negatively affect their pay will have detrimental effects on the workforce – even the perfect employees that always seem to ace their performance reviews.
- An example of compensation that was tied to an overall performance review is for an employer that put all performance review up as fixed numerical metrics and data on tasks and objectives achieved.
- There was no personal touch, as all information was tied with how much revenue each employee was able to garner for the employer through the performance period.
- Employees who exceeded their targets received bonuses, all employees who hit their targets got some additional compensation, and employees who were below target were laid off.
- This created a workplace culture where employees fought over tasks and objectives that yielded the most revenue and set up an abuse system where certain employees were only assigned tasks that yielded little to no revenue.
- All employees – regardless of their results – described the employer as cultivating an active abuse culture and using the performance review to actively target and force out employees who weren’t favored.
- High performing employees all showed less empathy for lower performing employees, as they actively participated in the abuse culture by often forcefully taking high-revenue tasks and objectives for themselves. As a result, high performing employees began showing a disconnect with their own values and morals, which resulted in changes in demeanor towards customer and third parties that began affecting their own results.
- All employees reported high levels of stress, use of sick-days was high and turnover was on a steady high with the employer failing to recruit more as the treatment of employees had become known to the outside community.
Problems with using performance reviews to control additional compensation
As fallible as humans are, humans also have a tendency to exploit what ever system there is in place.
Exploitation of a compensation ruling performance review system could for example be:
- Faked results.
- Hyper focus on only the assessment or criteria that yields compensation.
- Bribing or threatening of evaluator to give higher scores.
- Using scores to retaliate against employees.
- Etc.
This is unfortunately to be expected, and employers should therefore put extra effort into making a performance review process that is as fair an unbiased as possible, but also has systematic checkpoints and audits in place that have the sole purpose of making sure that all results are fairly given and earned.