We recently ran a club survey for executive level roles in the not-for-profit sector. As part of the launch meeting to present the findings, a round table discussion ensued. The key challenge that came to the fore was one I frequently hear about when talking to clients in the sector; linking pay to performance, either through base or variable pay.
For those of you working in the sector, you will recognise the dilemma of whether it’s something your organisation should do or not. There are inevitably pay consequences for every decision. Treating everyone the same by giving an automatic increase creates the message, ‘it doesn’t matter what you deliver, you’ll get an increase anyway’. This means those who bust a gut feel unappreciated and those who coast have no incentive to perform. There is a real desire to differentiate between employees’ performance levels but uncertainty about how best to do it. Particularly when internal equity and being seen to ‘treat everyone fairly’ is a far bigger driver than typically seen in the private sector.
The main concerns with introducing any form of pay differentiation seem to focus around:
- Perception - Particularly from an external perspective, there is a significant appreciation of how the organisation will be perceived by stakeholders/members/funding partners if they are seen to be paying ‘bonus’ or performance related pay. This sensitivity is particularly heightened with charitable status where organisations want to be seen to be spending money wisely and not be tarnished with the same brush as the financial services sector.
- Risk of getting it wrong - Whether it’s recognising the wrong people, the amount of effort involved vs. the impact on the organisation, or the size of performance payment made (either distorting behaviours negatively or, not making any difference at all to organisational productivity, or ROI), there is a real fear of introducing a framework that is costly and seen to add little value.
- Managerial capability - Concerns typically focus around management’s ability to fairly differentiate and not use the system to cover their own failures. We’ve all seen the scenarios of ‘I would have given you X but I was told I couldn’t’ or ‘the system wouldn’t let me’. Alternatively, that there is an element of favouritism at play and it doesn’t matter how well an individual thinks they do, they believe there are others who will always be treated more favourably.
- Affordability - Often with a fairly limited size of pot available, the question inevitably ensues around whether an extra 1-2% really makes a difference between an average performer and a great performer. Is it really worth the effort involved and does the organisation really get value for money?
All these concerns are perfectly valid and performance related remuneration, whether linked to base pay or variable pay, is not right for everyone. There are several organisations I know of who have used performance differentiation in pay to raise the bar and send a different reward message to the one mentioned above. However before considering it, I suggest you take the following into account:
1. What do your employees and managers want?
- Is there a desire or a real business need for performance related pay?
- How would it fit with your values, culture, business plan and reward aspirations?
- What will it give your organisation that you don’t have now?
Just because others do it doesn’t make it right for your culture. The true benefits are to differentiate and motivate those who are going above and beyond, by recognising their efforts financially. But there are other ways to do this. Recognition, like communication, is something we all think we can easily do. But time and time again, these areas are underestimated in terms of how much time and effort is needed to get them right. A well planned and communicated recognition framework will have far more of a positive impact than a forced PRP framework that does little to motivate your staff. I’m not necessarily talking employee of the week approach – instead it’s about aligning recognition to your values and culture, giving managers and peers the opportunity to recognise and share achievements regularly and with meaning.
2. The state of your performance management system
We often hear how performance management is dead. It’s not really dead - more the traditional application of it is. Moving to a more fluid approach that provides feedback and focuses on growth, I believe, is a positive thing. However, removing ratings (which many organisations have done) creates another dilemma - how do you fairly distinguish between employees if there is nothing to hang your decision from? That’s not to say ratings are the only way to do it, but in their absence, decisions that affect reward need to be seen as fair and transparent. This is where management capability comes into play and having the confidence that managers can fairly apply decisions and feel prepared to stand by them.
3. How well it is understood and communicated
At the survey launch meeting, one not-for-profit organisation talked about their PRP system actually being applied very fairly and going through several rounds of calibration before final decisions were made on the top 40% of performers. The challenge was that this robustness of process was done behind the scenes and decisions were not properly communicated back to employees - the whole process was regarded as ‘a dirty little secret’. You could have the fairest and most robust decision making process in the world, but if employees don’t understand how the decisions about performance are made, the impact is lost.
There’s no quick fix to implementing performance related pay. In not-for-profit organisations, social and moral purpose provides an additional lens to check back through before deciding if it’s the right thing to do. I think the jury is still out in the sector as a whole, but those who do decide to implement it, have a very clear view on what they believe they will achieve. For help and advice on performance related pay please get in touch: 020 3457 0894.
