Compensation Strategies in the Recession: How to Cope with the New Economy

According to a Harvard Business Review survey, which analyzed the responses of 1,379 global business leaders, 70% of the respondents predicted a “double” recession will transpire in the following months. Additionally in a similar survey conducted by World Bank, indicated a decrease in global growth to 2.8% in 2011 from 3.8% last year (Harvard Business Review). These statistics indicate the recession is far from over. As the economy struggles to get back on its “feet” and the potential for a second recession grows more promising, it becomes even more important to manage human capital with a compensation strategy that is cost-sensitive as well as motivating. With the addition of performance-based initiatives incorporated into the compensation strategy, employers can foster an environment for learning, innovation, creativity, problem-solving and empowerment, while managing compensation budgets and ensuring resources are allocated accurately.      

Pay for Performance links an employee’s reward to their performance and the performance of the company. This type of compensation structure allows the employee to be an individual as while a collective contributor to the company’s bottom line by aligning their goals to match the organization’s goals. A key component in executing performance based-pay is implementing the “right” periodic performance review. Performance reviews or performance appraisals should reflect an employee’s true performance, instead of a subjective interruption of what managers think performance should be based on their own evaluation approach. The employee performance reviews must invoke both internal and external equity for it to be adopted by the employee.   

Primary Components of an Effective Performance–Pay System

  • Conduct a job analysis
  • Evaluate the worth of the job based on an absolute basis and relative basis of the job compared to others in the organization; assign a labor grade to the job based on the position  
  • Assign rate ranges (minimum, midpoint and maximum) with dollar values for each labor grade 

Best Practices of an Effective Performance Appraisal System   

  • Implement a rating system that supports calibration (adjusting the performance measurement to match a known standard), to eliminate a flat distribution of ratings. A wider rating scale results in a fairer and more accurate distribution.
  • Implement performance appraisal periodically, at least quarterly, to give an accurate assessment of the employee’s progress. Use the performance appraisal to document the employee performance throughout the year.
  • Provide feedback to employees on a constant basis (not only through the performance appraisal).This helps to motivate the employee and pinpoint problem areas.
  • Engage employees in two-way communication about their performance through an Open Door policy. This communication style decreases the likelihood of rumors or complaints about information being withheld and enables the employee to trust the manager and vice versa which leads to increased commitment and performance.
  • Implement an employee self-appraisal assessment to the process. The employee self-appraisal assessment can be completed prior to the performance appraisal meeting to gage the employee’s perspective on their performance in comparison to management’s point of view.
  • Creating and presenting performance goals is a critical step in the performance appraisal process. Goals should be set in way that reinforces the employee’s ability to plan, implement, and achieve the goals.      
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