By Kaitlyn Knopp, Co-Founder and CEO, Pequity
Sometimes there’s a disconnect between employee performance and employee compensation.
Traditionally, top performers will earn more and get promoted, and low performers will get more training and development.
But companies can have inconsistent processes around compensation, or a lack of visibility into the comp patterns that develop over time.
Your company’s compensation cycle is a recurring opportunity to get this right.
By taking a strategic approach, you can re-connect your compensation cycle with performance management.
Here are a few tips for how to combine performance management with your compensation cycles.
Set Strategic Priorities for Compensation
It’s important to have a compensation strategy focused not only on talent recruitment and retention, but on employee performance management.
Here are a few examples of how to put performance management at the center of your compensation strategy:
- Define Your Compensation Structure
Early-stage startups and fast-growing companies may not have well-defined compensation structures, roles, and levels.
When people don’t know why their job is paid differently than someone across the aisle with a similar title and experience level, this can cause confusion, hurt feelings and higher turnover.
One of the most important steps you can take as an HR leader or hiring team is to sketch out a specific structure for how you want to organize people within your organization, what you expect of each job, and what it takes for people to get promoted and advance in their careers.
- Decide How and Why to Pay People
What kind of compensation strategy do you want to have, and how does it fit into your company culture, mission, and values?
For example, are you committed to paying top performers significantly more than the lower-performers? Do you want to have a more equitable pay structure for a flatter organization? Do you want to offer a larger equity grant, faster equity vesting, or generous health insurance benefits?
The way you design your compensation philosophy reflects how you manage performance.
Whether your company can offer employees a bigger guaranteed income, lower financial risk, or higher potential upside says something about what you value and what kind of talent you will attract and retain.
- Define the Competition
Know who your talent competitors are and what you’re going to do to compete with them. This goes beyond just market data, but should also include setting up internal systems to collect competitive data every time you come across it.
Using these aggregated metrics proactively as a part of the process will arm you with the right strategies to win.
Determine Key Employees – Roles and Levels
Going through your compensation cycle is also an opportunity to identify key employees who deserve extra attention and potentially higher pay increases.
Key employees might include:
- Business-critical executives who are leading key initiatives
- Project managers who are crucial for a big client implementation
- High-potential leaders who could be groomed for future C-level roles
- Top performers across the organization who deserve consideration for a promotion
- Employees with in-demand skill sets that need to be retained
Defining key employees will depend on your company’s overall situation, business goals, and competitive environment.
Some companies might place a higher premium on retaining engineers, while others might need data scientists or systems analysts. Some might have a well-stocked pipeline of future leadership talent, while others might need to prioritize retaining a key executive who is overseeing a crucial client relationship or project.
Whatever your company’s idea of key employees is, you need to put these people at the center of your compensation cycle. Make sure you make every effort to keep the right people in the right roles.
Pay Attention to External Trends and Market Data
You need to analyze the latest market conditions (ideally with real-time compensation data) to see how your compensation compares to your competitive environment.
Without real-time market data, you’re essentially flying blind.
Don’t assume that employee surveys or exit interviews are giving you enough information to see the full picture.
Here are a few signs you can watch to better understand market conditions:
- Top performers are leaving the company for better compensation. If you are losing high-performing people who get better offers elsewhere, this is an indicator that your compensation might not be enough to retain top talent.
- Top candidates are declining job offers. How are people responding to your job offers? Are they unimpressed, or making counteroffers that are higher than the job’s pay range? This is a sign that your pay scales might be out of step with what the market will bear.
- New hires are negotiating higher-than-usual compensation. Some companies that are growing fast might find themselves in a situation where newly hired talent is out-earning their more senior colleagues. If you’re not careful, you might end up overpaying (or underpaying) people based on when they were hired—not based on their performance.
In the current competitive environment for talent, it is a job seeker’s market. Your best people might be getting poached or approached by other companies almost every day.
Companies may need to prepare to raise compensation overall—not just for top performers and in-demand candidates, but to get people in the door to fill their open positions.
Do you manage the compensation cycles at your company?
Pequity can make that process positive, efficient and reflective of your compensation philosophy.
Check out our video demo here.