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How to Make Pay Decisions Without Annual Reviews and Ratings

If you’re reading the title of this blog and scratching your head, maybe you haven’t been paying attention.  All the cool kids are doing it.  They’re ditching traditional ways of making pay decisions and moving to a new model.

Don’t believe me?  Deloitte has already done it, with Accenture right behind them and GE contemplating a similar move.  They’ve all discovered how to make pay decisions without annual reviews and ratings.

So, why?  Let’s read about retooling the way we manage decisions about compensation to reflect the world we’re living in.

Have times changed, or has time?

Technology now governs all we do in the working world.  Traditional concepts of time have, therefore shifted dramatically.  Projects which used to be marked in months or years are now accomplished in real-time.  Moreover, younger workers are focused on rapid upward mobility, never staying in a job for more than a little over 2 years.

So, it’s time that’s changed and the way we use it. In an agile world made possible by technological deployment, the way we gauge performance must also change.

While many continue to be married to the practice of annual reviews and employee ratings, others are recognizing them for what they are – time-consuming and antiquated, with no place in our brave, nimble new world.

Market Reference Point (MRP)

An employee-driven job market means mobility, so paying the market rate makes sense, when you’re hoping to keep on the stars who are making a difference in your organization.  Senior people are generally given 10% over the MRP.

When the rate goes up, so do your employees’ salaries.  The Lear Corporation has seen a three-fold increase in its share values since jettisoning a performance-based pay system.  So much for the carrot and stick model.

While the model may have drawbacks, like a lack of differentiation between skill sets and high rates for some roles, the transparency it affords pulls no punches and motivation adheres to the desire to be promoted.

Managerial discretion

This model places control in the hands of managers, working from a set budget for pay increases and bonuses.

Managers have the closest working relationships with your employees.  They observe what’s happening on the ground, uniquely placing them to make decisions which might not be obvious higher up the chain.

While favoritism is a drawback and this model lacks transparency, high performers are rewarded by fully-engaged managers and the elements of performance and skill set still come into play.

Behind-the-scenes ratings

Performed by the managerial team, the practice of shadow ratings links compensation to performance, although that’s not necessarily the key metric applied.

Compensation is awarded according to a variety of factors, collectively calibrated across the employee pool.  Scores are assigned and employees bucketed into categories, according to the level they achieve through those scores.

The lack of transparency involved makes this model employee-hostile and probably the least desirable option.  By the same token, calibration forces the management team to defend their rankings.

Precedent HR is setting the standard for online applicant tracking.

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