Performance management and rewards systems are critical components of any organization’s success. They are essential in ensuring that employees are motivated and engaged in their work and that they contribute to the achievement of the organization’s goals.
In this article, we will discuss performance management and rewards systems, process and procedures and best practices that can be applied for any organization.
Introduction for Performance Management and Rewards System
At our XYZ Company meeting, the Board approved the Results Oriented Pay Program (ROPP). This plan reflects our value to “revere hard work and pay for results.”
The XYZ Company HR ROPP program is designed to fit our culture: an entrepreneurial public agency seeking to continually improve and keep a balance between caring for our customers, caring for each other, and caring for the organization (financial sustainability).
ROPP provides the guidelines for distributing salary increases at XYZ Company HR. The premise is that employees will receive increases based solely on performance as determined by conformance to a performance plan jointly developed by the supervisor and the employee.
Supervisors will evaluate employees and provide ratings which will be reviewed by management. The CEO will ensure the management team maintains organizational consistency in administration of the program.
All employees will be evaluated and paid under the same system. However, different bonus levels may be available for non-exempt and exempt positions.
The Results Oriented Pay Program will be reviewed and evaluated on an annual basis by the senior leadership team and adjustments made to the program content to ensure its continued effectiveness in differentiating performance and rewards and supporting attainment of organizational goals and objectives.
Pay Levels
Pay levels for XYZ Company HR job classes are based on a combination of external, or “market,” pay information and appropriate internal pay differentials with other XYZ Company HR job classes.
Internal pay differentials are established by comparing jobs to determine similarities and differences. Jobs which have sufficiently similar job duties, level of responsibility, and employment background requirements are placed in the same pay range and are given the same class title. Jobs in the same occupational area, but different in level of responsibility and employment background requirements may be placed in a series (i.e., Level 1, Level 2, and Level 3) and assigned to different pay ranges based on relative differences in level of responsibility and employment background requirements.
External comparisons are made by selecting “benchmark” jobs (key classes) within the organization to compare to jobs performing similar duties in other organizations (the market). Once the benchmark pay ranges are determined, the salary ranges for linked classes are established based on internal comparisons with the benchmarks. It is XYZ Company HR’s goal to set the maximum of our salary ranges after considering both the mean and median of the maximum of the market’s salary ranges. An annual survey will be conducted in the fall and reported to the Board in October/November.
Labor Market agencies will include:
• City of Elk Grove
• City of Fairfield
• City of Roseville
• City of Sacramento
• City of Stockton
• County of El Dorado
• County of Yolo
• Placer County Water Agency
• Sacramento Municipal Utility District
• Private sector data from Economic Research Institute – using all industries within a 50 mile radius of Sacramento
The XYZ Company HR goal is to set our salary ranges to ensure our ability to attract and retain a high quality workforce. However, since our first priority is to reward individuals based on performance, if there is a gap between XYZ Company HR salary ranges and our market but insufficient funds to provide for both market based adjustment and performance bonuses, we will give priority to performance pay. This allows more money for performance pay.
Pay Policy for Performance Management and Rewards System
As indicated previously, the maximum of XYZ Company HR’s pay ranges are tied to the maximum of the ranges in our market. The bottom of our ranges is 20 percent lower than the maximum except for the Mid-Manager and Senior Leader band, which are each 30% lower. At XYZ Company HR, placement of employees within pay ranges will be based on performance expectations and individual fulfillment of those performance expectations.
The bottom area of a pay range is for new and less experienced employees within each job classification. The top area of each range is for experienced employees, who, with consistent application of their job skills, have regularly achieved “above standard” or better job performance of the full scope of their job duties.
Exempt employees who excel in job performance may also be eligible for annual performance bonus pay which can exceed their actual base pay received by up to 20%. FLSA employees who excel in job performance may be eligible for annual performance bonus pay of up to 12% of their actual base pay received, including overtime.
The important difference in XYZ Company HR’s pay policy is that all increases in pay are based on and directly related to employee performance. Pay increases are not “across the board” and will not be automatic. Our pay philosophy is that dollars received mainly reward job performance, less importantly they represent changes in labor market rates or employee experience in a job classification.
Pay Administration for Performance Management and Rewards System
Pay administration policy has been developed by connecting the pay policy to the performance rating descriptions; i.e., an employee’s pay is adjusted at a reasonable pace to a point in their range that is consistent with the pay policy and their performance rating. Employees that achieve an “exceeds standards” rating and maintain it can expect to progress to the top of their range, depending on the annual market based range adjustments. Ratings of a minimum of “4” through the “5” ranking reflect superior performance.
Employees with lower ratings can expect to reach mid-range or less. Pay is administered once each year at the same time for all employees. Distinguished employees may receive pay above their base pay in a lump sum during the annual pay administration period. Only employees on the payroll during the annual pay administration period are eligible for increases to their placement in the salary range and lump sum performance pay.
In addition, there is an element of the pay administration policy that includes a supplementary increase which takes into account where an employee’s salary is within the pay range along with his or her ROPP score. Salary ranges are divided into quartiles.
For those in the lowest quartile of the range, the supplementary increase, when available, will be larger but still tied to the employee’s most recent ROPP score. The percentage amounts can be increased or decreased as business needs dictate, or to allow employees to move either more quickly or more slowly through the pay ranges. Employees who have received salary increases outside of the annual adjustment during the prior calendar year will not be eligible for supplementary salary increases. For example, if an employee received a pay increase outside of the annual adjustment in 2014, s/he will not be eligible for a supplementary increase for calendar year 2015.
Both types of pay increases described above are guided by a “pay grid” designed to correlate pay administration with performance rating. The actual matrix used will vary from year to year depending on a variety of factors such as market movement and XYZ Company HR’s ability to fund salary range increases. Annually, Human Resources provides ROPP training to all employees.
Guidelines for application of the pay grid, salary setting methodology policy, bonus structure, and other important information will be presented at the annual training and copies of applicable documents will be made available to all employees.
Performance Management
Each regular XYZ Company HR employee, in concert with his/her supervisor, is required to complete an annual performance plan which describes accountabilities, performance indicators, and objectives to be completed during the period covered by the plan.
Each employee will receive a performance evaluation that compares accomplishments to performance plan commitments, performance in the competencies required to carry out their core job, how well they perform as an organizational citizen, and how well they provide service to internal and external clients.
Goals of a Performance Management Process
1. Clarify understanding of the goals of the organization and work unit.
2. Establish mutual understanding between employee and supervisor about the job performance standards and expected results.
3. Provide employees with useful feedback on their performance compared to established performance standards and expected results.
4. Improve employee productivity and job satisfaction by recognizing individual strengths and providing development plans for areas in need of improvement.
Definitions
1. Accountabilities: Represent the major focus of a job and are expressed as the key “end results” on the performance plan. Includes core job function and client satisfaction for all employees.
2. Results and Evidence: Indicators of successful or unsuccessful performance for each accountability. They are either qualitative or quantitative.
3. Objectives: Identify a means to satisfy a job’s accountabilities. They are specific statements of planned accomplishments. They identify results to be achieved, time frame, and resource constraints and are related to organizational goals and objectives.
4. Performance Plan: Annual document developed by the employee and his/her supervisor to outline supervisory expectations and employee responsibilities in meeting job accountabilities. These plans assure employee activity is linked to organizational goals and objectives.
5. Performance Evaluation: Evaluations linking employee accomplishments to performance plan objectives. Performance evaluations will be used to determine performance pay as part of the Results Oriented Pay Program.
General Procedures for Performance Management and Rewards System
1. All employees will prepare, in collaboration with their supervisor, an annual performance plan based on assigned accountabilities. For current employees, generally annual performance plans are developed and become effective in July of each year.
2. Within 30 days of employment or movement to a new position within XYZ Company HR, employees, in collaboration with their supervisor, will prepare a performance plan.
3. Performance plans will include accountabilities, goals and objectives, results and evidence.
4. Accountabilities include core job competencies and client satisfaction.
5. Throughout the plan year, supervisors and employees will meet periodically to discuss accomplishments as they relate to the performance plan. Objectives will be updated as needed.
6. Midway through the performance plan year (usually January), employees will receive a mid-year review. The purpose of the mid-year is to discuss and document progress and performance as compared to the performance plan. Numerical ratings are not provided at this time, but a short written narrative documents progress to date.
7. At the end of the plan year, employees will be evaluated by supervisors based on their accomplishments as compared to plan objectives and job expectations. Evaluations and ratings will be used to determine pay increases and performance bonuses through the Results Oriented Pay Program.
Performance Planning
In order for XYZ Company to accomplish its organizational goals, each individual employee must make a strong and relevant contribution. The performance planning process is a communication tool that cascades from organizational goals and objectives to Business Unit, to work units, and then to individual goals and objectives. In this process, individual expectations are tied to the organization’s goals and objectives.
The purpose of the performance planning process is to:
♦ Clarify understanding of the goals of the organization and work unit; and,
♦ Establish mutual understanding between employee and supervisor about the job’s performance standards and expected results.
Performance Evaluation
The purpose of the performance appraisal process is to:
♦ Provide employees with useful feedback on their performance compared to established performance standards and expected results;
♦ Improve employee productivity and job satisfaction by recognizing individual strengths and providing development plans for areas in need of improvement; and,
♦ Provide a rational basis for pay administration.
Performance evaluation consists of two parts: performance monitoring and performance appraisal. It is a natural result of evaluating the success of the performance plan.
Performance monitoring occurs during the course of the year subsequent to the development of the performance plan. The purpose is to provide employees with periodic feedback regarding progress/performance; to tell employees how they are doing.
It is to provide positive reinforcement when performance is as expected and going well, and to help develop steps for improvement if needed. It is also to ensure that goals and objectives remain current and relevant. The performance appraisal should include the entire year, not just the end of the year. Consequently, it is important that performance monitoring and feedback occur regularly.
Mid-year Review: Midway through the performance plan year (usually January), employees will receive a mid-year review, which documents an employee’s progress and performance compared to their performance plan. No numerical rating is provided by the supervisor during the mid-year evaluation process.
The annual performance evaluation occurs at the end of the performance plan year and is generally due by mid-July.
The annual ROPP Performance Evaluation will be finalized by having both the employee and supervisor complete the appropriate forms, signing, and dating the form, which is stored in electronic format and placed in the employee’s official personnel file.
Rating Scale
The standard point scale is from one to five. The scale is defined below.
1. Well Below Standard: Performance in the essential elements of the position is ineffective and completely unacceptable. Performance is well below the acceptable standards for quality, quantity, independence of performance, timeliness, dependability, teamwork, and other measures of performance or standards. Performance errors are significant and frequent and the consequences of error are extremely detrimental to the organization.
2. Below Standard: Performance in the essential elements of the position is not effective and unacceptable. Performance is below standard for quality, quantity, independence of performance, timeliness, dependability, teamwork, and other measures of performance or standards. Performance errors are significant and/or frequent and the consequences of error are detrimental to the organization. Acceptable initial review period performance, but much remains to be learned and demonstrated.
3. Standard: Performance in the essential elements of the position is acceptable for the journey-level worker. Performance meets standards for quality, quantity, independence of performance, timeliness, dependability, teamwork, and other measures of performance or standards. Performance errors are infrequent and have no impact on the organization. Good performance for the less experienced worker.
4. Above Standard: Performance in the essential elements of the position is above standard for the journey-level worker. Performance is above standards for quality, quantity, independence of performance, timeliness, dependability, teamwork, and other measures of performance or standards for the whole job. There is an absence of performance errors and steps to respond to future errors are implemented.
5. Far Above Standard: Performance is far above standard for all elements of the position. Performance far exceeds standards for quality, quantity, independence of performance, timeliness, dependability, teamwork, and other measures of performance or standards. Employee’s contribution to the organization is above that expected of an above standard journey-level worker for the whole job. Employee proactively implements activities to minimize performance errors.
Merit Rewards
Pay adjustments, except promotional increases will, if approved, take place annually on the first full pay period occurring in January.
A pay grid has been developed representing the amount of movement within the pay ranges associated with various ROPP ratings. The grid also determines the maximum percentage increase allowed in any fiscal year and is determined by the senior leadership team based on affordability. Any in-range adjustments will be given based on availability of XYZ Company HR funds. The pay grid is available from Human Resources and may be changed periodically.
Merit funds will be based on several factors: placement in our market, performance adjustments and affordability. The performance portion will be composed of two elements: payment within range and lump sum.) In lean years, very little money will be apportioned and in better years, the merit fund may be larger. The prime criteria for merit dollar funding will always be ability to pay.
Bonuses
Performance bonus pay will be paid in a lump sum for superior performance. Lump sum amounts will depend on ROPP rating received during the bonus pay period. The maximum lump sum amount possible for exempt employees is 20 percent and the maximum amount for non-exempt employees is 12 percent.
A rating below 3 in any given accountability will make the employee ineligible for a performance bonus. Though most bonuses will only be provided for superior performance, which is defined as a rating of 4.0 overall, at the CEO’s discretion the bonus payout threshold could be adjusted under special/unusual circumstances to allow for payouts to overall ratings of less than 4.0. Lump sum performance bonuses will normally be paid in September.
Finally, to ensure that it continues to satisfy the organization’s and its employees’ changing demands, an effective performance management and reward system necessitates constant evaluation and improvement.
Hope you have understood the performance Management and reward system in detail.
Also read 5 Types of Budget Friendly Recognition and Rewards Programs for best employees