Part III: How to create a performance culture — What is the role of compensation?

Everyone in the business cares about compensation.

1. Compensation in knowledge-based companies can be as high as 80%+ of the budget.
2. Boards and CEOs often see compensation as the primary driver of executive and employee behavior. (My own opinion: this is true a lot of the time for some people but not all of the time for all people).
3. All employees care about their compensation and, if they are managers and leaders, their teams’ compensation, naturally!

How can we use compensation to drive performance cultures?

How do you motivate people to do great work? Everyone needs to see that people who do great work get the most rewards and compensation and that people who haven’t yet done great work have a path to doing that work and getting rewarded for it (see more on this last element in this post on performance assessment and career pathing).

There are 3 things in particular I think need to happen to achieve this as an organization:

1. Make the connection between compensation and performance clear for your people. How are performance assessments tied to base salary, variable compensation or other forms of compensation. I usually make this very specific and numerical (e.g. showing a grid of how various performance ratings or goal achievement translate to specific compensation changes. The grid looks deceptively simple but is usually the product of multiple weeks and months of modeling based on financial budgets, performance rating distributions, and market assessments). I’ve often publicized the grids via HRBPs and manager sessions, providing material for managers to share with their employees in 1:1s. In one instance we decided as an executive and HR team to share the grids via email and, to our surprise, it worked well. More and more companies are doing this.
2. Build reward and compensation systems that are above all fair — decisions are market-aware, and are made based only on how an employee performs (tied to clear, well-communicated, relevant and objective criteria such as competencies or well-defined goals). Everyone knows when the system is not fair. Make it fair, and they will know it’s fair.
3. Communicate clearly, consistently and earnestly about how the process works, without compromising confidentiality (there is an appropriate level of transparency and not every detail can be communicated, but a lot can still be shared to provide people a window into how compensation works at your company). Clarity and predictability around the consequences for great performance creates even more faith in the system and motivation to succeed within it. This means communicating who is involved, when key decisions are made during the year, and the principles being used to make those decisions. If you are an HR leader looking for more specific guidance (e.g. communication plans, templates, talking points, decks, etc. for different audiences such as boards, exec teams, managers, all employees, etc.) please reach out.