There’s a lot to gain from separating pay from performance — so is it time you changed your approach?
A happy, motivated and long-standing workforce is good for business. Not only is a high retention rate great for culture building, it also helps protect the bottom line.
So what can organizations do to ensure their staff members are satisfied at work? For one, giving and receiving feedback is essential — only by listening to their staff can leaders better understand the employee experience and troubleshoot any issues blocking productivity. But there’s an argument to be made for salary, too.
Every employee wants to earn a fair rate for the work they do. And they want the opportunity to earn more money, as their tenure in, and commitment to, the company goes on.
In this way, performance reviews and remuneration are naturally linked — they both form pieces of a larger staff satisfaction puzzle. So much so, in fact, that 90% of companies adopt a pay-for-performance culture, with the aim to attract, retain and reward talented employees.
But is this the best approach? Possibly not.
After all, we’re increasingly rethinking other aspects of people and performance management. Is it time to rethink salary talks as well?
We think so.
Where compensation negotiations and performance appraisals have traditionally been one and the same, the evidence is mounting that these discussions are more productive when done apart.
4 reasons why pay and performance should be discussed separately…
- Salary talks are the most dreaded business discussions
Whilst some people may find the topic more approachable than others, pay talks are still the most dreaded workplace conversation across the board.
Whether it’s discussing salary expectations or asking for a pay rise, these topics tend to leave employees in a defensive position, clammy-handed and shifting in their seats.
… and that’s hardly the ideal environment for giving and receiving feedback!
Instead, by separating these conversations — using one meeting to discuss salary, and an entirely different one to catch up on performance progress — both employees and managers alike may feel more open-minded about appraisals on the whole.
And whilst the nerves around money may never disappear entirely, there’s a lot to be said for normalizing financial discussions and removing the subjectivity from salary negotiations. The quickest and easiest way to do this? Position them separately to performance.
2. Culture is more impactful for satisfaction than pay grade — and culture is built through meaningful, rewarding, ongoing feedback
Arguably, salary discussions are so unsettling because they’ve been demonized too much — that is, we’ve spent so long saying they are difficult, and so of course, now they are.
Indeed there are 169 million results Google hits for ‘how to ask for a pay rise’, and many online guides emphasize the need to ‘fit your corner’ when it comes to pay.
Really, it’s little wonder employees enter into these discussions with trepidation.
So it’s time to change the narrative; to make sure that the other aspects of job satisfaction and employee wellbeing get the attention they deserve. And this becomes so much easier when salary talks and performance are dealt with discretely.
By removing the ‘dreaded’ topic of remuneration from a performance review, both the manager and the employee can focus on — and enjoy! — discussing personal and professional growth, intrinsic motivation sources, fulfillment goals and objectives and the overall employee experience.
In turn, this creates a culture where team members feel listened to and respected — a proposition that’s far more likely to attract, retain and reward talent than pay grade alone. In fact, a 2019 Glassdoor survey, found that over half of the 5000 respondents believed culture outweighs salary in job satisfaction.
And if positive company culture is a priority, then incentive-based pay should arguably be left behind entirely…
3. Incentive-based pay can have a hugely negative impact on team culture
Salary is important, no doubt about it.
Each and every employee deserves to feel financially stable in their role.
But there’s financial stability, and then there’s financial incentive. And the latter has been found to work detrimentally to employee wellbeing. In one study, researchers concluded that performance-based pay led to heavier workloads, lower job satisfaction and higher levels of stress.
What’s more, holding salary discussions as part of an employee’s performance review can involuntarily create a culture of competition and blame. With pay used as a yardstick for measuring and rewarding performance, colleagues can turn against each other — resorting to “self-serving, egotistical behavior”. It creates a competitive environment where employees can easily view themselves as pitted against each other for a finite number of raises.
On the flip side, if pay is removed as a reward for performance, the opposite occurs. When car manufacturing giant, Lear, dropped salary talks from the appraisals of 115,000 staff members, leaders saw “a noticeable increase in collegiality”.
So whilst it may seem reasonable to expect a cash bonus or pay raise to incentivize employees, if you want a happy, motivated, collaborative workforce, other rewards need to take precedence.
4. An organization’s performance management approach should make space for other, more intrinsic rewards
At Duuoo, we’re big believers in continuous performance management, and doing away with the annual performance review.
That’s because real-time feedback loops and frequent check-ins not only empower employees to be hands-on with their own development journey, this approach also creates space for greater intrinsic bonuses.
This may come in the form of a “job well done” email, or seeing their progress ticked off versus an agreed set of development goals. It could be having their hard work publicized across the company, or a recent success celebrated in a team meeting.
However it comes, regular recognition helps build confidence and capability — excelling each individual towards their full potential. By partnering with team members to draw up their own development plans, and meeting with them often to discuss their journey, managers can quickly learn what works as intrinsic reward for each employee. Be it autonomy, greater challenge, the chance to travel professionally, or working a four-day week.
After all, we know that when employees feel truly understood, they are more motivated to perform.
Ant therein lies the danger with cash — and therefore extrinsic — rewards. If an employee doesn’t get the pay raise or annual bonus they expected, it feels like a reflection of their inability or lack of commitment. Even if this is not the case.
If a staff member has only one touch-point for performance appraisal a year, and they are expecting to receive a pay increase, then that will be their focal point for the whole session. If they do get the salary hike they hoped for, they may not take on board the constructive feedback given as areas for development. If they don’t get a raise, they may allow this to overshadow the praise-laden feedback from their peers and seniors; they may feel they’ve not performed well at all.
Thing is, some years there simply won’t be money in the pot to hand out healthy bonuses at Christmas, or give teams the salary increase they want or deserve. So mitigate potential future disappointment by leaning on intrinsic rewards more than extrinsic ones, continuously throughout the year.
Now that’s not to say you shouldn’t treat staff when budget does allow! But for all the reasons we’ve explored so far, decouple the topic of compensation from performance appraisal and you’ll be putting greater emphasis on progress, rather than reward.
It’s time to separate salary discussions from performance management. Here’s how…
You probably won’t be able to overhaul your company’s approach to performance management overnight. After all, it will take work and reinforcement to separate pay from performance in employee’s minds, even if the talks now take place in different meetings.
But, as leaders, you can start to lay the right foundations from today. If you’re in a position to influence performance management in your organization, you can start with the following:
- Make feedback an everyday, collaborative practice — and that includes salary talks, when needed!
The best way to break down barriers to feedback and salary discussion is to make it a habit.
Sure, it might be difficult at first, but practice makes perfect, as they say!
Whilst there’s no ‘one size fits all’ approach to feedback in an organization, there’s a wealth of evidence to suggest that regular, continuous appraisal leads to a more highly functioning team. Invest in the resources your team needs to support real-time feedback loops. Train employees up on best-practice appraisal — both positive and constructive.
The best feedback is also delivered collaboratively. Don’t just hand out observations, partner with your team members to get the support they need to fill experience and knowledge gaps, and bolster the natural strengths they show.
You’ll also need to be receptive to feedback of your own, too! Listen to what your team members tell you, and respond to it.
As for the regularity of salary talks, that’s largely up to you. What’s most important, though, is to change the narrative surrounding pay.
If you feel your team ‘dreads’ discussing pay because it’s not welcome for debate 364 days of the year, perhaps experiment with more frequent check-ins.
Regardless of how often and when, make sure you focus on the ‘why’ behind pay decisions too…
2. Help employees understand why their salary is set as it is
Market rate is one way to help explain pay grade — and it’s a good way, too. Positioning an employee’s compensation package versus similar roles frames the extrinsic pay-off with objective measures. At the end of the day, it’s hard to argue that a market salary rate is performance-dependent.
But, more than this, companies should exercise greater transparency on remuneration decisions. If an employee will receive a bonus or pay rise: why? What exactly are the reasons? If it represents a percentage of sales brought in, then tell them. This will help encourage the same behavior again
4. Remember: salary is important, but high performing employees should be rewarded intrinsically too
In the case for decoupling performance reviews from salary talks, the final message shouldn’t be that compensation doesn’t matter.
True, salary might not be the most important factor influencing job satisfaction, but it is crucial for a sense of security and wellbeing — indeed, 80% of US employees live paycheck to paycheck, and leaders would do well to bear this in mind. As a result, each and every pay discussion should be given the time and importance it deserves.
Nevertheless, salary shouldn’t become a primary means of motivating or rewarding high performers. Instead, look to purpose, responsibility, autonomy or challenge — collaborate with team members to identify the intrinsic motivators which work for them and create a development pathway which puts these within their reach.
Are you looking to restructure your performance management approach? We can help
If you want to explore new ways to structure feedback within your organization — and, indeed, set goals and objectives that are both intrinsic and extrinsic in nature — then Duuoo can help.
Our continuous performance management software better connects managers with their teams, providing a platform for open, real-time discussion, and can even help you have more meaningful conversations at work.
Get in touch today to see what Duuoo can do for you.
Read more at Duuoo.io/blog