Performance management (3 of 3): discretionary reward

28th September 2015

Staff member Julia

Julia Hanna

Can you see clearly?

You’ve followed the trailblazers from Blog 1 and revolutionised performance management; ditched the annual cycle, ratings and bell curve to embrace ongoing honest conversations.

The consistency/discretion debate from Blog 2 has brought you down on the side of manager discretion in reward. So how do you make it work?

It’s true that the more skilled managers will have an instinct for how to do this well. But the decision to ‘remove the shackles’ and give managers more discretion in reward has the potential to bring significant disorder and unfairness.    

This new way of rewarding performance requires careful support. Many aspects of performance and reward will become more important to get right than ever before.

Here’s four areas of focus:

Have a strong purpose

I believe a strategic review of reward should be at the heart of any performance management change programme. Clarity of purpose for both will ensure decisions complement each other. This integrated approach brings clarity to how performance in your organisation translates into pay.

Whatever reward levers you employ be clear on the purpose of each. This guides manager decisions. Is the function of pay retention or reward? Is the function of bonus to share success or motivate the best?

In an environment where managers have discretion, it is even more important to carefully define the factors behind decisions. Robust organisational values and culture, a vision for your business and the people and behaviours you need to succeed, will determine ‘what good looks like’. This drives reward. 
Know your drivers and be as specific as possible. For example, is pay progression driven by a complex mix of factors such as market rate, performance, potential, value of role to business, salary of others in team and scarcity of skills required?

Make reward an ongoing process

If your ‘new’ performance management is ongoing and forward-looking, reward that remains annual and backward-looking will be disconnected.  Greater alignment could mean:

• Rewarding behaviour/values/achievements ‘in the moment’ with impactful recognition
• Rewarding outputs (e.g. project/business milestones) through frequent bonuses
• Rewarding inputs (e.g. skills, knowledge) that drive future success through pay
• Conducting pay reviews as and when required, not annually
• Reserving annual bonuses for rewarding company performance
• Creating a development fund as part of reward to build the skills needed for the future

It’s about ensuring the implementation of performance and reward is integrated and complementary. 

Ensure line managers are accountable

Empowering line managers will of course require additional skills and ongoing reinforcement of the purpose of performance and reward. 

Employees need to trust line managers to reward fairly. And this trust is a key driver of engagement. It requires honest reward conversations face to face.  Only then can the line manager look the recipient in the eye and explain the decision in context.  

It follows that discretionary decisions require managers to have accountability for reward budgets. Perhaps take this a step further with people budgets where line managers control the investment in both reward and development.

Make line managers accountable for the impact of their decisions. Reward them for engagement levels in their team, the impact of their decisions on pay equality, and on business success.

Execute well

Greater discretion around reward means managers will embody your reward policy. So it’s even more important to get the foundations right:

• Have a clear strategy, so that everyone knows and understands the parameters
• Know your pay stance against the market and provide credible data
• Decide what ‘fair’ means – what factors drive your decisions and their relative importance
• Create a broad pay framework with clear progression principles
• Be clear about the purpose of each element and make them impactful

These foundations are not about restrictions but about guiding flexible application. 

More discretion is likely to mean more complex decision-making. Big data brings opportunities to support those decisions with more robust and timely data.  

To conclude, what is clear is that discretionary reward requires careful integration of performance and reward. And choosing it is just the start of an important change programme.

This is the 3rd and last of our Performance Management trilogy. Read 1 and 2 here.

Image courtesy of Brandon.

How we can help

At Verditer we work with you to establish an approach to performance management that is integrated with reward, aligns with your culture and drives performance.

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