When the Future of Work and Future of HR is discussed, there is one topic that always seems to get overlooked and this is rewards and performance. Of all the changes made to processes, systems, and the impact of technology, the annual pay review process has barely changed in the past several decades. The vast majority of performance review processes are still focused on individual achievement, even though research has proven that this is not the most efficient way. Organisations are still using a compa ratio designed 50 years ago and wondering why they can’t attract or retain talent. They are even offering the same life insurance cover to a single 25-year-old and a 45-year-old that is married with 3 kids. It needs to change.
Pay for performance
Research has comprehensively proven that the highest performing organisations reward their employees based on team goals, not just individual goals. Despite this, less than one third of organisations operate in this manner. Moreover, research from Mercer shows that only 2% of leaders believe that their performance process delivers high value. Yet, the performance processes of these organisations remain the same. Only half of organisations set goals at a business unit level as well. So, if no goals are being set in 50% of firms at a business unit level, how can performance even be assessed? It is also well established, that people leave managers and not businesses yet 70% of businesses do not rate their managers on their people leadership capabilities and only 9% reward their managers on their ability to lead people.
There needs to be a significant shift in tying reward into performance. Managers need to be assessed based on their ability to lead and get results. Issues like attrition, number of employees under them learning new skills, number of employees promoted under them and so on should all directly impact their pay and bonuses. Likewise, for employees, if they do not deliver their goals, they should not expect a pay rise or a bonus. Such things should be earned by delivering valuable outcomes, not as an entitlement merely because you stayed with the company for 1 year.
Compa Ratio’s are outdated
There is a global talent shortage. That is an undeniable fact. As we move through the fourth industrial revolution, businesses all around the world are struggling to hire and retain talent. One of the key reasons for this struggle, is their use of compa ratio. This is a concept that is now pretty much 50 years old. It no longer serves its purpose. When you are in a talent short world, tying in a person’s salary to an industry mid-point instantly handicaps and organisation in its ability to hire good talent. If you pay more than an average salary, you are above the mid-point and most organisations hate to pay above the 1.0 ratio.
This means that the only people that fit into many of these organisations pay brackets are low performers. If the average salary is $50,000. This means that an average performer at a competitor should already be paid $50,000. For them to move, they would expect a pay rise, but most organisations will not offer this as it involves paying above the industry mid-point. Therefore, they set their own budget at $50,000. This means that the only people that will consider their role is the bottom third of the talent pool, as for them, being paid equal to their level, the mid-point is a pay rise, and they will therefore be open to making that move.
All of this is before we then factor in organisations are now trying to acquire very niche STEM related skill sets and wondering why they can not afford them. Again, this is down to the compa ratio. Because 50 years ago when this was created, someone with 10 years’ experience, regardless of skill set was roughly paid the same. There were no agile ways of working and the concept of T shaped individuals was unknown, and someone with 2 years’ experience in an area, was not worth the same as a Senior Manager with 15 years of experience. This new reality often breaks an organisations entire organisation structure and pay bandings.
Generic employee benefits
Finally, an organisations blanket approach to employee benefits also needs to change. Not only is a company wasting huge sums of money each year on benefits that many employees do not need, it is also not providing benefits that would be useful to employees. If you have two employees working for the same organisation at the same level, they receive the same employee benefits regardless of their own personal circumstances. This means they would both receive life insurance for the same amount, even if one were single and had no family, and the other was married with 3 children. This is stupid. Likewise, the married person may be given extra leave, due to having children (something very common in a place like Singapore), yet the other will not receive any additional leave, even though they may have a sick parent who requires a lot of care. Employee benefits need to be tailored to the individual.