In today’s economy, creating a fair and rewarding compensation plan for your employees can be a challenge. On Episode 118 of the Talent & Growth podcast I spoke to Jessica Zwaan about how she structures compensation plans for her employees. Jessica is the Chief Operating Officer of Whereby, as well as an external advisor for startups on operations, people and talent. We’ve previously talked about the science of putting together a compensation plan, and now we’re taking it a step further by explaining how to link compensation with performance.
Why should businesses be connecting comp plans with performance?
A lot of companies haven’t really started building a consistent, repeatable compensation framework yet. Once you have, the next step is obviously saying ‘What do we do with it now?’ It’s easier to build a compensation framework than roll it out and maintain it year on year, especially at the moment. Compensation is a living, breathing market force. It’s not something that you can set permanently, like ‘We pay everyone at 50th percentile, and this is our data set’, and then that’s it forever. You need to think about it every year or every quarter, to get more data. Your team will come to you and say that there are things that have been pressing against their salary expectations or their own performance, which I think is what we’re mostly going to talk about today. There are lots of external market conditions, and this is really a tough time and place to be a people or operations leader. Focussing on your people’s performance makes your plans flexible and equitable.
What are the common pitfalls that companies fall into when it comes to compensation plans?
Companies often don’t have plans. Changes are rolled out in a very ad hoc way, maybe every time someone’s anniversary comes around, or when somebody does a project that they’re proud of. There’ll be a vague structure about how performance ties to a compensation change. Let’s say Jane Austen is an engineer. She’s been working for a company for just over a year now, and a manager asks her in their one-to-one, ‘How are you doing?’, and she says, ‘I’d really like a compensation change.’ Her manager goes to the HR leader and says ‘I want to give Jane a compensation change. I propose 10%’, often the HR leader says ‘No, we haven’t given anyone 10%, we’ll give her 7%.’ That’s how the decision is made. The manager is completely shielded from the information about how those decisions are made after they make their proposal, and often, whoever makes the most compelling proposal wins.
Because these proposals happen randomly throughout the year in siloed decision making funnels, purely by the HR team, there is very little input from the managers who work with key members of the team. The team feels like it’s not fair, because they don’t understand what the actual process behind the 7% is. The interesting thing that does happen, particularly for anniversary-based pay changes, is that if you have a pay change at the beginning of the year, it’s more likely your paycheck will be higher than if you have one at the end of the year. That’s because everyone’s running on tighter budgets at the end of the year, whereas at the beginning of the year, everyone has a brand new budget to spend. That ends up compounding pay inequality throughout the year if you haven’t got a consistent timeframe in which you’re looking at performance and pay as well.
How do you determine which metrics to use when evaluating employee performance for compensation purposes?
This is one of the areas that HR leaders can be really creative and strategic in. Of course, you can just rate people from one to five on performance, one being poor performance, five being great. A lot of companies do use that, and it works perfectly effectively for them. I really like the idea of using two axes to drive not just performance, but performance in the context of another axis that we think is relevant. I use a grid that has performance and potential along either side. Essentially, it’s like how likely are you to be promoted within the next 12 months? We use something called active growth, because we are encouraging autonomy, which is operationally necessary for us as a fully distributed company. If somebody needs a lot of hand holding and their manager works at different times, then it’s going to be very difficult for them to be successful at Whereby, no matter how strong of a performer they are. So, we look for independent, effective and consistent growth behaviours.
We want people who are consistently looking for feedback, reaching out across different teams and asking them to collaborate on something rather than requiring a manager to make that connection, etc. That rewards the people within our business that are more likely to display independent growth behaviours. Another example I’ve seen in the past is using an axis full of values, behaviours and performance in your day to day role. If you require integrity from your team, then did they ship this new project while really thinking about the security features that were available to the customers and how it would be received by the press if something leaked? Your axes depend on what you need from your team.
Another aspect you could look at is competencies and skills versus performance. That’s great if you care a lot about outputs. They’ll measure how effectively you do your role on a day to day basis, how skilled or competent you are and what behaviours you demonstrated. The more likely you are to do those things on the two axes, the more likely you are to receive a high performance rating. This is an area where you can go beyond the standard in your market and create something that’s bespoke for your company, that’s easy to understand and drives strategically relevant behaviour for the team.
How do we ensure that our comp plans are fair and equitable across different levels and functions within the organisation?
There are two things that we know people care about with compensation. One of the most important things is that people really want the compensation framework that they operate within to be procedurally fair, which means there needs to be some structure around it. It needs to happen in the same way for everybody, and take into account the inequalities or the challenges between different groups and assess them equitably.
One of the things that really helps that sense of procedural fairness, both in the eyes of your team and the outcomes as well, is running a performance calibration. It doesn’t take an inordinate amount of time, but it’s not as easy as having a manager write an email saying ‘my team is performing well’. Performance calibration involves managers doing a one to five rating on performance, then a one to five rating on growth, before moderating the results. We put our results into a spreadsheet so that you can see the ratings for all the teams. We ask for clear, actionable, evidence-based feedback around why you’ve come up with that rating. This moderates all of our performance ratings, and shows us if a manager is not achieving their expectations as a manager as well.
Once all that calibration data has been collected, we gather all of the data and completely anonymize it. We look at it against tenure, gender, ethnicity, level and team. We try to see if there’s any outliers against a bell curve and see if there are any trends. It’s just another way of really interrogating that we’re being fair and consistent about how we think about performance, and then overlaying it with the most commonly discriminated against characteristics.
What are some key takeaways that people can implement in their business to get the ball rolling in the right direction?
If you’ve got a compensation philosophy already, you can take all of your data from it and put it all in a nice spreadsheet that everyone in the company can see. After that, you need to create some methods for measuring performance, then a method for calibrating those decisions. That’s a crucial step towards empowering your managers to understand performance and compensation, and giving them a direct link to those decisions. Make sure that you’re using that exact same methodology to forecast compensation changes and give yourself room in the budget for that. Those are the three main things; measure performance, create a calibration process, and then spend time forecasting within your budget.
To learn more about developing a compensation plan, tune into the Talent & Growth podcast here.