Performance Appraisal Blog

History’s Lessons for Modern Managers



If performance management is the process of ensuring employees perform better, you first must define what you mean by “better.” Front-line managers may define it as staff accomplishing daily tasks. Senior leadership may define it as improving the organization’s overall efficiency. A team member may define it as developing new skills to advance a career. Good performance management tools must link all three definitions.

When you have clear performance standards—and straightforward metrics for demonstrating whether they have been achieved—you can fit those standards into your organization’s culture, leadership styles, and business model.

With the dawn of the Industrial Age and its shift from farming to factories, came a more organized approach to performance management.

A quick look at the history of performance management can help you decide on the best strategies, methods, and evaluation metrics for employee performance.

Performance management is as old as work itself—our ancestors could count whether this year’s hunting had more success than the last’s. Farmers could assess their fields’ productivity year by year. Merchants evaluated which items were becoming more popular with customers.

With the dawn of the Industrial Age and its shift from farming to factories, came a more organized approach to performance management. Supervisors devised new tools to improve productivity such as assembly lines. An innovator named Frederick Winslow Taylor was among the early proponents of scientific management: the science of doing each task exactly right with a minimum of wastage. Both Henry Ford and Frederick Taylor used time and motion studies to determine work processes and performance standards.

However, not every new idea was an advancement. Douglas McGregor of MIT devised Theory X, which says that employees love to shirk their duties and take no personal pride in their jobs. Managers adhering to this type of performance management model were prone to pay poorly, limit rewards, fire workers who struggled to meet quotas, and place more emphasis on meeting daily targets than on the employees’ potential for long-term contributions to the organization. Early managers disregarded the inherent human differences in their employees, often to the detriment of both the organization and the staff.

Management theorist Henri Fayol believed that while individual interests should be subordinate to the organization, the organization must allow employees to innovate and should build team spirit. However, most work environments were not designed to encourage positive employee involvement in these ways.

While advances have been made since those early years, deplorable working conditions still exist in today’s world, as evidenced by the horror stories that have come out of Sports Direct’s U.K. warehouses.1 (Goodley and Ashby, 2015; Lawrence, 2016). Some managers have yet to learn that treating employees well and enabling their rise in the organization is crucial for long-term business success. Unrealistic performance standards and punitive working conditions create attrition, absenteeism, and health issues; and leave the company susceptible to legal and regulatory action.

Going back to the history of management, the Hawthorne experiments began changing managers’ long-held notions by showing that creating a positive social environment among employees can improve their productivity.

In time, McGregor’s Theory Y, which argued that people desire to work hard toward goals and will respond to positive reinforcement, gained a greater following. Today’s norms of feedback and employee engagement are proofs of how communication, attention, and consideration can improve employee performance. However, despite these positive shifts, human relations movement remained more paternalistic than progressive.

Until the 1950s, the most popular tool for measuring performance and results were annual appraisals conducted by the supervisor. These appraisals were kept confidential and served as a basis for promotions, increase in salaries, incentives, and dismissals. In most cases, decisions were not reviewable. Many employees felt that performance management was out of their control and often more punitive than beneficial. Even today, managers who maintain dictatorial control over performance appraisals reduce the efficacy of performance management as a tool for employee development and engagement.

Peter Drucker revolutionized perspectives on performance management with his Management by Objectives (MBO) technique, which included tenets such as identification of organizational objectives; the creation of specific, measurable, achievable, realistic, and time-based (SMART) goals; joint goal-setting between employee and supervisor, periodic feedback about performance, frequent monitoring of performance, and honest evaluation of results. The change was meaningful: as employees gained a voice in their performance standards, they saw a link between their performance and the organizational objectives. They could also then improve performance based on transparent feedback. Today’s performance standards have built on the MBO approach by linking themselves to the firm’s strategic objectives through the Key Result Areas (KRA) and Key Performance Indicators (KPI).

In this new approach, employees communicate more easily with supervisors, are better aligned with organizational objectives, and tend to accept decisions stemming from their appraisals. Employees are also more likely to improve performance according to the received feedback and remain engaged in their work.

In the last few decades, performance appraisals have begun to include an estimation of an employee’s potential. This metric compares the employees’ historical performance with their potential for further development. Potential appraisals can provide HR managers with a rich source of internal candidates who can be developed to rise within the organization. However, this entails several caveats. First, supervisors must be trained as mentors or coaches in order to effectively identify the employees’ capacity for professional growth. Second, performance management must be supported with development opportunities. Finally, employees must be given opportunities for promotion and other rewards that build trust and faith in the system.

In this new approach, employees communicate more easily with supervisors, are better aligned with organizational objectives, and tend to accept decisions stemming from their appraisals.

In this era of agile HR, performance management has become a highly sophisticated exercise. Rapidly developing software, artificial intelligence, and swift advances in communication technology can help in determining standards, providing feedback, and measuring performance while eliminating psychological errors.

Despite vast historical changes in performance management and the degree of technological sophistication available to your organization today, one thing remains unchanged: unless employees truly believe your performance management system can help them develop, they will lose faith in it just as their predecessors lost faith in the punitive systems of the Industrial Age.

Today, you can apply a sophisticated performance management tool that systematizes goal setting, synchronizes employee expectations, monitors employee accomplishments, gives continuous contemporary feedback, and decreases time spent on writing performance reviews. That tool is called Perfecting Employee Performance.

References

1Goodley, S. and Ashby, J. (2015) ‘A day at “the gulag”: what it’s like to work at Sports Direct’s warehouse’, The Guardian, 9 December.
Lawrence, F. (2016) ‘This is a brutal and inhumane way to treat staff – and Sports Direct is not alone’, The Guardian, 8 June. Available at: https://www.theguardian.com/commentisfree/2016/jun/08/inhumane-sports-direct-mike-ashley-workforce.

Core Values – Say What?

 



Beliefs That Guide Actions

Core values defined simply are the basic beliefs which guide every individual’s actions, whether at work or at leisure. Like individuals, organizations too have core values which help them set apart their culture and influence their strategy for reaching common goals. For an organization, core values can help determine the key priorities, support or even help create a vision, and build policies and practices that uphold them. In a sense, core values form the soul of the company – its principles, beliefs, and philosophy. This is why core values are considered a peek into the organizational culture. Unfortunately, many organizations only attend to their technical expertise while ignoring their underlying capabilities that can drive a sustained competitive advantage.

Core Values Help Decision Making

If customer delight is a core value, consistent low rankings of customer feedback about any issue needs immediate attention.

  • Educating customers. Core values can tell customers and other stakeholders what to expect from a company. Proclaiming a core value, however, needs to be backed up by evidence.
  • Building awareness among employees about what the company aspires for and creating a positive and enabling culture to do so.
  • Guiding managerial action in times of confusion and struggles. When offered an alternative refrigerant technology to CFCs, a handful companies agreed to adopt Greenfreeze despite the huge costs of revamping their production and marketing processes. Such a decision was made easier by a core value of sustainable and green operations.

Why do some organizations not state their core values?

This missed opportunity in corporate cultural evolution is perhaps because distilling what a company stands for in a few keywords is not an easy task. It may not be easy, but it definitely is essential. The first step in identifying the core values is the reflection of whether they need to be identified or created. If you feel your organizational culture is positive and enabling, identify what makes it so. If you feel it needs amendment, then identify why, and mark that as a core value. In this way, you will have a set of guiding posts of what needs to be changed to achieve your objectives. If you do not know your objectives, then the core values cannot succeed.

Identification (or Creation) of Core Values

Support is needed by both HR and the line managers. The HR managers perform the role of enabler by:

  • Resourcing the right candidates who share core values and have demonstrated them in the past or at least shown an interest in doing so in the future.
  • Modifying HR policies of onboarding, learning and development, and performance and reward management to demonstrate the core values in action. If employee focus is a core value, then career development should be a major HR policy. Any core values that remain unsupported in practice are empty baggage.
  • Enabling the demonstration of core values in practice. If employees perform volunteering in line with “social responsibility” than some form of recognition (not necessarily financial) is needed.

Line managers make sure that the core values are embodied in the company operations. With their support, the core values of “quality focus”, “innovation”, and “customer focus” can be reached in practice. In fact, the identification of core values is only possible by involving the line managers in the process and asking them what they like to see in their workers or what is needed. Like the organizational vision, core values are also best approached in a collaborative framework that can make them universally accepted and used.

Many managers scout for core values by looking for them on the internet. A number of links provide a “comprehensive” list of core values for leaders to choose for their companies. But can this method of copy paste really work? Sure it can yield a list of five desirable values to be demonstrated on billboards and the company website, but the values remain empty and unfulfilled.

Collaboration

What is needed is a collaborative, brainstorming exercise that not only identifies the core values; it also brings the gaps in working practices out in the open. Ask your line managers and employees to come up with their own lists of core values that they feel should be part of the company. Conduct group exercises with your main managers to identify the final list of values. It is important that the final list really does represent the company and is not the most popular or most cited value. This precaution will avoid popular and empty core values from being included which may not inspire people.

An important consideration is that each core value should be defined well. Keeping five keywords may be a good idea to remind all employees of the core values, but each of them should be able to explain their meaning in the same manner.

Examples

The New Zealand firm James Wren & Co.

“Three coats means three coats.”

James Wren & Co. are a high-quality painting contractor in existence for over a century in Dunedin. They distinguish themselves in a market driven by cost leadership through their core values. Managing Director Richard Daniell has explained his Core Value statement by stating:

“It is easy in this industry to get away with one less coat if you tint your sealer/primer coat, and many of our opposition are known for it. We know you can do it, too, but you end up with an inferior finish, so we choose not to take the shortcut approach, often to the detriment of securing a contract. It is core because we are prepared to miss out financially by not securing contracts; it is spoken virtually every day by either one of our shareholders, estimating staff, tradesmen, supervisors, or clients. Examples of it are given in every edition of our newsletter. We incorporate this Core Value in nearly every decision we make.”

This definition explains Wren’s commitment, espousal, and usage of core value and shows how each and every employee understands and practices it. If you join the company, you will know quality is not compromised here, if you hire them as contractors, you will expect quality.

Ben & Jerry’s

  • Our Product Mission drives us to make fantastic ice cream—for its own sake.
  • Our Economic Mission asks us to manage our Company for sustainable financial growth.
  • Our Social Mission compels us to use our Company in innovative ways to make the world a better place.4

Google

  1. Focus on the user and all else will follow.
  2. It’s best to do one thing really, really well.
  3. Fast is better than slow.
  4. Democracy on the web works.
  5. You don’t need to be at your desk to need an answer.
  6. You can make money without doing evil.
  7. There’s always more information out there.
  8. The need for information crosses all borders.
  9. You can be serious without a suit.
  10. Great just isn’t good enough. 5

These core values not only explain the company objectives (Great just isn’t good enough) they also tell the employees what they can and cannot do. They don’t need to wear formal clothes but they do need to focus on the user.

Risible Example

While working with a client to zero in on their core values and put them into a form that effectively demonstrates what the company truly values, I reviewed their many attempts to memorialize their beliefs. My client had many good values such as respect, teamwork, integrity, helping, trusting, etc. They even had defined each. Respect means not talking down; staying professional; listening; not throwing anyone under the bus.

As I pondered each I saw a theme: we do this and we do that. And the reason we do this and that is so we can effectively and efficiently take our product to market. The “we” here being the company and all of its employees. From that we came up with the following one-line value statement.

We, We, We all the way to Market

Given this value statement as the title of the company’s core values points out how interdependent all employees are and that they must rely on each other in order to be of value to their customers. Given the statement’s comical tone it is almost instantly memorable. A little further definition provides the greater meaning while still supporting the “we” theme.

  • We respect each other.
  • We work together.
  • We do what we say.
  • We help our customers to achieve their business objectives.
  • We hire, invest in, and delegate to the best people.
  • We make significant contributions.
  • We innovate.
  • We talk openly.
  • We embrace change rapidly and with passion.
  • We lead.

We then sought to provide examples of each value. The examples came from the employees of the company as a demonstration of the value in order to present real life scenarios. The full package was made public so all employees could see the values and how they relate to their jobs and their interactions with everyone at the company.

We respect each other.

  • Don’t talk down to employees.
  • Stay professional.
  • Listen.
  • Give honest feedback, up and down.
  • Don’t throw anyone under the bus.

We work together.

  • We are a team.
  • We succeed together.
  • No single person is better than another.
  • Everyone contributes.

We do what we say.

  • We meet our commitments.
  • We do what is right.
  • We trust each other.
  • We help our customers to achieve their business objectives.
  • Ask customer about their business objectives.
  • How do our products and services fit with their objectives?
  • Can we help them visualize beyond their current objectives with our products and services?
  • Make them know that we only succeed if they succeed.

We hire, invest in, and delegate to the best people.

  • We, the team, hire great people.
  • We invest in our people’s development.
  • We trust employees to do the right thing.
  • We hire employees with a sense of humor.

We make significant contributions.

  • Solve the important problems.
  • Find out what the customers big problems are.
  • Learn quickly from problems.
  • Share the learning.
  • Increase the velocity of our execution.

We innovate.

  • Bring new and meaningful innovations to market.
  • Recognize the need for change.
  • Predict change.
  • We are constantly learning.
  • We are constantly improving every aspect of our business.

We talk openly.

  • Management and employees talk directly to each other.
  • Each listens and responds professionally.
  • We have a great working environment.
  • We share the news of our successes.

We share stories of Core Values in action.

  • We embrace change rapidly and with passion.
  • We know there will be change.
  • We do not fear change.
  • We welcome change so that we can grow and improve.

We lead.

  • We don’t wait for our competitors to set the direction.
  • We as a team move in the same direction at the same time and at the same speed.

Core Values – the Cohesion Factor

Core values tie a firm to its employees and make them both answerable to their clients and stakeholders. They are an essential management principle and can make your organization run smoothly.

1Morgan, J. (2018) ‘How Greenpeace changed and industry: 25 years of GreanFreeze to cool the planet’, Greenpeace, 15 March.
2https://www.threadsculture.com/core-values-examples
3 https://www.threadsculture.com/core-values-examples
4https://www.benjerry.com/values
5https://www.google.com/about/philosophy.html

Managing a Remote Workforce




This article was original published April 1st, 2020

 The coronavirus pandemic has produced a massive shift in the working conditions of millions—now, more employees are working from home than ever before.

Managers must adapt to flexible working conditions to keep their organizations competitive

Many companies have remote-working policies for occasional situations or for those employees who regularly work remotely. Even setting aside the current urgent demand for social distance, remote working is on the rise. Managers must adapt to flexible working conditions to keep their organizations competitive.

Cloud-based tools can help managers become more effective at managing remote work

How can I oversee remote employees?

According to Sujan Patel, co-founder of Web Profits, an abundance of cloud-based tools can help managers become more effective at managing remote work.1

Should I oversee the work or the employees?

Getting work done is the objective. That’s accomplished through a three-step process. First, tell employees what you want them to do and, just as importantly, how you want them to do it. Second, monitor what employees accomplish and how they get it done. Third, help them correct their course as necessary. You’ll need to provide encouragement, constructive criticism, and guidance on problem-solving.

All three steps can be done via a cloud-based system called Perfecting Employee Performance (PEP). Let’s look at two key modules:

  • PEPtalk™ is a remote coaching tool that works without face-to-face interactions. It’s 24/7/365 documentation of the manager’s feedback and two-way communication.
  • PEPpulse™ provides ongoing goal status updates that show progress toward goals. Data is downloadable to help you identify employees that may need added attention.

PEPtalk™ and PEPpulse™ can help employees focus on progress instead of activity by aligning employee goals with management and company goals.

80 percent of U.S. workers favor jobs with flexible working conditions

How do I get buy-in?

Good news—employees already favor distance working. In an International Workplace Group survey, 74 percent of respondents described flexible working as “the new normal” and 80 percent of U.S. workers favor jobs with flexible working conditions. 2

Even after the pandemic ends, remote workers will remain the new reality. With PEP, you can be sure you’ve got the tools to effectively lead them.

Emergency Savings Plans (ESP)

 

Nearly 78% of Americans live paycheck to paycheck and about 40% of us would struggle to come up with $400 for an unexpected expense. We need to create a social norm of being prepared.

This article suggests a remarkable—and yet, relatively unknown—strategy.

Read More at HumanResources.pro

Goal Setting – Road Map to Success

 

Setting goals in order to achieve a desired end result has been around since Noah built the ark. However, there hasn’t been a wide spread increase in the number of people who do it well since things dried out. Nearly all companies utilize some form of goal setting. And yet many employees still do not understand how their contributions tie into the overall success of their organization. With no communication or acknowledgement of their individual performances except for long-after-the-fact appraisals, it is no wonder that goal setting is an exercise to be afraid of and nervous about and not what is should be – a road map to success.


What Say Employees

Surveys have shown that only 1 in 7 employees understand their company’s strategy and direction. And 1 in 7 employees feels engaged by their job. I don’t know if it is the same employee who understands the company’s strategy or not. In addition, just over half of employees say their manager clearly communicates goals and objectives. Is it any wonder that less than half of employees are satisfied with their company’s system for managing their performance?


Failure to Communicate

The enormous failure here is recognition of the crucial role that goal setting plays in employee performance management. The first step in effective employee performance management is to Communicate Expectations – tell employees what you want them to do and how you want them to do it.

Unless Tom can see how his goal achievement has affected his team’s performance and contributed to the company’s progress, he will consider them as two separate happenings. Sure, we understand that our pursuit of success with respect to one of our goals has affected our performance increase or incentive and promotion opportunity, but do we link it to the results published in the annual report? How do we ensure individual and team goals are aligned and that all employees understand why goals are being set?


Linkage

There are several ways of linking individual and organizational goals. In fact, it can be argued that the entire art and science of management runs on ensuring that employees have a personal stake in the organization. We have come a long way from the management principles suggested by Henri Fayol where unity of direction and subordination of individual interest were considered to be a reality. Today talent management thrives on understanding what highly talented employees want and ensuring that they get it.


OKRs

One goal setting methodology that is used in many dynamic businesses such as Google and LinkedIn is Objectives and Key Results (OKRs). OKRs are used to track progress as teams move towards achieving objectives that are ambitious and in alignment with the entire organization. OKRs are built on the philosophy that goals need to be clear, inspiring, public, consistently measured, and permitted to fail.

Whether you use OKRs or your company’s performance management system the principles are comparable.

  • Bottom-up collaborative goal setting process which empowers employees and assures their acceptance and commitment to achieving the goals
  • Supervision that educates employees and shows the linkage between employee, team and company goals and objectives.
  • Coaching that is robust, frequent, encouraging, and avowed. You can find more details about this in our article on Coach for Success
  • Continual tracking and reporting of progress toward clearly expressed milestones.
  • Ability to course correct as variables change and further lessons are learned.

No Measurement = No Goal

No goal is effective without concomitant measurements. These measurements stand as proof that the goal has been achieved. If the goal to be increase existing customers’ engagement the measurements can be:

  1. Reduction of customer turnover rate by 5%
  2. Obtain an average NPS of 95 or better.
  3. 100% completion of customer engagement profile forms.

Assessment of goal achievement requires increased frequency of feedback and evaluation. While the estimated time to achieve a goal may be 12 months, milestones can be achieved weekly, monthly or quarterly to ensure on-target total goal achievement. The employee performance management system should allow for annual, semi-annual, quarterly, or monthly goals and assessments. Strategic, tactical and operational goals with related milestones and tasks should fit comfortably within the performance management system.

The benefits of flexibility in creating goals and measurement cycles can contribute to making an organization that is more responsive to environmental changes and more agile in its managerial policies.


Stretching Improves Health

Some goals or some milestones should be ambitious at the outset. Encouraging employees to stretch their capabilities and knowledge into the unknown has benefits not only for the company but also the employee. We do not necessarily know how far we can get until we are well-tested. This is not setting people up to fail. If we know that achieving a new method that is faster than the current method and our goal is to do so in 6 months, then implementing the faster method in 8 months is still a win and should be rated as such. Such S-Goal achieved with desired quality and within a reasonable interval beyond the stretch date should receive a 100% rating.


Get SMART

  • Specific – What needs to be accomplished?
  • Measurable – How will w prove that it has been accomplished?
  • Achievable – Is it possible to accomplish?
  • Relevant – Does the goal fit the employee’s skills and responsibility within the team/department?
  • Timely – What is a reasonable time within which to achieve the goal?

Get even SMARTER

  • Specific
  • Measurable
  • Achievable
  • Relevant
  • Timely
  • Education – What goal can lead to increased knowledge for the employee? (Locate a program which will provide the employee with additional training related to progressing in current job field, obtain approval of cost and time off, and receive a passing score.
  • Reward – What goal, when achieved, can be a reward for the employee? (Is there a course or activity that will provide them employee with additional knowledge beyond the current job field for the benefit of the employee’s broader development?)

Having a performance management system that provides professional development goals increases employee engagement noticeably. These goals should allow an employee to develop skills specifically related to their position in order to help them progress professionally. In addition to having their own professional development goals, managers should have goals that support their team’s development. You can find more details about this in our article on Communicate Expectations


The Bottom Line

It is clear that goal setting is beneficial in motivating employees and accomplishing organizational objectives. From an HR perspective, effective goal setting offers an added benefit of improving the performance management process. Once employees understand how their goal achievement can affect their professional advancement, they will be more engaged and committed, thus maximizing the effectiveness of the performance management process. They will also make strides in their own development which creates a win-win proposition for all.


Compensation Calibration Using Range Ratio

 


Robert Griffard and Geoffrey Griffard


Precise Compensation Calibration will allow an organization to gain an advantage in the market place. Compensation Calibration begins with the Compensation Philosophy which is developed, administered, and maintained with thorough analyses of market data. This paper will demonstrate how Range Ratio is the most effective market analysis tool for compensation. Technology has made more data available through compensation surveys. Range Ratio uses the increased data to structure and administer pay programs. A properly calibrated compensation program is easier to communicate to employees and managers—resulting in greater transparency, consistency, and effectiveness.

Compensation Philosophy

A company must articulate its compensation philosophy so that every employee’s pay is administered in accordance with the predetermined, consistent direction set by the company. Development, maintenance, and analysis of pay ranges then become straightforward. In addition to HR’s expertise in these actions, every manager of employees must understand the company’s compensation philosophy so that they can make decisions in line with that philosophy—and explain to employees how pay is determined. The education of managers and employees is central to the smooth, consistent, and orderly administration of employees’ pay, which in turn is fundamental to the company achieving its goals and objectives for productivity, growth, and profitability.

An Example Compensation Philosophy

Consider the following example of how a company stated its compensation philosophy.

XYZ Corp believes that our employees are our most significant resource, and our continued success depends on maximum use of their contributions. We strive to have compensation policies and practices demonstrate our appreciation for each employee’s contribution.

XYZ Corp’s compensation philosophy is to:

  • Reward employees based on their contribution to the company’s success.
  • Consider on-the-job performance as a primary factor when determining changes to an employee’s pay.
  • Provide employees with compensation opportunities that are competitive within the market.
  • Provide employees with compensation opportunities that are equitable within the company.
  • Ensure that all employees and management understand XYZ Corp’s policies, plans, and programs that govern compensation.

Purpose

When paired with an effective communication plan, the XYZ Corp compensation program supports, reinforces, and aligns with our mission and values, business strategy, and operational and financial requirements. Our compensation program balances the needs of both employees and the business, with a goal of growth and profitability.

The XYZ Corp compensation program is designed to attract, motivate, and retain talented employees who drive the company’s success. We strive to provide base salaries that are competitive and appropriate for the market. Each position is assigned a pay range as determined by XYZ Corp based on the position’s duties, responsibilities, and qualifications. The pay range is a reflection of what the market pays for the same or similar positions. The pay range minimum approximates the 20th percentile of the market while the pay range maximum approximates the 90th percentile of the market. The pay range midpoint is an average of the minimum and maximum.

Note: Deciding to use specific percentiles of the market to set the pay range minimums and maximums is a major step in the evolution of a company’s management philosophy. Not only does this decision require a solid understanding of how the company manages employee compensation, it also requires management to put teeth in its commitment to take full control of pay—including pay plan development, communication, administration, and ensuring all managers are trained in their role of compensating the company’s employees. Whether to use the percentiles in the above example (20th and 90th) or to use some other percentiles should be a matter of enlightened discussion and definitive action by the company’s management team.

Determining Wages

Each employee’s position within the pay range is based on that employee’s skills, knowledge, and abilities as assessed by XYZ Corp, taking into consideration the employee’s education, training, experience, and performance. All employees must meet the minimum qualifications of the position. Those employees with less experience, less-developed skills, or whose performance does not exceed expectations will be paid in the lower portion of the pay range. Those employees with significant experience, fully developed skills, and whose performance meets or exceeds expectations will be paid in the middle portion of the pay range. Those employees with extensive experience, outstanding skills, and performance that exceeds expectations will be paid in the upper portion of the pay range.

Employees of XYZ Corp who are not meeting expectations are counseled to improve their performance before any pay increase is available. Employees counseled to improve their performance and who subsequently do not improve, will have their employment terminated.

In addition to base salary, XYZ Corp uses incentives or variable pay as a way to meet the strategic goals of the company. Incentive pay will be available to some employees with consideration for a number of factors and will be based on individual goals that relate to the company objectives as well as overall company performance.

Goals

In alignment with our company culture, we strive to communicate openly about the goals of the company and the design of the compensation program. The compensation process is intended to be fair and simple so that all employees and managers understand the goals and outcomes of the process.

The pay administration program at XYZ Corp was created to achieve consistent pay practices, comply with federal and state laws, and mirror our commitment to Equal Employment Opportunity. Pay decisions and reviews are made without regard to race, color, citizenship status, national origin, ancestry, gender, age, religion, creed, physical or mental disability, or any other factor protected by law.

Several factors may influence an employee’s rate of pay. XYZ Corp considers the essential duties and responsibilities of the job, market data, as well as individual and company performance. XYZ Corp periodically reviews its pay administration program and restructures it as necessary. Merit-based pay adjustments may be awarded in conjunction with superior employee performance as documented through the performance evaluation process.

Privacy

Pay, bonus, and any other type of compensation information are highly confidential. You should not discuss your compensation or other employees’ compensation with anyone other than your manager or Human Resources. You should bring any pay-related questions or concerns to the attention of your manager, who is responsible for the fair administration of departmental pay practices. Human Resources is also available to answer specific questions about the pay administration program.

Employees will not be paid below the pay range minimum unless there are issues related to the employee’s qualifications or performance. Employees will not be paid above the pay range maximum unless circumstances exist where an individual is required to fulfill specific needs of the company. Such needs may be a stated project or a specific goal to be realized in order for the company to achieve its goals and objectives. Paying below minimum (green circle) or above maximum (red circle) requires the approval of the VP of HR. Such approval will be based on the stated project or goal and upon a course of action to adjust the employee’s pay and/or classification following the achievement of the project or goal.

Managers are responsible for ensuring job descriptions are up to date for the positions that report to them directly or indirectly. HR reviews and approves the job descriptions and maintains copies for use in determining the market pay for the positions. Pay ranges are reviewed annually with respect to market pay and are adjusted to the appropriate levels for the upcoming year.

Individual employee performance is assessed through the Company’s Performance Management Program. Pay increase budgets are established based on market pay movement and the company’s finances. Based on the budgets and employees’ performance, pay increase recommendations are submitted to HR for review. Following its review, HR submits the recommendations to Management for review and approval. Approved pay increases are then communicated to employees by their manager in one-on-one meetings following the direction provided by HR.

Compensation Philosophy Potency

Given the sophistication of today’s pay surveys it is not only possible but obligatory that a company’s compensation philosophy state the range minimum and maximum as explicitly defined points in the market. The midpoint then becomes just an average of the minimum and the maximum.

A compensation philosophy can and should be very specific about what to pay employees with the basic qualifications for each position, as well as what to pay employees with outstanding qualifications. Telling your top performers that their pay opportunity is up to the 90th percentile, for example, can provide reason for such employees to invest a significant portion of their careers at your company.

Selecting a percentile at the lower end of the market data should be done with an understanding of the qualifications of employees whose pay is at the lower end. There is a point below which employees have less than minimum qualifications and minimum performance. It is possible to argue that that point is the 10th percentile or the 15th percentile or the 25th percentile. A company must arrive at a decision with the same level of sagacity as it used to determine the range maximums.

When using specific points in the market to set range minimums and maximums, the range midpoint becomes irrelevant, at least with respect to the market. It now is simply the average of the minimum and maximum.

Looking Beyond Range Midpoint

Indeed, the importance of the range midpoint is often overstated. It is not “the market,” as in the point below which employees are paid “below market” or above which employees are paid “above market.” Market is the entire pay range—all employee pay within the range is “in the market” according the company’s definition of market. All employee pay within the range is between the minimum and maximum of the market, as specified by the company’s compensation philosophy.

The range midpoint is just a mathematical mean with no intrinsic value. It’s simply halfway between the bottom and the top. Shoving employees with lower-level qualifications toward a midpoint is senseless and results in money ill spent. It is better for both company and employee if the employee’s pay increases as the employee’s demonstrated qualifications increases and as performance enhances. Employees who continue to perform have the entire range available to them. There is no value in throwing employee pay toward the midpoint nor is there value in retarding employee pay above the midpoint.

About Compa-Ratio

Compensation analysts have historically used compa-ratio, which tells where an employee’s pay is vis-à-vis the range midpoint, as a primary analysis tool. Compa-ratio—short for “comparative ratio”—is derived by dividing an employee’s pay by the midpoint of the pay range in which the employee’s pay is managed. As illustrated in the following table, an employee paid at exactly the range midpoint has a compa-ratio of 100%. Employees paid below or above the midpoint have a compa-ratio below or above 100%, respectively.

Employee PayRange MidpointCompa Ratio
$30,000$30,000100%
$24,000$30,00080%
$20,000$30,00067%
$36,000$30,000120%
$40,000$30,000133%

Compa-ratio cannot tell when employee pay is outside the minimum or maximum of the pay range. That requires calculating the compa-ratio of the minimum and maximum, and then comparing the employee pay compa-ratio to the minimum and maximum compa-ratio.

While compa-ratio can compare one employee’s pay to other employees, it is more accurate just to compare employees’ actual pay. Aggregate compa-ratios can also be used for larger datasets, such as finding the average compa-ratio for all employees in a company to determine the average pay compared to the average range midpoint.

But that’s really the extent of compa-ratio’s usefulness.

A Better Solution

A judicious compensation philosophy requires an analysis tool that goes well beyond compa-ratio. Range Ratio tells precisely where an employee is paid in the pay range. Range Ratio is calculated by subtracting the range minimum from the employee’s pay and then dividing the result by the range maximum minus the range minimum:

(employee pay) – (range minimum)


(range maximum) – (range minimum)

The following table illustrates the clarity offered by using Range Ratio (RR):

  • RR of 0% means that the employee is paid at the minimum of the range.
  • RR of 50% means that the employee is paid at the midpoint of the range.
  • RR of 100% means that the employee is paid at the maximum of the range.
  • Negative RR indicates employee pay below the range minimum.
  • RR above 100% indicates employee pay above the range maximum.

Changing the Language

Because the pay range is based on the market, RR corresponds to a position within the market. An employee with 25% RR is paid lower in the range (and thus in the market) while an employee with 75% RR is paid higher in the range and market. “Low” and “high” are absolute terms, so using the more relative “lower” and “higher” more precisely communicates pay in relation to the range and the market. In other words, saying an employee’s pay is “low” sounds like something is definitively wrong and must be fixed, but saying an employee’s pay is “lower in the range” associates the pay with qualifications and performance.

An employee whose qualifications meet only the minimum requirements of the job is positioned lower in the market and therefore should be paid lower in the range. An experienced, higher performing employee should be paid higher in the range because their skillset has positioned them higher in the market. Changing the language helps both the company and the employee better understand whether or not the employee is paid appropriately.

Using RR Effectively

To fully calibrate your Range Ratios, a company should analyze the results from them and know why an employee is at a particular point in the range and if it is the appropriate point for them.

The variables that affect pay and market position include:

  • Experience
  • Seniority
  • Education
  • Performance
  • Competency

These qualifications and elements of performance (Q/P) may also include other factors deemed relevant by the company’s compensation philosophy.

RR provides an immediate view of those employees who are below minimum and those employees who are above maximum. If an employee’s pay is below minimum (negative RR), the following questions must be asked:

  1. Is the employee classified correctly?
  2. Does the employee meet the Q/P for this level?

If the answer to both is yes, the employee’s pay should be increased to at least minimum. (This can be done immediately, planned for the next scheduled pay review, or addressed with step increases. Of course, a company’s budget is always a consideration.)

If an employee’s pay is above maximum (more than 100% RR), the following questions must be asked:

  1. Is employee classified correctly?
  2. Does the employee meet the Q/P for a higher level?

If the employee is correctly classified, their pay can be reduced to maximum, or maintained until the range “catches up” with future increases. (Though generally accepted, “Red Circle” must be warranted, and used only as an exception.)

If the employee meets the Q/P of a higher-level position, that employee should be reclassified to the higher level and their pay viewed with respect to the new range.

The Many Uses of RR

A well-calibrated set of Range Ratios can scale far beyond individual employee pay rates. For example, the average of all employees’ RR is equivalent to the company’s RR, and therefore shows the company’s position in the market. But remember that a low RR does not necessarily mean the company is underpaying its employees. For example, a 40% average RR does not mean the company should give pay increases to bring the average RR up to 50%. Just as with an individual employee, the company’s RR must be viewed in light of its Q/P. If the average Q/P level is low, then RR will also be relatively low.

RR is a good dashboard metric that should cause us to look for answers rather than jump to conclusions. For example, it’s useful to watch the average RR history. If a company’s annual RR average over three years went from 40% in year 1, to 42% in year 2, and then to 35% in year 3, the company must account for the sudden drop:

  • Was the pay increase budget inadequate?
  • Was year 3 accompanied by increased turnover?
  • Has the market moved exceptionally?
  • Did they lose highly paid employees?

RR can also be used to analyze pay across geographic locations. If you have pay ranges for various geographic locations that are based on that location’s market you can easily compare the RR across those locations. For instance, what is the average RR for NYC, OKC, and SLC? Why are they different, if they are? Does the staff in a lower RR location have lower Q/P? If Q/P is similar, should a larger portion of the next pay increase budget be directed to the lower RR location?

RR is also useful when analyzing the pay for employees in the same job family. What is the average RR for program managers in Austin compared to program managers in Boston or Chicago? If Austin is lower, is it due to the program management Q/P in Austin being lower? Similarly, if the average RR across all three sites is close to equal, the company should expect the Q/P also to be equal.

In Summary

A well-calibrated compensation program begins with a solid Compensation Philosophy. Range Ratio is an exact tool that will improve compensation analyses, make it easier for your company to communicate with management and employees about pay rates, and endow your organization with solid guidelines to follow in the future. Make the change today to Calibrate Compensation using Range Ratio and discover the substantial benefits of consistent, precise compensation programs in today’s competitive environment.