Over the last few years the discussion about scaling back the traditional performance management process has been heating up. In a recent Firing Line interview Josh Bersin reveals to Bill Kutik that fewer than 15% of organizations believe that the time they spend on performance management today is worth the amount of time they spend on it. One of the first line items to get vetoed from traditional performance management is the concept of rating individual employees. This leaves organizations that are eager to embrace this revolution in performance management scrambling to answer one important question: How does the trend toward reducing the emphasis on performance rankings/ratings impact pay for performance? In the past employee rankings and ratings were used to develop merit matrices to support pay-for-performance. But as organizations operate in a more agile work environment, the traditional models of merit-pay-increases and market-value compensation have the potential to introduce rigidities into rewarding top talent for high performance and retaining high-potential employees for future leadership development. This webcast will discuss the pros and cons of alternative ways of managing pay-for-performance and present a simpler approach to compensation.

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Making Compensation Simpler
amid a Changing Performance
Management Paradigm

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Today’s Moderator
@AndyWebcast
Andrew Bateman
Online Content and Community Director
The Human Capital Institute

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THANK YOU
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Today’s Featured Guests
Stephanie Thomas
Research Associate
Institute for Compensation Studies, ILR School
Cornell University
Linda Barrington
Executive Director,
Institute for Compensation Studies, ILR School
Cornell University

6. Variable Pay and Incentive Plans are Growing
47% of business establishments surveyed had
some variable pay plan in 2003 including
production-related payments, nonproduction
bonuses and wage add-ons. www.bls.gov
32% of U.S. employees reported that some
portion of their pay/compensation was
dependent upon individual performance or
productivity targets in 2013. www.kellyocg.com
The percentage of organizations
using variable pay grew to 82%
in 2012, up from 79% in 2011.
www.shrm.org
KELLY GLOBAL WORKFORCE INDEX™

7. Poll Question #1
In the last three years, how has the use of variable
pay changed in your organization?
• Driven deeper down into lower levels of the organization
• Expanded to encompass a greater percentage of employee
compensation
• More strongly linked to strategic goals
• Used less
• No Change

8. Poll Question #2
Within my organization, we track and measure the
alignment between performance ratings and
compensation decisions.
• Agree
• Disagree

9. Performance and Pay Alignment Needs Work
Source: Mercer’s Global Performance Management Survey, 2013

11. Low Potential High Potential
High Performance
Regularly exceeds
expectations
Lacks skills for success at
higher level
Sets standard of excellence
in role
Model leadership
candidate
Low Performance
Little-to-no aptitude
Weak, unsatisfactory
performance
Above-average aptitude
Inconsistent performance
High Performers vs High Po’s?
Figure 1: Typical traits of performance vs. potential.
Assessing Performance vs. Potential
Source: “High Potentials vs. High Performers: A Manager’s Guide to Identify, Assess and Develop,” October 26,
2012 by Kyle Lagunas. http://new-talent-times.softwareadvice.com/high-potentials-vs-high-performers-a-managers-
guide-to-identify-assess-and-develop-1081012/

12. 0
10
20
30
40
50
60
year 1 year 2 year 3 year 4 year 5 year 6
Potential Hi-Po
Performance Hi-Po
Performance Other
Paying for Potential is an “investment strategy” where you expect
to earn a profitable future return (pay now, gain later)
Paying for Potential and Performance?
Source: Institute for Compensation Studies, School of Industrial and Labor Relations, Cornell University, 2015

13. 0
10
20
30
40
50
60
year 1 year 2 year 3 year 4 year 5 year 6
Potential Hi-Po
Performance Hi-Po
Performance Other
Want to pay something now above actual performance, because
future potential will “pay back” the current investment
Paying for Potential and Performance?
Paying for Potential is an “investment strategy” where you expect
to earn a profitable future return (pay now, gain later)
Additional “profit” made from performance
of Hi-Po if paid same as others
Source: Institute for Compensation Studies, School of Industrial and Labor Relations, Cornell University, 2015

14. Organizational Justice Theory
Distributive Justice
Procedural Justice
Interactional Justice
Informational Justice

15. Distributive Justice
Perceived fairness of the actual outcome
• Did I receive what I should have received?
Was the pool of bonus money distributed among the
eligible employees equitably, given our policies and
procedures?

16. Procedural Justice
Perceived fairness of the policies and procedures
used to arrive at the actual outcome
• Was what I received determined fairly?
Do the policies and procedures we use to distribute
the pool of bonus money affect different groups of
employees differently?

17. Interactional Justice
Perceived fairness of the treatment received in the
application of the actual outcome
Was I treated with politeness, dignity and respect?

18. Informational Justice
Perceived fairness or adequacy of the information
provided regarding the actual outcome
Do I understand how what I received was
determined?

19. Informational Justice
Perceived fairness or adequacy of the information
provided regarding the actual outcome
Do I understand how what I received was
determined?

20. Poll Question #3
Which aspect(s) of organizational justice does your
organization do really well?
(check all that apply)
• Distributive
• Procedural
• Interactional
• Informational

21. Employee Perceptions
of Internal Equity
Distributive
• Strongly associated
with satisfaction
regarding an
individual’s own
outcomes (i.e., pay
satisfaction)
Procedural
• Somewhat associated
with satisfaction
regarding an
individual’s own
outcomes
• Strongly associated
with organizational
commitment and trust
in supervisorSOURCE: Folger and Konovsky, “Effects of Procedural
and Distributive Justice on Reactions to Pay Raise
Decisions” Academy of Management Journal, Vol. 32,
No. 1 (March 1989), pp. 115-130

22. Takeaways & Considerations
• Pros can be cons and cons can be pros – it depends
on the organization and the situation

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Questions?
Stephanie Thomas
Research Associate
Institute for Compensation Studies, ILR School
Cornell University
Linda Barrington
Executive Director,
Institute for Compensation Studies, ILR School
Cornell University

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THANK YOU
www.hci.org