The Art and Science Behind Compensation Strategy That Promotes High Performance

Compensation is directly tied to employee retention. Simultaneously, it is also tied to performance management. HR can leverage science-backed performance management platforms to promote fair compensation decisions, thereby improving employee engagement. Courtney Bigony, MAPP, strategic science advisor, 15Five and Jennie Yang, vice president, people and culture, 15Five, provide six practices that promote a fair compensation strategy that attracts and retains top performers. 

As your organization grows, having an effective compensation strategy becomes essential for high employee performance and retention. Holding onto top talent is not easy in the best of times, and as the Great Resignation morphs into the Great Upheaval, it becomes even more critical. 

Effective compensation programs are intertwined with performance management toward the end goal of motivating high performance. A continuous performance management platform helps HR teams motivate high performance at scale through a science-backed compensation solution built using Positive Product Design, a method for creating technology that unlocks human potential. This new method of product design leverages the latest science of thriving to offer a deeper understanding of human needs and how to meet them, as well as a guide to making better product design decisions. 

Science showsOpens a new window that when it comes to an effective compensation strategy and performance management process, fairness reigns supreme. A compensation process is fair when the manager is credible and motivated to get it right and when employees have a voice. To increase performance and motivation, the north star for all HR teams is fair compensation, reviews and decisions. HR can leverage science-backed performance management platforms to promote fair compensation decisions at scale.

Below are six proven, evidence-based practices that promote a fair compensation strategy that attracts, motivates and retains top performers. 

Reduce Rating Bias

Most companies use ratings to make efficient compensation decisions. But they are often the top practice holding back HR teams from adopting more progressive performance management programs that truly motivate high performance. Ratings are an efficient method to make compensation and promotion decisions in organizations, but are they fair? Are they effective? Research by CIPDOpens a new window shows that ratings are biased and therefore create biased compensation decisions, which demotivates employees.

The first issue is that people are more holistic than a number. Secondly, most ratings are highly biased and say more about the person doing the rating than the person being rated.

15Five has developed a rating alternative called the Private Manager Assessment (PMA) that leverages a set of four questions developed by DeloitteOpens a new window to drive both pay equity and retention by ensuring fair and objective performance assessments over time. 

Unlike traditional rating systems, the PMA does not have the manager assess their team members on a scale of one to five. Instead, it includes five future-focused questions that ask managers what they would do with an individual, not what they think of an individual. For example, it asks managers whether they would like this individual to be on their team in the future. 

The PMA reduces the two biases most prevalent in rating systems. The first is an idiosyncratic rater bias where ratings say more about the person rating than the person being rated. The second is recency bias — assessing only recent performance so managers can develop fair assessments of performance that are grounded in objective behaviors and results (e.g., for salespeople, measure calls and revenues).

Objective assessments of performance results in more fair compensation decisions. 

See More: 5 Reasons Employee Benefits Increase Staff Performance

Unlock Psychological Safety at Scale Through Role Clarity

According to GallupOpens a new window , only 50% of employees have a clear understanding of their role. Yet science shows role clarity is the foundation of effective performance management and essential to psychological safety, the invisible force behind all high-performing teams. So it is important to prioritize clear role and performance agreements from the start. 15Five promotes role clarity at scale in its platform through a robust role clarity feature. This agreement is a document that employees and managers can reference as the source of truth if any performance issues arise. 

Separate Development and Compensation Conversations But Assess Performance 

During regular performance reviews, which we recommend at least two times a year, it is important for HR to separate development discussions from the compensation discussion; science shows combining the two is demotivating. Top HR teams offer regular reviews that focus on development and a separate annual compensation discussion. They also include a self-review in the review to promote fairness and ensure that the employee’s voice is heard.

Use Team and Organizational-based Incentives 

Help team members feel like owners, using team and organizational-based incentives like profit sharing, gainsharing, bonus programs, employee ownership, or stock ownership.

Profit and gainsharing programs improve productivity and performance, while individual pay-for-performance programs can create a culture of competition. However, there can be room for both individual pay-for-performance and company-wide incentives. At a minimum, provide essential pieces like stock ownership and paying at or above market rate.

Create Job Ladders With Job Bands Aligned to Market Pay

At 15Five, for example, our mission is to create highly-engaged, high-performing organizations by helping people become their best selves. Part of that is leveraging compensation as a motivator and ensuring that our compensation program is competitive in today’s market (at or above market rate).

Promote People Frequently 

Move from broadbanding with a broader pay range to narrow banding to promote people more often and determine market pay based on job ladders. Narrow banding uses many levels to provide opportunities for promotion, whereas broadbanding has fewer levels, resulting in less frequent promotions, which can be demotivating.

There are many creative ways to promote people without increasing pay, such as giving the individual more responsibility or moving the person laterally to a different role more aligned to their strengths or career goals. So it does not have to be a traditional upward trajectory on a career ladder.

While facilitating fair and objective performance and compensation is foundational, science shows ultimately, the key to motivating high performance is through offering strengths-based careers, unlocking intrinsic motivation and motivating through purpose. No matter what, pay your high performers well and take the money issue off the table to enable higher-level motivations such as purpose and strength development. 

Using science-backed practices, HR can create a fair compensation program that unlocks thriving and high performance.

What practices are you following to promote a fair compensation strategy in your organization? Share with us on FacebookOpens a new window , TwitterOpens a new window , and LinkedInOpens a new window .

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