Looking to Benchmark Pay?
Pay-for-Performance
Managers are well-suited for pay-for-performance compensation strategies since their efforts can clearly impact the overall performance of the organization.
If there is a difference between pay-for-performance systems for managers and those for other groups, it lies in defining manager performance in both financial AND operational terms at the organization level and individual level. But as in most pay-for-performance systems, the correct performance standards must be the focus.
In pay-for-performance, top management pay is often based on long-term objectives coupled with the short-term goals of the enterprise.
Merit salary increase matrices, which companies use, are often modeled to provide larger merit increases for higher performance ratings. Companies also use other tools to align pay with performance such as Balanced Scorecard and Competency Models.
Balanced Scorecard
Using the balanced scorecard (BSC) assists in evaluating managers' performance and measures results based on impact to the bottom-line. BSC involves measuring a company's success using Key Performance Indicators (KPIs). This approach is used to define performance in terms of a firm's productivity, efficiency, and organization with new types of measurements.
The four perspectives of BSC:
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Financial. Encourages the identification of a few relevant high-level financial measures, explaining how shareholders view the company.
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Customer. Encourages the identification of measures that explain how customers view the company.
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Internal Business Processes. Aids in identifying what goals must be achieved.
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Learning and Growth. Helps to decide how and if the company can continue to improve and create value.
Issues: There are two main issues often found with using BSC for determining executive pay:
- Requires resources and management commitment to establish, support, and maintain a balanced scorecard.
- Requires cascading the scorecard to all levels and evaluating the appropriateness of performance metrics.
With the introduction of business analytics and business dashboards, many of the BSC issues are being addressed with reliable and real-time data accessible for these and many other purposes.
Competencies
There is no common definition found in business today regarding competency modeling. Individuals, including executives, are expected to possess certain traits, knowledge, skills, and abilities and apply them to essential responsibilities, goals and objectives that further the strategies and missions of their organization. Many companies include competencies in their performance evaluations. Results of competency evaluations serve as inputs to an organization’s succession plan.
Here's how Competency Models work:
- Establish a list of competencies. The manager and their supervisors jointly develop a list of the knowledge, skills, abilities, tasks and understanding required.
- Evaluate results. Underlying this approach is the assumption that executives who possess certain competencies can facilitate the attainment of organizational goals and objectives.
- Evaluate application of competencies. Competencies prove their value with the illustration of achievements.
Competency modeling is the approach found in many larger organizations and has replaced job analysis and job evaluation. In some organizations, the comparison of an individual's achievement is based on this "vocabulary" and replaces even the traditional performance appraisal common to military and governmental organizations.
Memory Jogger
If one were to use the BSC approach to evaluate a Chief Operating Officer, Mr. Fred McClure, what kind of measures would be included?