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Dear Workforce How Do We Implement a Performance-Management System That Works Well in Good Times and Bad

When a small employer factors individual and company performance into its annual pay-raise policy, how is it best divided and measured? I would like to find a method that would be fair and consistent in lean/loss years as well as successful ones.
July 2, 2004
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Related Topics: Performance Appraisals, Dear Workforce
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Dear Eye:

Employers generally use company performance to determine two broad compensation elements: overall or average merit budgets, and variable-compensation payouts.
Company performance, no matter how it is measured, determines whether the employer is able to generate the cash needed to provide raises, and whether the company should share some of its success with employees in the form of bonuses, cash or otherwise. Consistency comes from treating all employees in a similar fashion.
In good years, everyone reaps the benefits, and in bad years, everyone tightens their belts. Bad years may even require the employer to freeze or reduce pay levels and eliminate bonuses, although this can play havoc with your competitiveness. In such cases, management should weigh the need for survival against potential turnover.
In addition, you'd better have an excellent reason--one that employees can understand, if not accept--for treating certain jobs differently from other jobs. Be aware that beyond what we cited above, management doesn't often use overall company performance to determine the actual salary increase for any given employee. Develop goals for company performance using tangible, credible measures (cash flow, profitability or surplus, return on investment, revenue increases, etc.).
In a typical performance-management system, an employee's salary increase is determined by his or her individual performance. This is usually done by comparing the individual's performance level to a predetermined increase guideline. It doesn't have to be this way, but the intent is to differentiate between individuals who contribute to the success of the organization and those who do not.
Be careful not to unduly penalize those employees who may need some additional training or development to be successful. Provide them with the opportunity to earn an increase once their performance improves to at least satisfactory levels. A company should gauge individual performance by measuring the employee's contribution to results against predetermined goals.
Did employees do what they said they would do? Are there mitigating factors? There are other ways to measure individual or small-workgroup performance--such as pay for skills or knowledge, as well as team-based pay--but most firms use a method similar to what I have just outlined.
Apply these principles in an environment of objective decision-making and open communication. If you do, you should be able to navigate successfully through the good and bad years--at least from a compensation perspective.
SOURCE: Robert Fulton, managing director,The Pathfinder's Group, Inc., an affiliate of The Chatfield Group, Chicago, July 28, 2003.
LEARN MORE:Managing Pay Is an Easy Sell.
The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.
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 The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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