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FEATURE

Performance-related compensation

Corporate competitiveness and performance are determined largely by employee motivation. While salary considerations are not the only motivating factor, the introduction of performance-related compensation nevertheless remains the most efficient way of inspiring employees. As such, 60% of companies in France exceeded their performance compensation budget in 2010[1]. Lotfi Chorfi, Business Intelligence Manager at Micropole, explains why.

 

Today, performance-related compensation policies are becoming increasingly widespread and more closely regulated. In the last two years, companies have been quick to review their compensation system along with its quantitative and qualitative criteria. Consequently, according to Aon Hewitt, a global leader in human resources management and administration, a large proportion of employees, 5-10% of the employee pool on average, now receive performance-related compensation..

 

“A well-designed performance-related compensation policy can lead to better company performance as it promotes employee loyalty akin to customer loyalty”, argues Lotfi Chorfi. “These are two crucial issues as we continue to live in uncertain economic times.” The advantages for companies are numerous:

  • Alignment of compensation policy with strategic corporate objectives
  • Performance development of direct and indirect players
  • Motivation and growing employee loyalty through individualized salary packages
  • Internal equity and competitive compensation
  • Transparency with regard to employees and partners
  • Better planning, analysis and forecast of workforce requirements

 

Building a more effective system

“The increasing prevalence of performance-related compensation would seem to be unstoppable. As such, it is essential for management to determine the way that it is calculated and awarded.” Of course, but is performance-related compensation a motivating factor or rather a consequence of it? This is the key question that managers have to ask themselves, and the answer can often be found in the combination of a number of different considerations:

  • The type of compensation (performance or commission-based) for different personnel (sales force and/or others). 
  • The clarity in the process of setting quantitative and qualitative targets.
  • The right balance between individual and collective compensation packages.
  • Evaluating performances “objectively”.

 

The nub of the problem lies in striking the right balance between and within each of these variables to implement an efficient system. One of the keys to its success will be its transparency and the way it is publicized. A recent study by Aon Hewitt showed that one-third of all companies surveyed thought that their performance-related compensation policy was ineffective, mainly because it had been badly communicated according to 42% of managing directors and HR directors. Similarly, getting managers on board is an essential prerequisite for 58% of them.

 

The keys to success of your system

Drawing on its experience from working closely with clients in various business sectors, such as banking, insurance, services and retail, Micropole can provide the following guiding principles to ensure the effectiveness of a performance-related compensation system, and in turn more highly motivated employees:

  • Flexibility and upgradeability: autonomy of business lines when implementing plans, simulation capacities and forecasts, consideration of external factors, etc.
  • Transparency and objectivity: open access for all to plan details and tracking, re-evaluation during mandatory annual negotiations, audits and complete archiving of data, etc.
  • Equity and simplicity: mobility management, rules for specific calculations (exceptions, corrective action, etc.)

 

Key factors

“There is a close relationship between employee motivation and company competitiveness. A successful performance-related compensation system is a natural convergence between boardroom strategy and results in the field.” Employees remain primarily motivated by the wages they earn. Managing this aspect carefully strengthens their commitment and prompts them to align their objectives with those of the company. To achieve this, the link between compensation and performance must be clearly established and explained, by proposing a complete overview on how it works in practice. In 2010, Refdoc, a leading source of scientific reference material, revealed that in order to have an effect on employee motivation, target-related bonuses should amount to at least 31% of basic salary, while optimum impact is achieved when this percentage rises to 71%. Conversely, a poorly conceived policy often leads to de-motivated employees and, in turn, lost company revenue. Poor – or even non-existent – communication about the policy also meets with the same fate.



[1] Source: Aon Hewitt survey, June 2010

 

Micropole

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