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Guest blog by Sharon Dorsett, PhD, of Dorsett Organizational Dynamics, who offers her perspective on tying compensation incentives to performance reviews.

As new thinking emerges on the efficacy of traditional Performance Management Systems, so too does a new approach to the annual bonus and salary conversation.

In an earlier blog, I proposed that holding formal performance reviews once a year is simply too infrequent. Waiting an entire year between goal setting and performance feedback creates a process that can feel obligatory and irrelevant. To address this, many organizations today are taking steps toward establishing a culture of “continuous coaching,” in which managers provide employees with developmental feedback on a more consistent basis.

As the review process evolves from an annual event to a year-long performance management process, you may be wondering what this means for the other half of the conversation generally had at review time: whether there will be a bonus and/or salary increase—and if so, how much.

While linking performance to pay during the review session works for certain organizations, others are beginning to rethink the impact of this approach on the employee development process. When performance review and merit reward conversations are combined there can be too great an emphasis on evaluation and compensation:

  • Employees often find it difficult to focus on the developmental aspects of the review because they are so preoccupied with compensation.
  • Those who fear retribution may be inhibited and are unlikely to provide managers with valuable feedback.
  • Employees can be reluctant to share personal concerns or discuss their weaknesses with a manager they perceive to be in the role of “rewarder.”

Although unintended, such consequences are the recipe for an awkward and unproductive meeting and may impede employee growth and development.

What you can do…

Try holding merit increase meetings separately from performance reviews. The manager should start with the developmental performance review and then have the compensation conversation sometime between a week and a month later. During the compensation meeting the performance review can be revisited and behaviors tied in to the context of compensation. Managers can also outline how the increase (or lack thereof) was determined, and ensure employees are clear on the process as well as how they may affect change in the future.

Take an honest look at your performance review process. What is your compensation philosophy? Does it align with your company strategy? Are you focusing on growth and development or on controlling behavior? Are you rewarding for the behaviors you want and need? For example, do you promote teamwork and cooperation but reward individual performance (and competition)? Do your employees have the flexibility to take risks (important for innovation and growth) or are they inhibited fearing it will affect their bonus?

Organizations are encouraged to consider new ways of improving processes for employee feedback and development. As part of this, other options for how and when employees are rewarded should be explored to find the best fit for the growth of both the employees and the organization.

If you have questions or need further assistance, contact KMA. We are here to help.