2 CompDoctor Tips on How to Move to Pay for Performance

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Question In a recent CompDoctor you said that some public agencies are successfully moving to pay for performance systems. You also said that the shift requires more of a focus on cultural issues than on the design of the pay system. But you guys are comp guys, right? Cultural issues sounds more like an organizational development issue. If the success of pay for performance in the public sector is more about a shift in culture, how do we do that? What recommendations do you have for preparing our culture for a move to pay for performance? Oh, and wed like to make the change in the next six months. Is that possible?

This article first appeared in March 2012 on

WWW.IPMA-HR.ORG

Great question. Actually a fabulous question!

We only wish we had an answer! Just kidding.

If you have read our articles before, you know

we have an answer for just about

everythingat least as it relates to compensation issues. Actually, we are getting

more and more calls from clients wanting to

revise their performance evaluation systems,

or simply develop them from nothing. They

are all asking about pay for performance. In

most cases they have very little clue about

what they are getting into and have not even

begun to consider the cultural, manager and

employee shifts that will be required. Oh, and

of course, they too want it to be effective in

six months time (or in some cases, if you can believe it, even less!).

Now is the time for a reality check. Because

unless you see the process laid out, you and

your elected officials, board members, boss, or

what have you, will think that if you cant get

it done in six months, you are not focusing

your attention in the critical areas.

Let us go through a process that we think you

ought to take, regardless of where you think

you are in the pay for performance

development cycle. We are going to start at

ground zero, so if you already have something

in place, you can skip over some of these

steps, because you apparently have already

gotten over these hurdles. On the other hand,

if you are not so sure, it is always a good idea

to start from the beginning and get it right. We

are going to deal with this like a procedure

manual, knowing full well that with anything

that affects humans and pay, such a systematic

way of proceeding is just plain nave. But, like

Don Quixote, onward we will go, completely

blind to such truth.

Step One: Are You Ready?

We think that you ought to engage in a

readiness assessment before you go any

further in your progress toward pay for

performance. This is a short questionnaire


(about 15 questions) that can be administered

to all employees and then the results tabulated.

The results will be enlightening, and in our

experience, will tell you what areas you need

to work on in order to be ready for a pay for

performance program, which well call P4P.

The questionnaire highlights areas of

organizational commitment, supervisor

support, purpose, trust and other issues. In our

experience, if the scores come back indicating

that the organization is not ready for P4P, then

moving to the next step is simply foolish and a

waste of time and money. As we once told a

city council, they wanted a highly tuned sports

car (our analogy at the time was a Jaguar),

when the kids didnt even know how to drive. Once they understood the situation, the

concluded that maybe a Ford Focus might be a

better choice (at least at the outset) so that

they could actually learn to drive, bang up the

car a bit and then move on to something more

sophisticated when they were better prepared.

An adaptation of this is to get small groups of

employees and supervisors together to discuss

the results of the survey and identify an action

plan for resolving some of the issues.

Step Two: What Are the Necessary Success Criteria?

Just knowing that you are ready may not be

enough. There are also aspects that you may

need to understand a bit more. So, in keeping

with that theme, here is a quick list of

questions that you should be able to have

answers to before you take the next step,

whether you are ready or not.

1. Do you have top management support?

(That includes leadership plus the

board/council members.)

2. Does the organizational culture accept

change?

3. Have you developed an idea of how you

will link pay and performance and also

address cost of living issues?

4. Do you have a viable salary increase

budget? (Well, who does these days, but

our research shows that while more is

better, the difference in effectiveness of a

program with one percent of payroll

dollars and five percent of payroll dollars

is insignificant. Hard to believe isnt it?)

5. Do you have an effective performance

management system? (Even a lousy one is

better than none at all, because at least you

have partial building blocks in place.)

6. Do supervisors and subordinates trust each

other? (This is one of those make-or-break

items. You might want to enroll in trust worthiness school if morale is in the dumps because of ineffective supervisors.

Poor supervisors will sink you every time.

Our best advice is to fix it.)

7. Are there measurable differences in

performance in the jobs that you are

focusing on? If not, then a P4P program

may not be very effective. (Frankly, some

jobs are either done or not, and there is

little difference in performance that can be

measured. Think airplane pilot; what does

unacceptable performance look like?)

8. Do your managers have the ability and

willingness to distinguish differences in

performance? (If they think all their

employees are wonderful and then some

random week, they want to fire them, you

have a problem that needs fixing.)

9. Is your pay structure competitive and fair?

(If you dont have a solid foundation, P4P is not going to fix it, and could make it

much worse.)

10. Do you effectively communicate with

employees? (If not now, when do you

think it would be a good idea?)

11. Do you have the administrative resources

to track and administer a program that will

require about as much effort every year (if

not more) than open enrollment?

12. Do you have a policy manual that you can

incorporate a P4P philosophy into? (While

more than a few words, the board should

agree to the statement.)

13. Will there be consequences for managers

who dont want to go along with the


changes? (One bad apple that is not held

accountable by top management is just as

important to the program as a solid

compensation program. Without this, your

chances of succeeding are minimal.)

As you can see, this is quite a list. And, do

you notice that of the 13 items, only two have

anything to do with compensation? All the rest

have to do with cultural and organizational

development issues.

Step Three: How Is Your Pay Strategy?

OK, lets say that you are ready and have passed all the tests. You have looked at Step

Two and are ready to go. When can we

implement? Slow down. We are far from the

finish line.

Do you have a pay strategy that is clear and

incorporates P4P? We didnt think so. Most public sector organizations (about 70 percent)

have a pay strategy, but about 95 percent of

them do not incorporate P4P. A pay strategy is

a statement(s) of the intent and approach that

you will take in compensating your

employees. Part of that approach is why P4P

is such a big issue. Is it to retain top quality

employees? What are you going to do with

poorly performing ones then? Do you want to

reward employees based on their contribution

to the success of the organization, department,

and/or work unit? Then you need to define

what success looks like and again what you

will do if an employee is not making the

expected contribution to success. This needs

to not only be thought out but spelled out. We

doubt that it can be stated in one or two

sentences in a short pay strategy statement.

So, you may need to engage the board and top

management in a rather intense discussion

about why you pay employees what you pay

them. The answer to that question is not found

in an hour-long lunch meeting.

Step Four: What Do You Want To Reward?

This may sound like a stupid question, and it

certainly is very directly related to the above

step, but you need to answer this clearly. Just

to help you out, here are a few things that we

have found that organizations want to reward:

Individual performance

Team performance

Performance improvement

Increasing capacity or competency/skills

Education

Personal/professional development

Interesting isnt it? If you are in a college or educational environment, professional

development and educational attainment are

highly valued and are usually items they want

to reward. Does that work for you? Or maybe

team performance would be very important to

a road maintenance unit, but not so to a

housing inspector. The point is, it can be a

combination of these things or it can be just

one of them. You have to decide which ones

and how much. And, different departments

may have different things that they want to

reward. No one can give your organization the

formula that works for you. You have to find

it yourself. How is that lunch meeting working

for you now?

Step Five: Is Performance Management the Same as P4P?

Wait! Isnt pay for performance just the natural outcome of performance management?

Well, yes, it could be, but for many it is not.

Frequently we ask our clients if they have a

performance evaluation system in place. Most

of them say yes. Then we ask if they pay

based on performance. The answers are

interesting.

Some say yes and some say no. (Well really

guys, what other choices are there?) Those

who say yes then follow up with saying that if

employees dont receive a satisfactory performance rating, then they dont get a step increase or a COLA. When asked how many

dont receive one of those kinds of increases because of an unsatisfactory performance,

they state that they cant remember anyone who didnt get an increase!


If this is the case, then you may have a form

and performance criteria, but you dont have a very effective performance management

system. You need one. And to have one, you

need these things (see Step Two):

1. Measurable differences in performance in

the jobs that you are focusing on.

2. Managers who have the ability and

willingness to distinguish between

different levels of performance. If you

have these, then you have a lot, but if not,

you need to immerse your managers in a

bit of training. To be honest though, some

managers can be fixed and others cant. You need to figure out what to do with the

latter.

Step Six: How Is Your Training?

If you are this far, you are in good shape. Not

much more to go. When we asked our good

friend, performance evaluation expert Marnie

Green, of Management Education Group Inc.,

what cultural issues she thought were

important, she came back with this answer:

TRAIN, TRAIN, TRAIN!

We dont think she was talking about light rail. Nope, she basically yelled in our ears

telling us that mangers must have the skills to

give specific feedback to employees and to

clearly convey their expectations for what

good performance looks like. This is the tough love of management. If you cant tell an employee that they messed up or did a good

job, maybe you ought to find another line of

work. Because effective managers can get a

lot out of people, but they need to be honest,

and sometimes that means that you need to tell

employees that they did not meet your

expectations.

The difficulty in most organizations is that

work groups are social groups. Managers and

supervisors may have been promoted into

their jobs and they view their subordinates as

their friends. Think about parents who simply

want to be friends with their kids we dont need to tell you the consequences that could

result from that type of parenting.

Step Seven: Where Are Your Employees?

Most managers and elected officials we talk to

think that performance evaluation is the

responsibility of the managers. It is something

managers do to employees at the end of the

year.

Wrong answer. If your performance

management process does not significantly

involve the employee, then you are destined to

fail. Back to Ms. Green; after she yelled in our

ears, she said this:

And, employees need the skill to fully participate in the management of their own

performance.

What that says to us is that employees need to

be trained as well. After all, they need to be an

integral part of the process. They need to

evaluate their own performance and be on par

with the managers when they talk about

performance expectations. When you treat the

employees as an equal part of the process, you

break down mistrust and the feeling that it is a

subjective process where only the ones who

are liked by the boss get raises.

Step Eight: Do You Hold Managers Accountable?

Part of being an effective manager, and one of

the criteria for a managers performance evaluation, is if they have found differences in

performance of their subordinates and if they

have had the willingness to clearly

communicate these differences to employees.

If you dont have this, find a way to get it.

Step Nine: Have You Linked Pay with Performance?

Even if you dont have much money to play with, you need to find a metric to link pay and

performance so that the top performers get

more than the ones who are not top

performers. This can be through a set-aside

bonus amount, a link based on placement in

range and performance (merit matrix) or a

percent pay increase factor. Regardless, it

needs to be established and understood.


Step Ten: Did You Tell Them How It Worked?

Ms. Green goes on: Communicate the results

of the program so that staff as well as elected

officials can see the impact that focusing on

performance has on the organization. Use

these data to maintain the funding support for

the board and possibly enlist union leaders, if

you have unions.

Step Eleven: Repeat

P4P programs need to evolve. In fact, in our

experience, once you set this up, you will do

rather poorly the first year. You will evaluate

more people as exceeding expectations than

should be (one county we heard of had 93

percent of their workforce exceeding expectations!), you will set easily achievable goals, or you will define performance

expectations poorly. Do not be dismayed. The

next year you will be better, and the third year

you will be pretty good. By then you will want

to revise the program! And we think you

should.

So, back to your question. As you can see, this

is mostly cultural, organizational and

employee development. But, if you dont have the essential underpinnings, you can have the

most elegant merit matrix or bonus plan and

great funding support and it will fall on its

face. And you said you wanted this in six

months? Really?

So, as Don Quixote said:

Ah, ah, now I understand you, Sancho! Oh yes, lots of times, and I feel it coming right now. Get me out of this pickle, because its already pretty messy in here!

About the Authors

The Comp Doctor is the team of Jim Fox and Bruce Lawson of the Compensation

Consulting Practice for the Human Resources

& Compensation Consulting team of Arthur J.

Gallagher & Co. Their practice helps

organizations strengthen the performance of

their organization with sustainable solutions

for compensation, program design, employee

engagement, executive compensation, HR

audits, surveys, training and development,

recruiting solutions and more.

James C. Fox, Ph. D.

Managing Director, Compensation Consulting

Human Resources & Compensation

Consulting

[email protected]

651.635.0976

Bruce G. Lawson

Managing Director, Compensation Consulting

Human Resources & Compensation

Consulting

[email protected]

602.840.1070

Consulting and insurance brokerage services to be provided by

Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit

Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a

licensed insurance agency that does business in California as

Gallagher Benefit Services of California Insurance Services and in

Massachusetts as Gallagher Benefit Insurance Services. Neither

Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal,

or tax advice.

2 CompDoctor Tips on How to Move to Pay for Performance

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