How to connect pay rises, bonuses and performance reviews

Before Howamigoing, I worked at J.P. Morgan, Goldman Sachs and Gresham Partners. Each tied the annual feedback session to their "comp discussion".

And a tonne of talented people left the business as soon as this review process ended. Pay wasn't as good as expected and to top it off, people were told it was their fault for not performing as well as some peers.

Having now discussed performance review structures and pay decisions with over 340 HR Directors and over 2,000 employees since then, it's clear that investment banks aren't the only ones doing this.

And while most people I talk to see the flaws in this structure, few can articulate why their company still does it, other than:

"it's just how it's done around here".

So to help you be the champion of change and empower your employees, below are two simple reasons to justify separating your feedback discussions from your pay discussions.

Reason 1: Pay is based on market forces, budgets and interpersonal politics, not someone's performance

To paraphrase Samuel A. Culbert in his book Get Rid Of The Performance Review, most jobs are placed in a market-competitive pay range prior to someone being hired. It's within this range that initial compensation packages get negotiated - before any performance is established.

E.g. the below job ad.

After the pay is set and the employee starts, Sam continues, any future pay rise is driven by one of three factors:

1. Whether the boss wants to retain an employee;
2. The amount of raise the boss thinks is necessary for doing so; and
3. The department's budget

The boss's desire to keep someone is based on countless variables:
1. Inter-personal history
2.Current project demands
3. Near-term staffing needs
4. Ability to hire someone else on short notice
5. Political positioning for the boss to her boss.

Sure, they'll need to be good at their job, but the pay rise isn't correlated to their day-to-day contributions.

If you don't believe me, think about what happens when a valued employee threatens to quit.

Their boss will respond with:

"How much will it take for you to stay?"

The almost-departed employee cites the gap in pay to a more generous competitor, the boss checks to see if the department can afford the rise, and it's done.

It may feel like "performance" came into it, but it's really only a subjective snap judgement and afterthought - the real driving issues were market forces and budgets.

One final quote from Prof. Sam Culbert:

"The performance review is simply the place where the boss comes up with a story to justify the predetermined pay."

You may think that your company's situation is more nuanced and that this is an oversimplification.

But let's be honest for a second.

You can't pay what you don't have. You can't always give everyone the rise or bonus they deserve.

What you have are your profits and next year's budget.

But the thing is, both profits and budgets are finite.

And as much as you'd like to think you've got complete control over profits and budget, you don't.

Your competitor's actions, changing macroeconomic conditions and unforeseen one-off events (like a global pandemic) all have a way of interrupting well-laid business plans.

Regardless of the industry you're in, profitability and budgets can swing from up to down in a single year.

In the case of John Lewis, they can decline for five straight years, much to the disappointment of their hard-working employees.

And so managers and bosses have little control over the pool of money available to pay their employees.

When it's a tight year, few people get a pay bump or bonus. Sometimes no one. If you’ve told your staff that performance = pay, then you’re in for a bumpy feedback discussion.

So how do you communicate that to your staff?

Here are the possible scripts.

Script #1:

"We can't afford to give anyone a pay rise this year, the company performed poorly and times are really tough. It's not you it's us."

(The honourable and truthful discussion. Typically the path least chosen though as it risks a flight of top-talent - your employee leaves the discussion thinking their company is a sinking ship and that their career is potentially going down with it.)

Script #2:

"We can only afford to give a few people a pay rise this year, and despite your strong contribution, you're not one of those people."

(This may also be truthful, but it's rarely communicated this way. The ambiguity leaves the manager in a tough position. The employee leaves the discussion feeling confused and undervalued.)

Or do you choose Script #3, as so many companies do, in a cruel and manipulative effort to prevent employees from deflecting to competitors:

"We'd like to give you a pay rise, but it's clear you have some things to work on. If you fix X & Y, then we can see you getting a bump next year."

(The employee has heard the company had a tough year and not many people received a raise, but she instead leaves the discussion feeling deflated by her deficiencies. In her depressed state, she takes solace in the fact that she still has a job, and things aren't that bad, she just needs to work harder and impress more people next year.)

The irony with suppressing morale to avoid employee turnover is that it usually has the opposite effect.

This brings us to the second reason why you shouldn't combine performance discussions with salary discussions.

Reason 2. Linking pay to performance feedback kills personal development and teamwork

So what happens when you use pay as a motivational carrot for better performance?

Surely your employees start performing at their peak level, all year round?

Surely you get a highly efficient team focused on being their best selves and continuously developing professionally?

Not quite.

If your company’s objective of a performance review is to "objectively determine remuneration", your employee’s objective will be to get the highest pay rise or bonus possible.

Simple.

Because while revenue and sales targets can be objectively measured, performance feedback given by colleagues is 100% subjective.

Do you think your employees will be open and honest about their areas for development, their failures over the past year and what they need to learn to be better at their job when they desperately want some extra money to help their family get ahead?

Do you think your employees will praise their colleagues' great work when they're competing for the same bonus pool?

Absolutely not.

Your employees will be motivated by short-term financial gain rather than personal development and learning.

Your employees will be afraid to be vulnerable and afraid to show weakness. They'll be afraid to be human and afraid to admit mistakes.

Your employees will compete with their peers rather than collaborate as a team.

(Spend a couple of years inside an investment bank and you'll see this in action.)

Your employees will prepare a self-promoting script for their performance review, focusing on all the amazing things they've done in the past year.

Your employees will be afraid to dedicate their review time to discussing how they could have contributed more to the team and how they could help deliver better team results next year.

Every many and women for his or herself in the race to the rise.

So how to separate pay decisions from feedback then?

Let's start with pay reviews.

Be transparent and honest.

(Why do we even need reminding of that?)

As Tony Berg AM, former CEO of Macquarie Group and Boral Limited, told Howamigoing in an interview:

"You can't have a constructive feedback discussion when a salary increase or bonus are being discussed."

Schedule your comp discussion a couple of months ahead of your next developmental feedback discussion, send the message that your employees' personal growth is not impacted by company profits.

(Hopefully this isn't the only time in the year that you're facilitating peer-to-peer feedback collation.)

Then tell employees that their salary is based on:
1. The market salary for their position
2. An adjustment based on what the company can afford to pay
3. The tenure/ importance/ role specifics of the employee

(Here's a good time to fess-up to any gender pay gaps, which I won't cover in this post, but which you can read more about in our interview with author and advertising titan Bec Brideson.)

Tell your employees that they received a bonus because:
1. The company outperformed; or
2. Their team outperformed

(Or tell them that they didn’t receive a bonus because the company or team under performed.)

Then you’ll get your employees focused on group success.

Then you’ll get your employees focused on feedback for personal development.

Then you're starting to get the foundations of a sustainable, high performance culture that you truly want.

A newfound level of trust and respect for your management team may even follow.

Now you're probably thinking:

"OK but, high performers should get paid more because we don't want to lose them, right?"

Ask yourself two questions here:
1. What makes a "high performer"?
2. "Paid more" compared to what?

Unless your employee is in Sales, performance is highly subjective. And some salespeople are more valuable to your business despite bringing in lower revenue, due to their ability to train other salespeople.

(Culture and training are perhaps more important to survival than revenue as James Baron and Michael Hannan showed when tracking 200 Silicon Valley start-ups through the dot-com crash.)

Your employees each have their own unique attributes, skills and behaviours. When mixed with their daily emotional states, the combination of the three move through time like a set of overlapping sine curves.

Some days, some projects and some teammates draw the best out of an employee and momentarily elevate them to "high performer" status with their manager.

Some people perform some tasks better than others, nobody performs every task perfectly.

And so the phrase "high performer" usually just means "someone the boss wants to keep right now".

"High performers" simply have a particular value at this point in time to a particular person in power.

But, if your high performer is in an amazing work environment, where they feel challenged and valued, why would they leave?

They'd leave because they can get paid more with a competitor and the financial reward to them is worth taking a risk on a new culture.

So if you feel you need to, and you can afford to give a salary-bump to keep your high performers, really you're just adapting to market forces. Don't use developmental feedback to justify the decision.

(We're back to Reason 1.)

Next thing on your mind:

"How do I manage staff feedback then if it's separate to remuneration discussions?"

Another simple solution if your vision isn't clouded by a 1980s management playbook.

As Pierre Nanterne, CEO of Accenture told the Washington Post when asked why they were abandoning performance reviews:

"Performance is an ongoing activity. It's every day, after any client interaction or business interaction or corporate interaction. It's much more fluid. Nobody's going to wait for an annual cycle to get that feedback."

The difficulty for businesses is finding the time to collect and distribute feedback more frequently than once per year.

In February 2018, Howamigoing conducted a survey of 1,137 UK employed people to ask them about their last performance review process:

74% of respondents still have to use pen and paper, Microsoft Word, Excel or other manual means to give their colleagues feedback.

This is despite the software industry being around since the 70s, widespread internet availability since the early 2000s, and smartphones being released a decade ago.

The strain on HR and managers to collect, collate and distribute feedback is unruly. And that's typically why companies can only be bothered to facilitate one or two feedback cycles each year.

That's why companies lump their annual budgeting cycle with their time for giving feedback.

But companies have missed a trick: running a feedback process is 90% data collection, and you don't always need to have HR facilitating the process.

There is absolutely no reason why your company shouldn't have learning, development and teamwork at its core.

There is absolutely no reason with today's available technology why your employees shouldn't be able to securely and privately gather developmental feedback at anytime, from anyone, on anything.

Give your employees the training and tools to own their development, rather than forcing it on them.

And this is why Howamigoing exists. We've developed a beautiful online platform for gathering high quality feedback all year-round. Teams can schedule their own 360 feedback processes as can individuals.

For us it's not just about streamlining an inefficient process, but creating an online environment that makes people feel safe and comfortable to gather personal development advice.

Now...

Change is never easy, particularly in a larger organisation.

But the world is changing faster than ever. If your company isn't growing and innovating, it's dying.

Given the resources now available to even the smallest of businesses, companies now compete on culture.

Employees aren’t sticking around to wait for an amazing, modern, engaging work environment. They’re taking their world-class education, global contact list, unassailable grasp on technology, desire to make an impact on the world and newfound digital creativity to switch jobs with lightning speed.

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