Business managers should be encouraged to "own" remuneration decisions, but they often need lots of training and prompting before they do, say two HR leaders.
Speaking on the intersection between remuneration, performance management and talent strategies at a breakfast hosted by Pivot Software, Downer EDI reward and policies GM Derek Berry said managers should play a greater part than HR in pay decisions because performance is just one factor in the equation.
"A lot of organisations make a formulistic link between performance rating and pay outcome, and sometimes [the latter] is set by HR as a guide and managers take it as a rule," he says.
"But if you look at it, there are so many other parts of the remuneration decision, other than the performance rating. I want to break it. To me, it's a business or a management decision about what is the pay increase. The performance rating is just one part of a series of things that need to be thought through in terms of the risk, the criticality of the position, the likelihood of loss, what's happening in the market at that particular place, and a whole range of things.
"The business manager needs to own the bloody thing, rather than say 'HR told me'."
The reluctance of managers to own decisions about pay comes down in part to their capability, Berry says. "It's partly, 'If I can push it off and if I don't have to own this - I can say someone else told me - I get away from that discussion quickly'."
But HR is somewhat to blame for that sort of mindset, because "we don't coach managers enough around that".
"The challenge on that is it is a time-consuming process, but the only way you're going to get your managers coached on that is to actually workshop it, get them to practise and role play it, and that takes a lot of time."
Berry says that in order to get better remuneration decisions from managers he prefers not to give them a salary increase guide. "If you give them one figure, and they're rushed, they tend to just go with the figure.
"I say instead, 'You've got a budget, you've got to make a decision. It's not an HR decision'."
Providing a range for increases can be useful, he says, but the point is to make the managers think about their decisions, "because you want them to be able to justify it to a staff member. Whether they do or not, you can't force that, but you want to try and get them in that headspace that they can actually have the conversation with the staff member around, 'I'm making this decision, this is what it is and this is why'".
Managers also have a tendency to want to give even pay rises across the board, Berry says.
He suggests an exercise to make them think more about linking pay to performance. "Something I've done on a whiteboard is this: If you bring someone in low on the range, how long does it take them to get to the midpoint [of salaries], assuming they're an excellent performer?
"It is never less than five years, and in my experience about 10 years, depending on the salary increase guides.
"But if you've got a top performer, what's the chance of keeping a top performer for 10 years? Keep them three years and you've done really well. So how's this going to work? You've got to break some of that."
According to Caltex Australia's rewards manager, Sarah Elliott, who also spoke at the briefing, there is often "a complete disconnect" between the messages coming from HR - "differentiate based on performance; high performers need to get between six and seven per cent" - and the messages coming from finance - "you've only got a budget of three per cent", so HR needs to help overcome that.
She says, "A good indicator of whether you've got your pay-for-performance side of things right is how many out-of-cycle pay increases come through the rest of the year? Because what you'll find is managers will find a way, regardless of what systems and processes you've got to look at, to give people what they want to give."
Where does performance management fit?
Remuneration is often too closely tied to performance management, when the latter process should be more focused on talent, Elliott says.
"It's about 'What rating can I get, to give someone better pay?' rather than what it should be about, which is better conversations, managing and setting expectations, and a more holistic view of someone's performance."
When performance management is tied to an annual pay review cycle then managers will be focused on "gathering the ratings", she points out. Both Elliott and Berry warn that this can result in ratings that "come out of mid-air".
It can also simplify the process too much, Elliott says. "What we have a tendency to do is try and make a performance management system - particularly the giving feedback side and documentation side - as simple as possible. And I think in doing that sometimes we lose the opportunity to really direct the conversations and outputs into multiple usage."
When deciding where remuneration should "fit" in an organisation's plans, Elliott suggests thinking of it as a spectrum.
"At the one end it's where remuneration is key, and at the other end it's where development and creating opportunities for people is key. And to the extent that you haven't done some of that 'creating opportunities' I think remuneration plays a greater role, because it becomes the thing that might retain people for a bit longer. But if you've got the stuff on the right-hand side right, which is around continually creating opportunities, people will want to stay with you, regardless of what the remuneration structure is."
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