2022 brought sustained change and challenge to organizations around the world, many of whom were, and still are, dealing with the impact of hybrid/remote working environments, inflation and the Great Resignation on both their talent and their bottom line.
Effective performance management and pay for performance by employers is key to addressing these multiple challenges. In September 2022, WTW examined the actions that companies are taking, or considering taking, to reset performance management and pay for performance in their organizations. A total of 837 organizations worldwide, including 150 North America employers, completed our survey addressing these issues; the results reveal several key areas for improvement.
Organizations that deliver performance management and pay for performance well are more likely to reap greater financial performance than their peers.
Why is this topic important now? Organizations that are effectively using performance management are nearly 1.5 times more likely to have significantly higher financial performance than their industry peers, and 1.3 times more likely to have higher employee productivity. Results in these areas are also higher for companies that effectively use base pay and short- and long-term incentives to drive individual and team performance.
The message? Performance management and pay for performance, effectively done, are differentiators with a direct impact on the bottom line – and reap dividends to employers who deliver them well.
By their own admission, employers are not managing and paying for performance effectively.
Only 16% of North American organizations reported being effective when it comes to managing and paying for performance. Additionally, the gap between the priorities for performance management and delivering on those objectives is wide.
Getting performance management right is more expansive than you might think.
Effective performance management goes beyond individual performance to include a more holistic definition of performance.
While most organizations emphasize individual performance alone, compared with low-effectiveness organizations, high-effectiveness organizations are three times as likely to also include the demonstration of skills, individual potential, progress against development plans and team performance.
High-effectiveness organizations also recognize the importance of engaging employees in the performance management process and fostering a favorable view of the process among employees.
Effective pay for performance leverages all components of compensation – base pay, short-term incentives and long-term incentives – to drive individual and team performance.
Organizations are planning or considering making changes to improve the effectiveness of their pay for performance in the following areas:
Managers play a key role in the solution, but there is work to be done.
Most North American employers recognize that their performance management programs are falling short of expectations, but less than half (49%) of these organizations agree that managers at their organizations are effective at assessing the performance of their direct reports. Still fewer – 45% consider their managers effective at properly differentiating their direct reports’ performance.
The good news? Employers do intend to address issues related to performance evaluation. While only 17% of employers have improved employees’ understanding of how their performance is evaluated, 70% are planning or considering doing so. And while just one in seven respondents have enhanced employee perception of the evaluation process, 65% are planning or considering doing so.
There are multiple actions that employers can take to improve their results in this area. Here are four; please reach out to your local WTW consultant for more.
