How Can HR in Manufacturing Tie Performance Incentives to KRAs? Seeking Your Ideas!

Hi Folks,

Linking performance incentive to KRAs for HR Professionals in a manufacturing industry.

Typically its easy to link incentives to KRAs for sales & manufacturing positions but for HR it is a little bit a grey area.

Can somebody help me out as how we can define the parameters to be linked with financial incentives in the following areas :

My friend has defined the following KRAs

• Competency Mapping of organization to be linked with processes like Recruitment, Appraisal & ISO 9000.

• Conduct Training Programs – internally & externally.

• Review & revamp the performance Appraisals of company and link it to the regular process with ownership by the Line Managers.

• Proactive recruitment of key positions by

Headhunting,

Attending seminars and

Networking.

• Review of all job responsibilities & tasks processes.

• Make the company- a preferred employee's place of work.

• Initiate Employee Relations activities to motivate the employees and enhance the productivity thereby develop a happy & hardworking workforce.

• Integrated PR efforts to highlight the success story of the company in media.

If any ideas or views would be greatly appreciated.

Cheerio

Rajat Joshi

Hi Rajat,

On what grounds is the incentive system deployed? Individual contribution (based on PA ranking, incentives will be computed). If a mix of individual contribution and organizational profit is considered, a certain percentage will be based on individual performance, and the rest would be decided based on profits made by the organization, on a quarterly basis. This is in line with BSC.

If it is based on individual contribution, KRAs are mapped against the timelines (for example, competency identification - 2 months, profiling and mapping of individuals - 3 months, etc).

Training matrix needs to be prepared - number of programs, participants, ROI computation, etc.

PMS - revamping the system on a competency-based model - timelines as well as surveys - method and efficacy of communication, acceptance, employee perceptivity on advantages, etc.

Employee engagement - if that exceeds a percentage over and above the current levels.

ESS - if the index shows a higher level of employee satisfaction.

Selection - usual metrics like time to fill, cost, etc.

These are a few things coming to my mind. Correct me if I am wrong. I am also learning and not a subject matter expert.

Regards,

Rajesh

Hi Rajesh & Lalita,

Thanks for your inputs..i really appreciate it..

Just would like to share the contrarion view on this..let me know what you think..

Are you considering pay for performance ? Think again....

The idea of merit pay or pay for performance is so widely accepted that almost every organization says it has a merit pay system. The major reason for the popularity of merit pay is the belief that it can motivate job performance and increase organisational effectiveness. Research shows that this can be true if pay has two fundamental properties:

• a)Pay has to be important to people

b)Pay has to be tied to their performance in visible, credible and direct ways as perceived by them

Think :

a) How important is pay to your people? More importantly is the pay increase big enough to be important to your people ?

b) Are salary increases perceived to be tied to performance in your organization or are they considered to be a function of favoritism, general increases etc ?

Since pay is important to most people, the critical factor is if a perceived relationship exists between pay and performance. Despite the widespread support for the policy of merit pay, there is considerable evidence that in most organizations, merit pay systems fail to create a perceived relationship between pay and performance. As a result of this failure, they fail to produce the positive effects expected of them. Here is a brief review of the reasons why merit pay systems often do not produce the perception that pay and performance are related.

Problems with Merit pay systems:

Poor performance measures

Fundamental to any effective merit pay systems are objective, comprehensive measures of performance. Without these, it is impossible to relate pay to performance. There is a great deal of evidence that in most organizations, PA is not done well, and that as a result, no good measures of individual or group performance exist. In the absence of good objective measures of performance, most organizations rely on the judgments of managers. These judgments are often seen as invalid, unfair & discriminatory. Because the performance measures are not trusted when pay is based on them, little is done to create the perception that pay is based on performance. Indeed in the eyes of many employees, merit pay is a fiction, which managers try to perpetuate.

Think :

How good are the performance measures in your organization? Who decides these? Are these tracked?

Poor communication

Salaries of many individuals in organisations are kept secret. In addition, pay practices and formulas too are kept secret. Salary increases, bonuses, highest & lowest raises all are kept secret. Hence the typical employee is often asked to accept in faith that pay & performance are related without ever being able to determine if they are.

Since trust build only with communication and exchange of information, secrecy in pay & performance decisions builds up mistrust. Many organizations don't bother to communicate at all how the system works as it needs a lot of energy and time and typically the HR department is understaffed. Even when they do they do so in ways that lead people to question the credibility of the system. For eg. Firms often say that all pay increases are based on merit, but all employees get uniform increases because of inflation and changes in the labor market. This raises the question ‘how much did merit have to do with their merit increase?'

Think :

How well have your employees understood how pay increases and performance are decided? How often and how well do managers communicate with their subordinates on these issues?

Poor delivery systems:

Merit pay policies and procedures often lead to actions, which do little to actually relate pay to performance. They are also complex that they fail to clarify the relation between pay and performance. The merit salary increase in particularly poor as it allows only small changes in total pay to occur in one year. Past merit payments are often made part of the individual's base salary. Thus a poor performer who used to perform well once upon a time can still get highly paid. Bonus plans may typically relate pay better to performance. However they are often kept low or are the same amount to everybody.

Think :

What are your stated and unstated policies towards deciding pay increases? How much of them have been genuine enough to motivate performance?

Poor Managerial Behavior:

Managers' actions often negatively affect perceived connection between pay & performance. They recommend widely different pay increases or bonuses for their subordinates when large performance differences exist. They will not recommend very large or very small pay actions as it means explaining why someone got a low raise.

Such difficulty to explaining raises leads to managers disowning the pay decision. They say that they fought hard to get the employee a good raise but lost. This communicates to the subordinate that pay increases are beyond their control and not based on performance.

Think :

what are the reasons that are typically given to explain how a raise was arrived at ?

Cheerio

Rajat

Dear Rajat,

Thought-provoking. I appreciate and accept the realities embedded in it.

Answering the first part: As HR professionals, we believe that pay is no longer an interesting factor for changes. This could be true for senior-level individuals who may be more inclined towards roles and responsibilities. However, currently, many people are still seeking job opportunities solely for a pay hike, predominantly. Culture, climate, etc., are perceptions that tend to change.

Performance Appraisal (PA) is utilized as a tool for increasing pay. Therefore, at the moment an employee is informed about their PA, their immediate thought is of a salary hike. However, the objectivity of PA remains questionable despite the best practices we adopt. Some organizations maintain critical incident diary methods for specific contributions, while others adopt the Balanced Scorecard (BSC) or HR strategies aligned with business strategies, incorporating goal setting and objective measures for evaluating contributions. Are people completely satisfied with the appraisal process? Not entirely, and it may never be perfect.

Indeed, the HR communication framework plays a vital role in enabling employees to understand the system and process. For example, there is a telecom company that provides the percentage increase at various contribution levels achieved by the employee directly in the PA form, eliminating any confusion. The rationale behind qualitative measures and competency evaluation may cause some discomfort for employees.

When objectives are set by employees and their line managers—with proven measurable targets (e.g., filling two critical positions during April, conducting ESS in June, ensuring the completion of the PA process by mid-May, etc.)—the Key Result Areas (KRAs) and Key Performance Indicators (KPIs) become clear, leaving no room for discrepancies in the evaluation of contributions.

In a nutshell, your point is one that all HR professionals are cautious about - communication and objectively measuring performance. How can we achieve that?

Since line managers carry the responsibility of HR managers for their associates, HR's role would be to introduce effective development programs that empower line managers to act as HR managers.

This is my view, and I am not sure if it encompasses all the points you raised.

Regards,

Rajesh

Hi,

Thank you for all your inputs. I am actually working on 'pay and performance' in my company. We are into product development in the IT field, and I had to develop an incentive scheme for the developers.

At first, this sounded like a difficult job. But then I broke it into bits and came up with a plan. I sat with the teams, understood their work, and now I am devising a performance review system and a form that would help the employees understand their job, set objectives, which was not happening before.

At this stage, I happened to read an article, especially the link provided by Lalitha. The article explains the step-by-step procedure of performance review. All this worked like a bible to me, and now I see myself smoothly sailing through the process.

I have divided the form into 3 sections. One for setting KRAs annually, the next for objective setting quarterly, and the third for self-review annually. The self-review part would be confidential with the HR department and not shared with the employee's reporting authority. As I was devising the system, I had a few queries and opinions.

1. Should contract employees be part of this review?
Contract employees would be paid through an agency, so they can fill the 'objective setting' sheet and are not required to fill the KRA sheet, which determines the annual increment.

2. Should contract employees be eligible for quarterly incentives?
Contract employees are eligible for quarterly incentives as they contribute to the revenues directly or indirectly.

3. How should the ratings given by the employee and the reviewer on a specific attribute of the employee be handled?
Both the employee and the reviewer can justify their ratings, and the average of both will be considered to measure the attributes.

4. I considered the HR department, reporting authority, and peers while preparing the review system. There is provision to rate them and justify, as they are influential factors in the organization but are not usually considered in employee performance evaluations.

5. How to link the objectives set by the employee with incentives? (IT developer)
Differentiate between objectives directly related to work and those influencing work, assign specific scores to each objective. However, defining the scores has been a challenge.

6. What about new employees?
New employees joining any part of the quarter would start their objective setting at the beginning of the quarter. They would fill in their KRAs along with objectives. For example, an employee joining in May would set objectives only in July, giving them time to settle down before being part of the incentive scheme.

Please share your comments on my views and any suggestions.

Regards,
Soumya Shankar

Hi,

Self-rating and appraiser rating must be in consensus and hence cannot be kept in isolation. Any amount of discrepancy and dissent will be dealt with by the reviewer. This is my view (kindly correct me if I am wrong).

Contract staff also need to be part of the appraisal on an annual basis to increase salaries, and I am not sure if companies offer incentives or performance bonuses to them.

Competencies are to be given some weightage, say 20% of the overall rating, wherein the KRAs will have an 80% weightage. The identified competencies are to be rated by self and appraiser, and you can also provide the critical incident method to justify the appraisee's rating.

When going for a 360-degree evaluation, you need to be very clear on the maturity level of your company before implementing it. Since this is used only for feedback purposes on potential development and not for salary increases, you will have to decide on your program objective.

Typically, the modules given to people, quality, documentation, and reviews, etc., are the measures used for assessing performance at junior levels. If people complete the tasks on time and meet the defined quality parameters, you can consider the task completion as meeting expectations. Decide on the percentage to be given on CTC. There are two ways of looking at this: individual contribution and organizational performance. You can have two measures for defining the incentives.

New inductees are not eligible for the rest until we finalize the confirmation appraisal. This is my view.

I am unsure about responding to all the points raised by you.

All views and suggested measures for improving my knowledge levels are welcome.

Best regards,

Rajesh B

Hi,

Thank you for the reply, Rajesh. Your email was clear to me, but can you define 'weightages'/'scores'? I am finding it difficult to judge if the weightages given to a specific job are in line with what the employee is doing. If not, how should it be corrected? But if it is correct, then how do we convert it to incentives?

Please help me out.

Regards,
Soumya Shankar

Hi Soumya,

Assigning weightage will have to be agreed upon by the parties involved. For example:
- Coding: 50%
- Quality: 30%
- Documentation: 10%
This is primarily based on the KRAs of the concerned employee. The weightage of both KRAs and Competencies are added, and an overall rating will be calculated. The scores will be converted into a point scale - 3, 4, or 5, which will describe the achievement percentage of the target set.

Translating scores into incentives:
- If the achievement is 100% and above - x%
- 80 - 99% - x% etc.
"X" can be on CTC or basic.

Hope this sheds some light.

Regards,
Rajesh

Hi everybody,

I am a new member, and I am glad to be one. All the information shared by Rajat, Rajesh, and especially the link by Lalitha related to increments helped me a lot. Thanks to all of you.

Sabi :)