Navigating Performance-Related Pay: How Do I Handle Uneven Distribution and Growing Team?

My company's HR is in the initial setup stage, so this year there is a problem that has come up regarding performance-related pay. Last time, the basis on which performance-related pay was given had an uneven format in which this pay was distributed. If we implement something now, there will be a difference in what was given last time. How should we go about this situation?

Additionally, the number of employees has also increased. What solutions are possible? Can anybody please help me? I need your help, guys. I am a fresher in this field and need your guidance.

Hi Deepti,

Performance-Linked Variable Pay is a highly sensitive area. You should be extremely careful while dealing with this issue. This system will work only if there is a robust performance management system, which includes performance planning, review, feedback, and performance appraisal. In the absence of a robust PMS, performance-linked variable pay will fail miserably on its objective, i.e., to build a culture of performance in the organization.

Once you have established and ensured a robust PMS system, then you can link the pay to the performance. Generally, there are three components to performance-linked variable pay:
1. Corporate performance contribution (generally contributing to 20-30%, depending on the level of the executive. It is higher for higher-level executives).
2. Department Performance quotient (generally 30-40%, again depending on the level).
3. Individual performance (generally 30-50%. It is higher for lower-level executives).

These levels of contributions are set to ensure that people work towards the organizational goals.

I hope this will give you some clarity for your concern. Please feel free to ask for any clarification via my email: [jrakesh@yahoo.com](mailto:jrakesh@yahoo.com).

Regards,

Rakesh

Dear Deepti,

I understand your situation. It is not an easy one. Setting up a new performance-linked variable pay system would take time but may not please many. At the same time, the basic pay structure should not be disturbed.

I HAVE A SUGGESTION. - review the company objectives/department objectives.
- take the employee job description.
- develop the 4/5 KEY RESULT AREAS [KRAs].
- for each KRA, develop KPI [KEY PERFORMANCE INDICATOR]. This should be done in conjunction with department heads.

NOW HERE IS A SAMPLE CASE OF A PROJECT MANAGER. HOW KRA/KPI IS APPLIED FOR PERFORMANCE PAYMENT.

THESE ARE THE MAXIMUM 5 KRAs FOR THE POSITION WITH WEIGHTS [IMPORTANCE] FOR EACH KRA.

- KRA 1: PROJECT MANAGEMENT AGILITY = 30%
- KRA 2: CORPORATE OBJECTIVE ALIGNMENT = 15%
- KRA 3: VALUE FOR MONEY OUTCOME = 20%
- KRA 4: PROJECT COLLABORATION = 20%
- KRA 5: PROJECT MANAGEMENT LEADERSHIP = 15%
TOTAL WEIGHTS: 100

WHEN ANYONE [BOSS/PEER/ANYONE] APPRAISES THE PROJECT MANAGER, THE APPRAISAL IS DONE FOR EACH KRA [KPI] out of 10 ratings.

SUPPOSE THE BOSS RATES THE KRA [KPI] OUT OF 10 AND GIVES THE RATINGS AS FOLLOWS:

- KRA 1: 30% - 7/10
- KRA 2: 15% - 8/10
- KRA 3: 20% - 6/10
- KRA 4: 20% - 7/10
- KRA 5: 15% - 8/10

TO GET THE WEIGHTED AVERAGE, we multiply the weights by their respective ratings:

- KRA 1: 30% x 7 = 210
- KRA 2: 15% x 8 = 120
- KRA 3: 20% x 6 = 120
- KRA 4: 20% x 7 = 140
- KRA 5: 15% x 8 = 120
TOTAL: 710
TOTAL MAXIMUM POSSIBLE: 1000
THE SCORING OF THE BOSS = 710/1000 OR 71%.

PAYMENT FOR PERFORMANCE

FOR SUCH AN EXERCISE, WE ADOPT THIS PRINCIPLE:
- The bonus is paid for performance.
- The performance is linked to the job responsibilities.
- The job responsibilities are reflected in the KRAs [KPI].
- Pay is linked to the job description/responsibilities/KRAs [KPI].

SUPPOSE THE PROJECT MANAGER IS ON $150,000 ANNUAL PAY.
80% OF THE PAY = $120,000 IS THE BASE PAY, WHICH IS FIXED.

WE ALLOCATE 20% OF THE ANNUAL PAY AS THE MAXIMUM PAYMENT FOR PERFORMANCE, WHICH IN THIS CASE IS $30,000.
WE APPLY THE KRAs [KPI] evaluation method. IN THIS CASE, IF THE PROJECT MANAGER ACHIEVES THE RATING 71%, WE PAY THE PROJECT MANAGER $30,000 X 71% = $21,300, which is the performance-linked pay.
THE TOTAL PAY = FIXED PART + PERFORMANCE-BASED PAY = $120,000 + $21,300 = $141,300.
IN THIS WAY, THERE WILL BE NO DISPUTE AS EACH ONE IS PAID ACCORDING TO THEIR:
- Responsibility
- Pay scale
- Based on their performance
- Same system/principle

DEEPTI, SOMETHING TO THINK ABOUT.

REGARDS,
LEO LINGHAM