Pay transparency and performance-based pay appear to be at odds with each other, what with pay transparency emphasising openness and fairness in compensation, and performance-based pay rewarding individuals for their achievements and contributions to the company. While both are different, the two concepts can co-exist in the same compensation system, believe many senior HR leaders.
Sharing his personal experience, Vivek Tripathi, VP-HR, NewGen Technologies, confirms, “Pay transparency is higher in companies which truly give performance-based pay.” He also shares that companies, which fail to accept performance-based pay or implement it successfully experience lower pay transparency.
For instance, in order to implement a performance-based pay system, a company would need to communicate pay levels for different types of jobs and the positioning of high performers within those levels to managers. This way, if the company pays high performers more, managers who implement salary increases will need to understand how to position high performers compared to average performers. Therefore, without this open communication, the pay system may be less transparent.
“It’s also about telling them why and for what, we as employers and an organisation, are going to reward them. So, I always feel that when we talk about performance pay and when we display our commitment towards performance pay, it’s also part of performance transparency”
Pradyumna Pandey, head-HR, manufacturing, Hero MotoCorp
Agreeing with Tripathi, A Thiru, C-suite HR professional leader, says, “The policy guidelines on eligibility, maximum limit (say 10 to 40 per cent of basic or CTC of the eligible employee based on work levels), annual goal setting and its proportionate percentage to company level, division / dept / individual level and if need be milestone-based achievements for projects are to be communicated ahead of the year and payment to be effected on the following month along with the monthly salary / wages of the year under review. The only thing which needs to be kept confidential is the pay out to individuals and not the eligibility criteria.”
“A performance-based pay system paired with pay transparency is one of the most reliable ways to bring transparency in an organisation, as it is based on employees’ performance orientation,” believes Pradyumna Pandey, head-HR, manufacturing, Hero MotoCorp.
As performance-based pay is designed to reward employees based on their individual contributions to the organisation’s goals, it can motivate employees to perform at their best and improve their overall job performance. On the other hand, pay transparency can help to build trust and engagement among employees by providing clear and open communication about how pay decisions are made. When employees have a clear understanding of how their pay is determined, they are more likely to feel valued and motivated to give their best.
“It’s also about telling them why and for what, we as employers and an organisation, are going to reward them. So, I always feel that when we talk about performance pay and when we display our commitment towards performance pay, it’s also part of performance transparency,” asserts Pandey. He also adds how the process is now much convenient with the digitisation and technology advancement. Employees can easily access the data on their portals.
Communicating pay transparency with performance-based pay also helps eliminate the doubts that employees generally have about various roles. “The next level of pay transparency would involve making pay ranges available to employees, without disclosing individual pay. This can be done by communicating the company’s compensation philosophy, which includes positioning high performers at the higher end of the range and those entering the job at the lower end. The first step towards this is to communicate the pay ranges or levels to managers and link them to the market. The second step is to make this information known to employees as well,” explains Tripathi.
“There are two aspects to consider when it comes to performance: the accuracy of measuring performance and how much of a difference in performance actually contributes to the organisation’s output”
Vivek Tripathi, VP-HR, NewGen Technologies
Many companies are adopting this approach by publicly sharing pay ranges for specific job roles, such as software engineers at level one, which may have a range of Rs 5 to 8 lakhs. High performers are positioned at Rs 6 or 6.5 lakhs and above, while average performers are positioned between Rs 5 to 6.5 lakhs. This way, employees are aware of the pay ranges and can understand how their performance impacts their position within the range.
Thiru also shares, “I had the opportunity to establish this in Vedanta Resources, not only in terms of performance pay but while awarding stock options of the London-listed entity to employees across levels including MTs and GETs. In fact, during the dip stick done amongst the young talents to find out whether they would prefer fixed retention bonus or stock options linked to market, they unanimously preferred stock options in view of its transparency.”
“Sharing the entire pay process with all the employees — the pay structure, the philosophy behind the pay — with clarity, helps employees engage more as that clarity motivates them. The rationale behind fixing these performance base pay parameters must be communicated to employees,” asserts Pandey.
In general, pay transparency and performance-based pay are not mutually exclusive and can co-exist in a harmonious manner. However, it’s up to the organisation how much of a differentiation they want to make based on performance.
“There are two aspects to consider when it comes to performance: the accuracy of measuring performance and how much of a difference in performance actually contributes to the organisation’s output,” points out Tripathi.
In cases where performance is difficult to measure, such as in creative or collaborative roles, one can still rely on feedback from leaders and colleagues to make an assessment. However, when deciding how much to differentiate between a top performer and an average performer, one must consider the job’s value and the impact the job has on the organisation. If a job cannot demonstrate its effectiveness, it may be necessary to redesign it to ensure it adds value.
For instance, product companies may highly differentiate pay for top performers who bring significant revenue, potentially giving them an increment three times higher than the average employee. However, manufacturing companies may have a lower degree of differentiation since employees may work in teams and not have an individual impact on revenue.
Additionally, it is also important for the companies to have the right performance-management system in place if they choose to combine both pay transparency and performance-based pay. “Companies must have a process to convince their top performers that they are getting the right performance pay.”
For instance, in a product company, a product development engineer who comes up with an idea that generates millions of dollars in sales can be considered a top performer and may be paid significantly more than an average engineer, who only completes assigned tasks.
“During the dip stick done amongst the young talents to find out whether they would prefer fixed retention bonus or stock options linked to market, they unanimously preferred stock options in view of its transparency.”
A Thiru, C-suite HR professional
On the other hand, in a manufacturing company, where operators perform similar tasks, the more efficient operator may receive a modest increase in pay compared to the average worker. However, without an appropriate performance-management system in place, it can be challenging to accurately measure performance and determine the extent to which it contributes to the organisation’s output. This is especially true for roles that involve collaboration or creative work. Nonetheless, measuring performance is possible even in such cases. For instance, in an HR role, the leader can assess the responsiveness of the HR person.
In some roles, it may be difficult to measure performance objectively, such as in creative or collaborative roles. In such cases, depending solely on performance metrics may not be a reliable way to determine pay. Therefore, organisations may need to consider alternative methods to determine pay, such as using peer evaluations or market data.
In summary, while pay transparency and performance-based pay can co-exist in a harmonious manner, organisations need to be mindful of potential issues that may create tension or defy each other. By being transparent about the pay system and considering employees’ privacy concerns, balancing objective performance metrics with alternative methods, and aligning performance goals with organisational values, organisations can create a pay system that promotes fairness, engagement and trust.
“There are two main factors that affect employee engagement. The first is, having transparent processes in place to promote discipline. The second is, leadership behaviour, which drives motivation. These two factors are crucial when it comes to transparent processing systems. Having such systems in place can increase employee engagement and ultimately boost productivity,” concludes Pandey.