Linking pay with performance can be beneficial for your company, but it could also have dire implications if done improperly. Read on as Ed Rataj explains what could go wrong, and how to overcome the pitfalls of linking pay with performance.

1. CBIZ Human
Capital Services
The Pitfalls of Linking Pay With Performance
– and How to Overcome Them

2. • Edward R. Rataj
• Managing Director, Compensation
Consulting
• Certified Compensation Professional
(CCP)
• Certified Executive Compensation
Professional (CECP)
• Frequently quoted in national news
publications, such as the Wall Street
Journal and Smartmoney.com
Introduction
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3. “HR matters enormously in
the good times. It defines
you in the bad."
- Jack Welch
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4. • Top 10 Reasons to Link Pay With Performance
• Trends
– Explore turnover in the rebounding economy.
– Consider offensive and defensive strategies.
• Best Practices
– Review steps for designing a market-based compensation system.
– Recognize and sustain high performance through a merit matrix.
• Q&A
Overview
4

5. Top 10 Reasons to Link Pay With Performance

6. Top 10 Reasons to Link Pay With Performance
10. ATB increases are not fair to top performers and over-reward
lesser performance.
9. Limited-increase budgets must be allocated as effectively as
possible.
8. As the economy turns around, there will be an increased demand
for top talent.
7. Calibration of scores can facilitate better evaluations over time.
6. Implementing market-based pay structures provides quality data.
5. New tools provide real-time modeling of “what-if” scenarios.
4. It sends a direct message to employees and facilitates a culture
of performance.
3. It creates “targeted turnover.”
2. The Affordable Care Act reduces differentiation of employer total
rewards offerings.
1. Using a merit matrix rewards performance while accelerating
employees to market-competitive pay levels.

7. Trends

8. Unemployment in Improving Economy
• While the unemployment rate continues to drop, most of
the change is the result of people “giving up” on their job
searches.
• A strong negative correlation exists between
unemployment percentage and education:
Bureau of Labor Statistics Table A4: Employment status of the civilian population 25 years and over by educational
attainment
Bachelor’s degree or above
Some college or an associate’s degree
High school graduate
Less than high school diploma
2.5%
5.4%
4.2%
8.2%
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9. • According to a recent WorldatWork survey, more than 8
in 10 employees intend to leave their current jobs as the
economy improves.
• The survey asked: Do you plan to pursue new job
opportunities as the economy improves?
Projected Turnover as Economy Improves
http://www.rightmanagement.com.br/en/news-and-events/press-releases/2014-press-
releases/item26654.aspx?x=26654
In 2009? In 2015?
Yes, I intend to leave. 60% 86%
Maybe, so I’m networking. 21% 8%
Not likely, but I’ve updated my resume. 6% 1%
No, I intend to stay. 13% 5%
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10. • Offensive Strategies:
– Top grading
• Poach top performers at competitors who would help drive your
organization forward.
• This is especially true for sales staff.
• Pay the “winners like winners and losers like losers.”
– Aggressively pay for performance via a merit matrix (further
discussion in the following slides).
Compensation Strategies in the Rebounding Economy
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11. Compensation Strategies in the Rebounding Economy
• Defensive Strategies:
– Provide total rewards statements.
– Communicate regarding other positive aspects of being employed
by your organization.
– Consider changing targets for sales staff to ensure that they are
reasonable, given the current downturn.
– Reprice options – otherwise executives will.
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12. Best Practices

13. • Plan and collect data.
• Ensure job documentation accuracy.
• Complete market analysis.
• Design pay structures.
• Model implementation costs.
• Assess internal equity.
• Create procedure manual.
• Report results.
Designing a Market-Based Compensation System
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14. Designing Salary Structures
Range Spread
Midpoint Differential
midpoint
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15. Assessing Current State of Compensation Program
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16. Merit Matrix

17. • Merit Matrix Approach:
– Affects pay increases, not pay structure
– Rewards performance
– Focuses dollars on employees who are most likely to leave
because of pay
Merit Matrix
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18. • Employee 1 ( ) and Employee 2 ( ) are both
accountants with exactly the same tenure, experience,
education and pay. Only performance differentiates
them. To whom would you provide a higher pay increase,
low-performing Employee 1 or high-performing Employee
2?
Merit Matrix
HighLow
2
1
1 2
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19. • In this example, all other factors are equal except current
base salary. To whom would you provide a higher pay
increase, high-paid Employee 1 or low-paid Employee 2?
Merit Matrix
2 1
Low High
COMPENSATION
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20. • Finally, all other factors being equal, to whom would you
provide a higher pay increase, high-paid/low-performing
Employee 1 or low-paid/high-performing Employee 2?
Merit Matrix
2
1
Low High
COMPENSATION
HighLow
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21. Merit Matrix
Typical
Matrix
Performance 1 2 3 4
Exceptional 3.5% 3.5% 3.0% 3.0%
Exceeds Expectation 3.0% 3.0% 3.0% 3.0%
Effective 2.5% 2.5% 2.5% 2.0%
Development Needed 2.5% 2.5% 2.0% 2.0%
Critical Need for Improvement 2.5% 2.0% 2.0% 2.0%
Quartile in Range
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22. Merit Matrix
Best Practice
Matrix
Performance 1 2 3 4
Exceptional 6.5% 5.5% 5.0% 4.0%
Exceeds Expectation 6.0% 5.0% 4.0% 3.0%
Effective 5.0% 4.0% 3.0% 2.0%
Development Needed 2.0% 1.0% 0.0% 0.0%
Critical Need for Improvement 0.0% 0.0% 0.0% 0.0%
Quartile in Range
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23. Merit Matrix
Ultra-Aggressive
Matrix
Performance 1 2 3 4
Exceptional 13.0% 11.0% 5.0% 3.0%
Exceeds Expectation 11.0% 6.0% 3.0% 1.0%
Effective 4.0% 0.0% 0.0% 0.0%
Development Needed 0.0% 0.0% 0.0% 0.0%
Critical Need for Improvement 0.0% 0.0% 0.0% 0.0%
Quartile in Range
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24. Merit Matrix
• Common Pitfalls
– Structures out of alignment with market
• Garbage in, garbage out
• May improperly allocate limited salary increase dollars based upon the
current competitiveness of pay
– Performance scores not calibrated
• Supervisors can learn to game the system
• Cheating is rewarded
• Top performers may not be properly rewarded
– Matrix results outside of budget
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25. Merit Matrix - Modeling
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26. Merit Matrix - Modeling
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27. Merit Matrix - Modeling
Company XYZ
Cost by Quartile
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
1 2 3 4
Quartile in Range
MeritIncreaseCost
Critical Need
for
Improvement
Meets
Expectations
Exceeds
Expectations
Exceptional
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28. Merit Matrix - Modeling Company XYZ
Costs by Performance Level
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
Exceptional Exceeds Expectations Meets Expectations Development Needed Critical Need for
Improvement
Performance
Cost
Fourth
Third
Second
First
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29. Merit Matrix - Modeling
Perf- Merit New Merit
Last Name
First
Name Job Title Min Max Salary Quartile ormance Percent Salary Increase
Brown Stan HR Generalist $47,042 $72,915 $46,000 1 4 6.0% $47,042 $2,822.52
Phillips Kevin IT Analyst $53,058 $84,892 $64,550 2 4 5.0% $64,550 $3,227.50
Pence Skyler Construction Manager $47,042 $72,915 $76,000 4 5 5.0% $76,000 $3,800.00
Pratt Jason Controller $70,169 $112,270 $103,299 4 2 0.0% $103,299 $0.00
Beals Susan Maintenance Manger $47,042 $72,915 $59,000 2 3 3.5% $59,000 $2,065.00
Duncan Elizabeth President $153,058 $229,587 $200,000 3 5 6.0% $200,000 $12,000.00
Salary Grade
Adjustment due to
employee being below
salary range
Lump-sum increase
due to employee being
at top of salary range
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30. Merit Matrix - Summary
• Cost neutral
• Rewards performance
• “Targeted” turnover
• Fair and efficient method for administering pay
• Accelerates employees to market-competitive pay levels
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31. Additional Considerations
• Nonprofit compensation
• Executive compensation
• Fair pay based on race and gender
• Sales compensation
• Job descriptions
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32. Questions?
Ed Rataj, CCP, CECP
Managing Director – Compensation Consulting
CBIZ Human Capital Services
(314) 692-5884
erataj@cbiz.com
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