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Align Performance Management and Compensation Systems

Feb 27, 2018

As talent management consultants, we see more frustration and consternation among our clients over performance management and compensation issues than any other human resource issue. It is important to align performance management and compensation systems to enhance employee understanding of the expectations surrounding performance and the impact performance has on compensation.


Establishing an effective performance management system in your financial institution can positively affect the performance not only of individuals, but of the entire financial institution. Performance management can improve employee performance by clearly defining the expectations for the position, facilitating goal setting, and promoting formal and informal communication throughout the review period. 


Regular performance discussions provide timely feedback to employees. Positive feedback most often leads to more positive on-the-job behavior, and constructive feedback provides an opportunity for the employee to change behavior to achieve outcomes. Effective performance management systems maintain open communication channels, guide “off course” employees, and provide support for the institution’s position in the event of a legal claim. 


Performance management trends are changing. Gone are the days when an annual performance review would suffice or “no news was good news.” Performance management is most effective when viewed as a process rather than a once-a-year event. Engaging in recurrent performance-related discussions on a monthly or quarterly basis increases the likelihood of employees achieving performance goals. It enables your financial institution to identify and remove obstacles, to catch performance slips prior to progressing to the termination stage, and to demonstrate to employees that the institution is invested in their success.


Utilize your performance management system to motivate employees by linking performance with compensation, both base and incentive. Research shows that most employees are motivated to attain high performance if they know they will be rewarded with a greater than average increase or when they see a direct correlation between the achievement of predetermined goals and objectives and incentive awards. 


An effective compensation system has six basic components:


  1. Accurate and up-to-date job descriptions
  2. Reliable, competitive market data
  3. A well-developed base compensation plan
  4. Reliable individual and institution performance metrics
  5. Incentive plans tailored to specific individuals and/or departments
  6. Regular communication with employees on goal achievement


Aligning performance management and compensation systems relies on accurate job descriptions, clear communication of expectations with employees, a fair and competitive base compensation plan, and your institution’s compensation philosophy as it relates to performance. Always keep the intent and purpose of your systems in your line of sight, and it will help you stay the course and manage performance and compensation effectively. 


Turn to the professionals at Wipfli for assistance in constructing and implementing an effective performance management and compensation system. Contact Julia Johnson at 920-662-2876 or via email at jajohnson@wipfli.com.



Julia A. Johnson
Director, Organizational Performance
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