Why pay for performance?
◦ Guides employee behavior in the desired
direction
◦ Reserves payout upon achievement of
contingent conditions
◦ Supports retention of employees till
performance payout
◦ From organization perspective, defers payout
till business performance is assessed and
accounted.
◦ Involves monitoring cost – of behaviors as
well as results and outcome
◦ Prone to biases from raters (Managers/
Management)
◦ Leads to undue competition amongst
employees
◦ Differentiation in pay may not lead to higher
organization performance
What to incentivize?
Behaviors (Input) Results (Output)

◦ Input into performance so right input will lead ◦ Business results achievement more valuable;
to right performance assumes results are achieved by right
◦ Supports more sustainable performance YoY behaviors

◦ Involves higher monitoring cost ◦ Easier to measure; less reliance on managers

◦ Perceived as more objective since its reported
◦ May be subjective and overly relies upon
and monitored
Managers assessment
◦ May lead to payout even when organization ◦ May lead to payout even when right behaviors
are not demonstrated for results achievement
results are not achieved
Whom to incentivize?
◦ Roles where slight difference in performance Typical industry practices
leads to difference in organization ◦ Short term incentives for field force
performance
◦ Annual performance bonus for all employees
◦ Roles directly impacting revenue and / or
cost / profitability ◦ Productivity plans for blue collared workers

◦ Roles performing mission critical tasks ◦ Company performance linked bonus plans for
requiring above and beyond performance – senior management
more than the call of duty / business as usual ◦ Long term incentives / ESOPs for key
employees
How much to incentivize?
◦ Market practice for job families
◦ Some job families are incentivized more than
others – eg: Sales and other revenue generating
functions
◦ Risk taking ability of the employees
◦ Variable pay signifies the risk of non-payment;
risk appetite of employees are different;
alignment required for attracting suitable talent
◦ Variability in performance of the company
◦ Companies experience higher variation in
performance tend to give higher variable pay
(mostly linked to company performance)
◦ Organization life cycle
◦ Organizations in growth stage pay more
incentives than those in maturity / decline stage
Types of incentive plans
Piece rate incentives
◦ Incentives attached with every
increase in production
◦ Leads to higher productivity
◦ However lower / inadequate
incentives leads to lower
productivity
Team based incentives
◦ Balances individual and team
performance
◦ Encourages collaboration for
larger objectives
◦ Problem of free riders
Relative pay / Tournament
theory
◦ Measures performance against
one another
◦ Winner takes it all philosophy
◦ Marginal difference in ability
of players leads to significant
different in rewards
 Employee Life Cycle

Recruitment Onboarding Learning Performance Promotion Mobility Exit

Recruitment
◦ Candidate fitment in the pay range of the band
◦ Typical fitment is in the Learning Zone of the pay range
◦ Compensation Team shares the pay ranges for each band
◦ Recruitment team adheres to the pay ranges – exceptions to be approved separately
◦ Candidate shortlisting stage considers current salary and expected salary – to evaluate if the candidate can fit into the internal
pay range

◦ Measure of success
◦ Recruited candidate moves to competent zone and can be compared with other tenured employees
Learning
◦ Differentiate employees by the skill sets
◦ Incentivize employees to acquiring skills that matter to the company
◦ Encourage / motivate employees on continuous learning
◦ Hot skills vs continuous education
◦ Incentivize acquiring certifications that contribute towards organization success
◦ Higher education – incentivize
◦ Process
◦ Identify hot skills – skills that are most relevant / critical for organization in next 2-3 years
◦ Attach monetary value to the hot skills – review and revise them periodically (typically every year)
◦ Communicate the hot skills to the employees
◦ Define criterion for acquiring hot skill eg: certification from recognized universities, clearing the exam with XX %age
◦ Review the list of hot skill every 2-3 years – realign them as per business priorities
Performance management
Bonus Payout
◦ Determine the kitty for bonus payout
◦ Link kitty size with Enterprise, Business Unit,
Department, Team performance
◦ Assign weightages to different levels – may vary as
per management levels as well
◦ Distribution of kitty amongst employees
◦ Link employee performance with payout
◦ Higher performance leads to high payout
◦ Differentiate performance – meaningful
differentiation
Merit Increase
◦ Determine kitty for merit increase
◦ Consider market growth rate, inflation (CPI),
competitors increment budget, company
performance
◦ Analyze spread of people, promotions, salary
corrections and include them in the budget
◦ Distribution of merit increase
◦ Link merit increase to performance
◦ Link increase to compa ratio
Promotion and Mobility
Promotion
◦ Compensation changes for growing to next
higher level
◦ Typically standard promotion increase ranging
between 15-20% - additional over merit
increase
◦ Increase and revised pay fits into learning
zone of next higher grade
Mobility
◦ Location changes, secondment, time bound
assignments
◦ One-time allowances / changes in compensation
◦ Mitigate the discomfort during performance in
job
◦ Adjust for cost of living
◦ Consider purchasing power parity, statutory
requirements, minimum wages in case of
international movements