Companies are finally learning that development-focused performance reviews are not just important, but essential to retain and empower their talent. Not only does development create an invested relationship between the employee and company, it’s also the best way to actually improve and track performance. But where does that leave compensation?
54% of organizations do not train their managers on how to have conversations about pay with employees.
– PayScale survey, 2022
For some companies, calculating raises and bonuses has been the ultimate aim of their performance reviews. This is problematic for several reasons. Firstly it sends the message that employees should be motivated primarily by financial gains. It also encourages competition between employees, rather than collaboration. Worrying about salary hikes makes employees anxious throughout the year and distracted in the performance review. Finally, 54% of organizations do not train their managers on how to have conversations about pay with employees.
"By taking away concerns about money and status, we’ve freed employees to relax and hear what their managers have to say.”
– Lear, 2014
Reacting to these discrepancies, Lear, who employ over 165,000 people globally, wanted to see what would happen if they ditched money talks altogether, relying instead on development and promotional opportunities to motivate their employees. “By taking away concerns about money and status,” Lear says, “we’ve freed employees to relax and hear what their managers have to say.” They still adjust pay, but only with a view to the local market - or if an employee has made truly extraordinary achievements that year.
However, they recognize that this approach won’t work for everyone. So what happens when you want to keep your money talks, but without the negative effects listed above?
- Set up a timeline for your salary talks. They should never appear out of the blue: ideally you should raise the topic of raises and bonuses at the beginning of the year so that both managers and employees have a good idea of what to expect, and how to plan accordingly. We recommend following a model like Google’s, where decisive money talks are held a few weeks after the end-of-year performance review. This gives employees enough time to fully absorb the developmental points discussed in the review.
- Make any decisions about salaries in groups of two or three managers. Not only does this help to make more objective choices, but it helps offset performance review bias and leads to fairer outcomes. This will be useful in providing a reasoned explanation to employees should there be friction further down the line.
- Plan what you want to say in the money talk, and prepare for an emotional reaction. Do you have any leeway with the figures you’re about to discuss; is the employee able to argue them? If not, be sure to create a cooperative tone in that beginning-of-year discussion by asking the employee what their expectations are. Make it clear that you value them and their work, but avoid making promises you can’t keep.
- Don’t be afraid to get technical. If you can talk about your company’s financial wellbeing and explain how salary decisions were made across the board (without disclosing what other employees are being paid), this will help justify the figures, give the employee perspective, and alleviate any feelings of under-appreciation.
- If you must talk about money during a performance review, make sure you do so at the start so the employee doesn’t have a mystery number dangling in front of their eyes for the entire session. In this way you can use salary decisions to activate a developmental conversation, not to conclude it.
- Lastly, you might consider who you give salary talks. Everybody needs development, but money conversations could be reserved for performers particularly in need of improvement, or those who have done exceptionally well. Some companies doing this have created balance by making their base-rate salaries competitive and tying compensation to overall company progress. Whatever system you opt for, make sure you are 100% transparent with your employees about the way talks will (or won’t) be distributed throughout the company:
“Researchers such as Dan Pink say that the things which really motivate people to perform well are feelings like autonomy, mastery, and purpose.”
– McKinsey, Ahead of the curve: The future of performance management, 2016
Ultimately each company should find a way to hold salary talks that complement development-focused performance reviews without overshadowing them. Most of the time this requires ongoing clear communication about money; careful consideration about the role of development; and just how far money talks are needed across the company.
For more on how to conduct the ultimate performance review, make sure to check our step-by-step People Ops guides on the topic!