Rewards in the Era

of Performance
Management
Transformation

CEB Total Rewards Leadership Council

CEB Total Rewards Leadership Council Content Publishing Solutions
Group Leader Print Designer
Aaron Kissel Ridhi Mahajan

Practice Leader Contributing Designer

Monique McCloud-Manley Reid Griffler

Principal Executive Advisor Editor

Ania Krasniewska Melanie Meaders

Research Director
Caitlyn Hongell

Research Consultant
Sara Haber

Senior Research Analyst

Pooja Muthiah

Research Analysts
Taylor Brown
Christopher Lane

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TABLE OF CONTENTS

Summary of Key Findings 4

Introduction 5

Assess Who Contributes Most 17

Differentiate Pay Between Core and Top Contributors 37

Explain Pay Decisions Through Narratives 51

Resources for Rewarding Top Contributors 64

Appendix 65

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Introduction 3
 Rewards in the Era of Performance Management Transformation 4

SUMMARY OF KEY FINDINGS

■■ Organizations are redesigning their performance management strategies to enable employees to contribute
in a way that drives business growth. They are moving from an annual, backward-looking review process that
ensures employees meet performance standards to a series of ongoing conversations that help employees
identify and prioritize ways they can add value to the business.
■■ In contrast, most organizations still reward employees for relatively small differences in job performance.
Managers assess whether each employee delivered what was expected of their role, and then make a series of
incremental pay differentiation decisions that fail to meaningfully reward the best talent. As a result, most pay
for performance strategies achieve less than half their potential impact on employee performance.
■■ The best organizations are refocusing pay for performance on larger differences in employee performance.
They presume that most employees meet expectations for their role and focus managers on correctly
identifying and disproportionately rewarding those employees who had an outsize impact on the business.
This approach allows more flexibility in the ways employees contribute to the business and ultimately
improves employee performance by 18% because employees seize opportunities to impact the organization
rather than worrying about how many boxes they check.
■■ Organizations should implement three strategies to reward larger differences in employee performance:

––Assess Who Contributes Most—Provide managers with simple questions they can use to determine who
contributes most to the business rather than asking managers to rate each employee against a series of
more granular performance expectations.
––Differentiate Pay Between Core and Top Contributors—Focus managers on achieving significant pay
differentiation between core and top contributors rather than making incremental pay differentiation
decisions for employees within the same performance group.
––Explain Pay Decisions Through Narratives—Teach managers to explain pay decisions using a narrative
that summarizes each employee’s most important contributions to the business rather than explaining pay
decisions as a function of performance scores.

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The nature of work has
changed, and the way
THE NATURE OF WORK HAS CHANGED
organizations manage
talent should follow suit.
Old Work Environment

Leadership ■■ Work was determined by leadership

teams.
■■ Work required general expertise.
■■ Work was less complex (e.g., more
silos, fewer products, smaller
geographic footprints).
■■ Work was more consistent and steady.
■■ Work expectations remained constant.
Frontline
Employees

New Work Environment

Leadership ■■ Work is increasingly owned by

employees.
■■ Work requires specialized expertise
and judgment.
Frontline ■■ Work is more complex and
Employees interconnected.
■■ Work changes faster, given the pace
of innovation.
■■ Work expectations increase and
Source: CEB analysis. evolve.
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Introduction 5
 Rewards in the Era of Performance Management Transformation 6

In today’s work
environment, employees
A NEW TYPE OF PERFORMANCE NEEDED TODAY
must perform their
individual tasks effectively CEB’s Model of Employee Performance
and also contribute to
broader organizational
outcomes in different ways. Individual Task Network Enterprise
Performance Performance Contribution
An employee’s An employee’s An employee’s
effectiveness at effectiveness at effectiveness at his
achieving his or her improving others’ or her individual Business
Outcomes
individual tasks and
assignments + performance
and using others’ = tasks, contribution
to others’ ■■ Profit
contributions to performance, and ■■ Revenue
improve his or her use of others’
own performance contributions to
improve his or her
own performance

Examples Examples
■■ High output per ■■ Identifying new product
hour worked or service opportunities
■■ On-time task ■■ Introducing improved work
completion processes
■■ Error-free work ■■ Improving working methods,
■■ High-quality work techniques, or tools
■■ Efficient use of
■■ Improving coworker performance
resources ■■ Transferring great ideas from
other parts of the organization
■■ Transferring skills and knowledge
Source: CEB analysis.

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Organizations are changing
their performance
PERFORMANCE MANAGEMENT REDESIGN NEEDED
management strategies
because current approaches Percentage of Organizations Planning Changes Challenges with Performance Management
do not enable the to Performance Management
performance organizations
need today. 2%
Other of HR leaders believe their
14%
No Change
9%
Complete
4% organization accurately assesses
performance.
Redesign or
Overhaul n = 379.
Source: CEB 2016 HR Agenda Poll.

33%
41% Significant
Some Changes of employees believe
Changes
35% performance management is
relevant to their job.

n = 10,531.
n = 99. Source: CEB 2014 Enterprise Contribution Workforce Survey.
Source: CEB 2016 HR Agenda Poll.
Note: “Other” represents organizations that were undecided or do
not have a formal performance management process. Total
does not equal 100% due to rounding.
of managers believe performance
55% management is too time
consuming.

n = 5,911.
Source: CEB 2016 Pay for Performance Employee Survey.

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Introduction 7
 Rewards in the Era of Performance Management Transformation 8

Organizations are shifting

the focus of performance
NEW APPROACHES TO MANAGING TALENT
management from
evaluating and monitoring Organizations Are Redesigning Performance Management to Enable Contributions That Drive
employee performance Business Growth
to enabling employees to
contribute in a way that
drives business growth.
Traditional Performance Management Today’s Performance Management

Ensure employees meet or exceed Drive business growth through regular

performance standards through periodic conversations that enable each employee
performance evaluations. to contribute to the organization.

Characteristics Characteristics

Episodic Ongoing
Backward-looking Forward-looking
Formal Informal
Manager-owned Employee-led
Focused on ratings Focused on contribution

Source: CEB analysis.

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We conducted best
practice research
ASSESSING THE IMPACT OF PAY FOR PERFORMANCE
conversations and
surveyed heads of Total Our Research Strategy
Rewards and employees
globally about their pay for Employee Survey Organizational Survey Organizational Interviews
performance practices.
We surveyed nearly 10,000 We surveyed more than We conducted nearly 100
employees in 18 countries to 100 heads of Total Rewards interviews with heads of
assess the impact of different globally to understand HR, Total Rewards, and
pay for performance their pay for performance Compensation to understand
strategies. strategies. pay for performance trends
and challenges.

Participating Organizations
Partial List

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Introduction 9
 Rewards in the Era of Performance Management Transformation 10

Traditional pay for

performance strategies are
REWARDING SMALL DIFFERENCES IN PERFORMANCE
misaligned with employee
contribution because Traditional Pay for Performance Strategies Reward Relatively Small Differences in Job Performance
they reward relatively
small differences in job
performance.
Rewarding All
Assess Employee Differentiate Pay Explain Pay Decisions
Performance
Performance Against Within Performance Through Process
Levels
Expectations Groups
Assessing and
rewarding
all levels of
performance
against
expectations

Reveals small Leads to many small Makes it hard for

differences in how pay decisions that employees to
Breakdown well employees result in limited understand how they
meet expectations differentiation for are rewarded for their
for their job top contributors contributions

n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.

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Most organizations evaluate
employees against a
CHECKING BOXES BUT NOT CAPTURING CONTRIBUTION
relatively granular set of
performance expectations, Traditional Assessments Reveal Small …Which Fails to Accurately Capture an
which fails to accurately Differences in Job Performance… Employee’s Impact on the Business
capture their impact on the
business.
Managers assess how well employees
perform against expectations for their role.

What an Employee Achieved

Objective 1: ….
Objective 2: ….
Objective 3: ….
Objective 4: …. 50% of top contributors are
correctly identified through
How an Employee Achieved Their traditional assessments.a
Objectives
Collaboration
Customer Centricity
Innovation
Drive for Results

n = 113.
Source: CEB 2016 Pay for Performance Benchmarking Survey.
67% of employees don’t understand
how their assessment relates to their
most important contributions.

n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.
a
Represents the percentage of top contributors rated as “high
performing” in their most recent performance review.

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Introduction 11
 Rewards in the Era of Performance Management Transformation 12

Focusing on small
differences in talent
FOCUSING ON SMALL DIFFERENCES LEADS TO SMALL
leads to many small pay
decisions that fail to
PAY DECISIONS
effectively reward top
contributors. Managers Make Incremental Pay Differentiation …That Fail to Reward Top Contributors
Decisions…

No Target Two Times

Payout Target
1.1x

Monique
(0.2)x

Lloyd
1.3x 82% of top contributors do not receive
a significantly differentiated salary
Gilberto
increase and bonus payout.
1.05x
n = 9,686.
Marvin Source: CEB 2016 Pay for Performance Employee Survey.

1.17x

Taylor
Source: CEB analysis.

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Small pay decisions within
a performance group
SMALL PAY DECISIONS DO NOT IMPACT PERFORMANCE
do not affect employee
performance. Impact of STI Payout Differentiation on the Performance of Employees Rated “Meets Expectations”a

■■ Although employee
100
performance varies within the Differentiation within a group hurts
“meets” category, recognizing perceptions of fairness as employees
those small differences struggle to understand pay decisions.
through pay does not improve
employee performance.

■■ Employees actually perceive Employee Performance

this type of differentiation as
less fair because they struggle
to understand the rationale for
small differences in their pay.
80

60
0
(1.20) 100
Target 200
1.20
Payout as a Percentage of Target
n = 3,732.
Source: CEB 2016 Pay for Performance Employee Survey.
a
Employee performance is measured using an index of individual and network performance.

Consistency Across Regions

The relationship between employee performance and incentive payout is consistent across
Europe, North America, Latin America, and Asia–Pacific.
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Introduction 13
 Rewards in the Era of Performance Management Transformation 14

Organizations can
significantly improve
REWARD LARGER DIFFERENCES IN PERFORMANCE
the impact of pay for
performance by encouraging Impact of Pay for Performance Strategy on Employee Performancea
managers to reward larger
differences in employee
performance. …but much less than
rewarding larger differences
in employee performance.

Employee Performance ∆ = 18%

Rewarding small differences

drives performance more
than not differentiating at all…

∆ = 6%

Do Not Reward Many Small Performance A Few Big

Employee Performance and Pay Decisions Performance and
Pay Decisions
n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.
a
Employee performance is measured using an index of individual and network performance.

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Organizations should
shift from a series of
FROM MANY SMALL DECISIONS TO ONE LARGE DECISION
smaller decisions about
performance and pay to Strategic Shift Required in How Organizations Reward Talent Today
one large decision about
who has the greatest
impact on the business and
how to pay them. Rewarding All
Assess Employee Differentiate Pay Explain Pay Decisions
Performance
Performance Against Within Performance Through Process
Levels
Expectations Groups
Assessing and
rewarding
all levels of
performance
against
expectations

Rewarding Top Assess Who Differentiate Pay Explain Pay Decisions

Contributors Contributes Most Between Core and Through Narratives
Focusing pay for Top Contributors
performance on
the talent that
has the greatest
impact on the
business

Key Exercise Who Had the Most How Much Should We Pay What Contributions
for the Business Impact on the Business? Them Relative to the Core? Led to That Decision?

Source: CEB analysis.

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Introduction 15
 Rewards in the Era of Performance Management Transformation 16

Rewarding larger differences

in employee performance
BIG PAYOFF FROM FOCUSING ON LARGER DIFFERENCES
improves talent outcomes
and ultimately improves Focusing on Who Contributes Most Improves Talent Outcomes and Organizational Performancea
organizational financial
outcomes. Increase
in Revenue

Benefits of Focusing on Larger US$1,040 per

Differences
employee
■■ 23% More Top Contributors
Identified
■■ 18% Increase in Pay
Differentiation for Top
Contributors
18% Increase
in Profit
■■ 42% More Employees
Understand the Link Between
Performance and Pay Increase in
Workforce
■■ 11% Increase in Employee
Performance
Engagement

4.75%

n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.
a
Increases in revenue and profit were estimated based on multiple studies of how employee effort and performance affect an organization’s
financial performance. Each percentage point improvement in employee effort and performance leads to a corresponding improvement in
revenue and profit.

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REWARDING TOP CONTRIBUTORS

Identify and reward the talent that has the greatest impact on the business
rather than aligning pay with all levels of employee performance.

1 2 3
Assess Who Differentiate Pay Between Explain Pay Decisions
Contributes Most Core and Top Contributors Through Narratives
Equip managers to make a decision Stop differentiating pay in small Shift the focus of pay conversations
about who had the most impact on increments within a performance from the process used to determine
the business rather than relying on group, and focus on large decisions pay to the contributions that led
traditional performance assessments for top contributors. to an employee’s pay decision.
to identify top contributors.

1
Pseudonym.
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Assess Who Contributes Most 17

 Rewards in the Era of Performance Management Transformation 18

Most organizations
connect rewards to a
RELYING ON TRADITIONAL PERFORMANCE
traditional performance
assessment that focuses
ASSESSMENTS
on small differences in job
Organizations Rely Heavily on Traditional Performance Assessments to Reward Employee Performance
performance.

Managers assess how well employees 77% of companies tie rewards

perform against expectations for their role. closely to traditional performance
assessments.
What an Employee Achieved
Objective 1: ….
Objective 2: ….
Objective 3: ….
Objective 4: ….

How an Employee Achieved Their

Objectives
Collaboration
Customer Centricity
Innovation
Drive for Results

n = 113.
Source: CEB 2016 Pay for Performance Benchmarking Survey.

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Changes organizations
typically make to improve
CHANGES BREAK DOWN IN PRACTICE
performance assessments
fail to address the Attempts to Improve Performance Assessments Don’t Enable Organizations to Identify Their Best Talent
underlying challenges that
make assessing employee
performance difficult. Type of Change Examples Breakdowns

Adjust Make goals ■■ Some goals matter more to the business

Goal-Setting more specific, than others.
Practices measurable, or ■■ Employees make important contributions that
flexible. cannot be predicted ahead of time.
■■ Goals cannot be updated regularly enough to
keep pace with changing business priorities.

Change the Change the ■■ Ratings continue to cluster around “meets” and
Rating Scale number, type, or “exceeds expectations.”
name of ratings. ■■ Performance distributions remain inflated, with
too many employees rated as high performers.

Adopt a New Change the ■■ New behaviors and competencies fail to

Definition of behaviors or distinguish those who contribute most to
Performance competencies collective outcomes.
included. ■■ Ways employees create value evolve, making
definitions quickly outdated.

Source: CEB analysis.

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Assess Who Contributes Most 19

 Rewards in the Era of Performance Management Transformation 20

Organizations should
equip managers to make
FOCUS MANAGERS ON IDENTIFYING WHO
a decision about who
contributes most to the
CONTRIBUTES MOST
success of the business
Strategic Shift Required in How Organizations Assess Performance
rather than relying on
traditional performance
assessments to identify top
contributors. Assess Performance Against Expectations Assess Who Contributes Most

Managers assess how well employees Managers make a decision about who
perform against expectations for their role. contributes most to the business.

What an Employee Achieved ■■ What were the employee’s most

Objective 1: …. important contributions this year
(planned and unplanned)?
Objective 2: ….
Objective 3: ….
■■ How much impact did the employee have
individually and by working with others to
Objective 4: …. influence business outcomes?
How an Employee Achieved Their ■■ How critical were the employee’s
Objectives contributions to the business achieving
Collaboration short- and long-term outcomes?
Customer Centricity
Innovation
Drive for Results

Source: CEB analysis.

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Organizations that
ask managers to make
FOCUSING ON THE TOP IS MORE ACCURATE
a decision about an
employee’s overall level of Percentage of Top Contributorsa Correctly Identified Through the Performance Assessment b
contribution to the business
more effectively identify top 80%
contributors.
73%
73%

50%

40%

Regional Differences
Organizations can identify
more top contributors in
each region:
■■ 37% more in Europe

■■ 19% more in North America

■■ 23% more in Latin America

■■ 23% more in Asia–Pacific

0%
Assess Performance Assess Who
Against Expectations Contributes Most
n = 1,937.
Source: CEB 2016 Pay for Performance Employee Survey.
a
“Top contributor” is defined as scoring in the top 25% on our Index of Employee Performance.
b
“Correctly identified” refers to the portion of top contributors who were rated “high performing” in their most recent performance review.
Note: Mean difference is statistically significant at p < 0.001.

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Assess Who Contributes Most 21

 Rewards in the Era of Performance Management Transformation 22

Managers are more

effective at assessing
HIGHER-LEVEL ASSESSMENTS ARE EASIER
whether an employee is a
top contributor than they
FOR MANAGERS
are at evaluating more
Percentage of Respondents Who Agree That Managers Are Effective at Assessing Talent
granular performance
criteria.

x + 32% x + 29% x + 32%

Assess Performance
Against Expectations
x Assess Who
x x Contributes Most

Reward Executives Managers Employees

n = 113 (reward executives); n = 5,911 (managers); n = 9,686 (employees).

Source: CEB 2016 Pay for Performance Employee Survey.
Note: Mean difference is statistically significant at p < 0.01.

Reducing the Idiosyncratic Rater Effect

Although ratings measure employee performance, research increasingly finds that ratings
reflect each manager’s idiosyncratic tendencies (e.g., his or her definition of “performance” or
“competencies”). Organizations that enable managers to focus on the big picture rather than
specific criteria and inputs can reduce or eliminate the idiosyncratic rater effect.
Source: CEB analysis; Marcus Buckingham, “Most HR Data Is Bad Data,” Harvard Business Review, 9 February 2015, https://hbr.org/2015/02/
most-hr-data-is-bad-data.

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The performance of the
entire workforce improves
FOCUSING ON THE TOP DRIVES PERFORMANCE
when managers have
discretion to assess an Impact of Assessment Strategy on Employee Performance
employee’s overall level
of contribution to the
business. x + 9%

Regional Differences
x Assessing who contributes
most improves performance:
■■ 13% in Europe

■■ 8% in North America

■■ 6% in Latin America

■■ 19% in Asia–Pacific

Assess Performance Assess Who

Against Expectations Contributes Most
n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.
Note: Mean difference is statistically significant at p < 0.001.

Why Focusing on Who Contributes Most Improves Performance

When managers make a holistic decision about an employee’s level of contribution to the business:
■■ Employees are two times more likely to believe their organization rewards them for the most
important ways they create value for the organization, and
■■ Employees are more motivated to contribute in diverse and creative ways because they know
important contributions they make within and outside their role will be considered when
determining rewards.
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Assess Who Contributes Most 23

 Rewards in the Era of Performance Management Transformation 24

Organizations that focus

on identifying the talent
FOCUSING ON THE TOP SHIFTS THE DISTRIBUTION
that has the greatest
impact on the business Average Workforce Performance Distribution
identify a smaller number
of true top contributors.
80% Assess Performance Against Expectations

71% Assess Who Contributes Most

Organizations that equip

managers to assess whether
56% an employee is a top
contributor have 15% fewer
high performers on average.
40%

25%

8%
3% 15% 8%
3%
0%
Does Low Meets High Exceeds
Not Meet Meets Meets
n = 113.
Source: CEB 2016 Pay for Performance Benchmarking Survey.

Finding the Right Distribution

Reducing performance inflation positively impacts employee performance. We recommend
identifying 15% to 25% of the workforce as top contributors, both because it is an achievable goal for
employees to reach that level and because it allows the organization to differentiate pay significantly
more, which improves employee performance.

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PAY FOR CONTRIBUTION APPROACH

OVERVIEW

Organizations often struggle to reward the employees who have the greatest impact on the business because the
criteria used to determine rewards are too narrow. Cigna addressed this challenge as part of a broader transition
to focusing on employee growth and contribution by expanding the criteria for rewards to include all the ways
employees add value to the organization and encouraging significant differentiation for top contributors.

KEY PRACTICE LESSON

To meaningfully motivate and reward talent impact on the business, organizations should expand the criteria
for rewards to capture overall employee contribution and focus on achieving significant differentiation for top
contributors.

COMPANY SNAPSHOT

Cigna Corporation
Industry: Insurance Cigna Corporation is a global health service company that
2015 Sales: US$34.9 Billion offers health, dental, supplemental insurance, and Medicare
plans to individuals, families, and businesses.
2015 Employees: 37,200
Headquarters: Bloomfield, CT; offices in 30
countries worldwide

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Assess Who Contributes Most 25

 Rewards in the Era of Performance Management Transformation 26

Cigna’s rewards team

realized that to support
ENABLE SUSTAINED GROWTH BY REWARDING
sustained organizational
growth, the company
EMPLOYEE CONTRIBUTIONS
needed to incentivize
and reward all the ways
employees contribute
value.
Sidebar to be added for Full-Text version
HR Shift Rewards Shift
Promote a growth mind-set to drive Focus rewards on contributions that
sustained organizational growth. create organizational growth.

Sustained organizational growth comes Pay for Contribution

from the entire workforce identifying ways To facilitate organizational growth, Cigna
to impact and add value to the organization. goes above and beyond what is measured
To enable this, we must drive a growth by performance against objectives to
mind-set that: incentivize and reward employees for all
■ Encourages new and deeper connections, the ways in which they add value to the
■ Energizes team members, and business.
■ Enables personalized growth.
Source: Cigna Corporation; CEB analysis.

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION

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05-19-2014

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION

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Cigna meaningfully
rewards employee
FOCUS REWARDS ON EMPLOYEE CONTRIBUTIONS
contributions by expanding
the criteria for rewards Cigna’s Approach to Enabling Meaningful Differentiation Based on Employee Contributions
to be more holistic and
focusing managers on Use Simple Questions Focus on How Much
significant differentiation Expand Reward Criteria Define the Bar for
to Align Pay with Differentiation
for the employees with to Capture Contribution Top Contributors
Contributions to Achieve
the greatest impact on the Sidebar to be added for Full-Text version
business.
Broader
Bonus Allocation
Business ■ To what extent has the
■■ First, the rewards team Impact Discussion
employee contributed
expands what the organization Provide examples of how
Performance through the attainment
rewards beyond performance a top employee can/does
Beyond
of his or her goals? Top contributors should
against objectives to capture Objectives
contribute on their team.
■ To what extent has the receive 1.5 times the
employees’ broader impact on
the business. employee contributed by average payout.
Performance
Against having difficulty/stretch
Objectives
■■ Alignment meetings are then in his or her goals?
used to define the bar for top
contributors to make it easy
for managers to identify who Expand the criteria for Focus alignment Provide managers with Focus guidelines
should receive the largest rewards to capture all sessions on defining simple yet revealing on what level of
awards. the ways employees what it means to be questions that help differentiation to achieve
■■ The rewards team provides
impact the business, not a top contributor to them align pay with for top contributors
managers with simple just how they perform make it easy to identify different levels of to encourage larger
reflection questions that help against objectives. who should receive the employee contribution. differentiation decisions
managers align payouts with largest awards. that managers feel
each employee’s contributions ownership over.
to the business. Source: Cigna Corporation; CEB analysis.
■■ Lastly, managers are provided
with guidelines on how much
PRACTICE
differentiation to achieve for SITUATION
FOUNDATION
COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
top contributors to encourage
© 2016 CEB. All rights reserved. TR163936PRINT  3
large differentiation decisions
that managers feel ownership
over. 05-19-2014

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION

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Assess Who Contributes Most 27

 Rewards in the Era of Performance Management Transformation 28

Cigna expands the set of

criteria used to determine
EXPAND REWARD CRITERIA TO CAPTURE
pay to better capture
all the ways employees
CONTRIBUTION
contribute to the
organization. Cigna Redefines What the Organization Pays for to Capture How Employees Contribute to the Business

■■ Cigna moved away from a Pay for Contribution: Cigna rewards all the ways employees impact and add value to the business, which
classic pay for performance Sidebar to be added for Full-Text version goes above and beyond what is measured by their performance against objectives.
model that emphasized
rewarding employees based
on how well they perform
against their objectives.
Broader Business Impact
■■ In the new pay for contribution ■Criticality to future strategy Employees contribute through impact on greater
model, employees are also
■Scarcity of skills/knowledge business objectives and future business needs.
rewarded for contributions not
captured by their objectives
■Difficulty to replace
and for other ways they
impact the business through
their role or skill set. Performance
Beyond
Objectives

Employees contribute through expected and

unexpected job performance.
Performance
Against
Objectives

Source: Cigna Corporation; CEB analysis.

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION

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05-19-2014

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION

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Cigna uses alignment
meetings to discuss the bar DEFINE THE BAR FOR TOP CONTRIBUTORS ONLY
for being a top contributor,
rather than the performance Cigna Uses Alignment Meetings to Identify How Top Contributors Impact the Business
of each employee, to
Alignment Meetings
ensure significant pay
differentiation for the
top group.
Sidebar to be added for Full-Text version
■■ Alignment meetings focus on
defining what it means to be
a top contributor each year
Meeting Purpose and Objectives
and identifying who is meeting Calibration Sessions Alignment Sessions
that bar.
Discuss the performance of each Create a shared understanding of the
■■ Focusing on top contributors employee. bar for top contribution.
makes it easier for managers Calibrate each employee’s performance Build consensus around who our top
to identify the most important evaluation. contributors are.
talent to reward and to
communicate what the Discussion Questions
organization values. ■Provide examples of how top employees contribute using different elements of the
contribution model. How do these actions impact and add value to the organization?
■■ Managers come prepared ■Based on this discussion, have we correctly identified the top talent who should
for alignment meetings with
receive the highest awards?
inputs from their frequent
check-ins and dialogue on
employee progress, goals,
and outcomes. Impact: Defining what top contributors do makes it easier for managers to effectively
align pay with each employee’s level of contribution.

Source: Cigna Corporation; CEB analysis.

“HRBPs also use
alignment meetings to
surface differences in
PRACTICE
performance distributions SITUATION
FOUNDATION
COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS

across the workforce early on

© 2016 CEB. All rights reserved. TR163936PRINT  5
so we can reallocate budgets as
necessary to make it easier to
reward top contributors.” 05-19-2014
Kristen Gorodetzer
PRACTICE
VP, Rewards and HR Operations SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION
Cigna Corporation
© 2016 CEB. All rights reserved. TR163936PRINT

Assess Who Contributes Most 29

 Rewards in the Era of Performance Management Transformation 30

Cigna provides managers

with a four-question
USE SIMPLE QUESTIONS TO ALIGN PAY
differentiation framework
to help them focus on the
WITH EMPLOYEE CONTRIBUTION
big picture of employee
Cigna Provides Managers with Four Questions to Help Them Differentiate Rewards Based on Employee
performance and easily
align pay with different
Contribution
levels of employee
contribution. Did Not Contribute at Contributed at an
an Acceptable Level Exceptional Level
■■ The questions are simple
and overarching in nature Merit To what extent has the Has not contributed at an Contributed at an exceptional
to encourage managers to employee contributed in acceptable level by failing level and has consistently
focus on holistic employee meeting the expectations to meet expectations performed above expectations
contribution. of the current role? a
Bonus To what extent has the Has not contributed by Contributed through the
employee contributed failing attainment of goals at an
through the attainment of to achieve goals exceptional level, with results
goals? above performing goals in a
timely manner
To what extent has the Goals were reflective of Goals had exceptional stretch
employee contributed by basic and require development of
having difficulty/stretch in job responsibilities additional knowledge/skills
their goals?
Stock To what extent has the Has not demonstrated Has demonstrated future
employee contributed to future potential and has potential and has contributed
long-term organizational not contributed to higher- to attainment of higher-level
objectives, and what level level goals at Cigna goals at Cigna
of potential have they
demonstrated?

Simple reflection questions help managers focus on the big picture and contextualize
performance to align pay with each employee’s contribution to the business.

Source: Cigna Corporation; CEB analysis.

a
Managers consider each employee’s market ratio as well as performance in the role when making merit recommendations.

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION

© 2016 CEB. All rights reserved. TR163936PRINT

Cigna provides managers
with guidelines on how
FOCUS MANAGERS ON HOW MUCH
much differentiation
to achieve for top
DIFFERENTIATION TO ACHIEVE
contributors, not ranges
Traditional Differentiation Guidelines Cigna’s Differentiation Guidelines
for each performance
level, to encourage larger
differentiation decisions How to Differentiate How Much Differentiation to Achieve
that managers feel Sidebar to be added for Full-Text version
ownership over. Recommended Range Merit Bonus ■ Managers should align payouts with each
per Level employee’s level of contribution.
■■ Providing less prescriptive ■ Managers have discretion to award
Low Performer — —
guidelines also encourages between 0 and 2 times the average salary
manager ownership over pay increase.
Core Performer — —
decisions and enhances their
ability to later communicate
■ Top contributors should receive 1.5 times
High Performer — — the average STI payout.
pay decisions to employees.

■ Encourages managers to make many ■ Encourages managers to make a few large

small differentiation decisions that do not differentiation decisions for those who
drive impact should receive the most rewards
■ Prescribes pay decisions for managers, ■ Fosters manager ownership over pay
which reduces perceived ownership over decisions, which enhances their ability
pay decisions to communicate decisions to employees
“Once managers make Source: Cigna Corporation; CEB analysis. Source: Cigna Corporation; CEB analysis.
pay recommendations,
we create reports that
display employee payouts by
PRACTICE
quartile. HRBPs use them to SITUATION
FOUNDATION
COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS

ensure those identified as top © 2016 CEB. All rights reserved. TR163936PRINT  7

contributors during alignment
meetings have received the top
awards.” 05-19-2014

Kristen Gorodetzer
PRACTICE
VP, Rewards and HR Operations SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION
Cigna Corporation
© 2016 CEB. All rights reserved. TR163936PRINT

Assess Who Contributes Most 31

 Rewards in the Era of Performance Management Transformation 32

Managers at Cigna are

able to meaningfully
MEANINGFUL DIFFERENTIATION FOR
differentiate rewards for
those who create the
TOP CONTRIBUTORS
greatest impact on the
business. “Our transition to a pay for contribution “This change enabled me to concretely connect for my team
the link between high performance and reward. Put simply,
system enabled us to identify employees
it helped me deliver increased business performance and
who have a significant impact on the
■■ Employees are rewarded by recognize those who contributed most to that result.”
business and make more productive use
the organization for their most
of our time and budgets to meaningfully
Sidebar to be added for Full-Text version
Howard Gough
important contributions to the
reward them.” Business Leader, Cigna Global Health Benefits
business. Cigna Corporation
Kristen Gorodetzer
■■ Managers find it easier to VP, Total Rewards and HR Operations
significantly differentiate
rewards for top contributors.
Cigna Corporation
“Based on initial analytics, we saw very positive results between
engagement and rewards. Specifically, employees who received
Bonus Differentiation Ratio Between top-quartile bonuses were significantly more likely to say
they’d be willing to ‘go above and beyond my normal job
Core and High Contributors
duties to help Cigna succeed.’ Also, managers who received
Indexed to Median
top-quartile bonuses had employees who were significantly
1.5+ more engaged than employees of managers with lower bonus
payouts.”
Tim May
1.0+
Senior Director, Compensation
Cigna Corporation

“Our new approach provides the necessary tools to effectively

reward our top-contributing employees based on the value
each individual delivers for the business.”
Joe Cranston
Median Top Quartile Operations
Source: Cigna Corporation; CEB analysis. Cigna Corporation

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION

© 2016 CEB. All rights reserved. TR163936PRINT  8

05-19-2014

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS
FOUNDATION

© 2016 CEB. All rights reserved. TR163936PRINT

Cisco and Deloitte provide
managers with simple
FUTURE ACTIONS REVEAL WHO CONTRIBUTES MOST
yet revealing statements
about what they would Ask Managers What They Would Do with Their Talent, Not What They Think of Them,
do with team members in to Reveal Who Contributes the Most
the future to identify how
much they contribute to
the team. Scenario-Based Questions Future-Focused Statements
■■ If it were my money, would I pay ■■ Given what I know of this person’s
this person at the top of their range? performance, and if it were my money, I
■■ If this person left, could I find somebody who would award this person the highest possible
is as good a performer to replace him or her? compensation increase and bonus.
■■ If I were creating a new team, would I hire this
■■ Given what I know of this person’s
person first? performance, I would always want him or her
on my team.
■■ This person is at risk for low performance.
■■ This person is ready for promotion today.

Source: Cisco; Deloitte.

The Theory Behind This Approach

■■ While easy to answer, statements about future actions require managers to think about how much impact
an employee has contributed in the past and can contribute in the future.
■■ While managers may rate individuals differently against any one criteria, they are more consistent about
their feelings and the future actions they would take for talent.

Source: CEB analysis; Marcus Buckingham and Ashley Goodall, “Reinventing Performance Management,” Harvard Business Review,
April 2015, https://hbr.org/2015/04/reinventing-performance-management.

© 2016 CEB. All rights reserved. TR163936PRINT

Assess Who Contributes Most 33

 Rewards in the Era of Performance Management Transformation 34

Organizations can
incorporate a top-contributor
INCORPORATING A TOP-CONTRIBUTOR FOCUS
focus by updating the
performance review process, Organizations Can Use Three Strategies to Incorporate a Top-Contributor Focus into Their Performance
augmenting it with additional and Pay Processes
inputs, or creating a separate
framework to determine pay. Update Augment Performance Create a Separate Framework
Performance Reviews Reviews with Additional Inputs for Determining Pay

Revise reviews to summarize Provide managers with Create a separate set of

each employee’s most additional inputs (e.g., criteria or questions (e.g.,
important contributions to potential, role criticality, talent would you always want this
the business and to determine designation) to help them person on your team?) to help
who has the greatest impact align pay decisions with each managers align rewards with
overall. employee’s impact on the talent impact on the business.
business.

Best When Best When Best When

 review process exists and
A  review process exists but
A A review process is being
can be modified easily. is difficult to change. eliminated or no longer
Reviews can focus more Reviews focus on aligns with an annual
on the pay decision, as developmental feedback, compensation cycle.
development occurs and it would be difficult for Developmental feedback
regularly during the year. managers to make a pay must be separated from
Changing performance decision at the same time. the pay decision to ensure
reviews is likely to change managers effectively
how managers assess and reward talent.
reward talent.
1

(Appendix) (Appendix)

Source: CEB analysis.

1
Pseudonym.
© 2016 CEB. All rights reserved. TR163936PRINT
ASSESS WHO CONTRIBUTES MOST

Current Approach Best Practice

Assess Performance Against Expectations Assess Who Contributes Most

Managers assess how well employees perform Managers make a decision about who contributes
against expectations to identify top contributors. most to the success of the business.

Implications Action Plan

■■ Changes to traditional performance assessments 1. F
 ocus managers on defining what it means to be
aren’t helping organizations accurately identify top a top contributor and identifying who crosses that
contributors. bar each year.
■■ These changes fail because assessing how an 2. P
 rovide managers with simple questions they can
employee performs relative to what is expected is use to identify the employees who contribute
not a good way to measure his or her impact on most.
the business.

The Benefit
Enabling managers to assess who contributes most to the business increases the number of top contributors who are
correctly identified and improves workforce performance by 9%.
Source: CEB analysis.

© 2016 CEB. All rights reserved. TR163936PRINT

Assess Who Contributes Most 35

 Rewards in the Era of Performance Management Transformation 36

ASSESSING WHO CONTRIBUTES MOST AT YOUR ORGANIZATION

Key Action Items

Determine How to Determine the best way to incorporate a top-contributor focus into your processes, including:
Incorporate a Top- ■■ Updating performance reviews to capture who contributes most,

Contributor Focus ■■ Augmenting performance reviews with additional inputs to help managers reward top

contributors, or
■■ Creating a separate framework for determining pay that enables managers to reward top

contributors.

Reset Employee Work with leaders to reset employee expectations by communicating that:
Expectations Around ■■ Objectives are a tool to help employees prioritize how they will contribute to the organization,

Pay for Performance ■■ Objectives should change throughout the year as an employee’s priorities change,

■■ Rewards will be determined based on an assessment of each employee’s overall impact, and

■■ Employees who have the greatest impact on the business will be rewarded.

Equip Employees to Equip employees to take greater ownership over their impact by:
Own Their Impact ■■ Increasing transparency into organizational priorities to help employees identify ways

to contribute,
■■ Encouraging employees to engage in regular conversations with managers about their

priorities, and
■■ Providing conversation guides and other tools employees can use to seek feedback on

their impact.

Improve Manager Insight Provide managers with better information about employee impact on the business by:
into Employee Impact ■■ Updating self-reviews (if applicable) to capture ways employees contribute beyond their

objectives,
■■ Enabling managers to collect feedback from peers employees work with most, and

■■ Collecting feedback from peers on how an employee impacts outcomes, not just their strengths

and development areas.

Source: CEB analysis.

© 2016 CEB. All rights reserved. TR163936PRINT

REWARDING TOP CONTRIBUTORS

Identify and reward the talent that has the greatest impact on the business
rather than aligning pay with all levels of employee performance.

1 2 3
Assess Who Differentiate Pay Between Explain Pay Decisions
Contributes Most Core and Top Contributors Through Narratives
Equip managers to make a decision Stop differentiating pay in small Shift the focus of pay conversations
about who had the most impact on increments within a performance from the process used to determine
the business rather than relying on group, and focus on large decisions pay to the contributions that led
traditional performance assessments for top contributors. to an employee’s pay decision.
to identify top contributors.

1
Pseudonym.
© 2016 CEB. All rights reserved. TR163936PRINT

Differentiate Pay Between Core and Top Contributors 37

 Rewards in the Era of Performance Management Transformation 38

Seven out of 10
organizations differentiate
DIFFERENTIATING PAY WITHIN ALL PERFORMANCE
pay within all performance
groups.
GROUPS
Percentage of Organizations Using Pay Reasons for Differentiating Pay Within
■■ In doing so, organizations
Differentiation Strategy All Performance Groups
believe managers will make
fairer pay decisions that will
better motivate employees.
22% Organizations believe this strategy will
Differentiate
Tail Ends drive performance because:
Any form of differentiation will be
70% motivating for employees,
9% Differentiate
Differentiate All Levels of Small budgets are optimized by
Top Performance smaller differentiation for more people,
Contributors
Managers will make fairer pay
decisions, and
n = 113. Employees perceive individual pay
Source: CEB 2016 Pay for Performance Benchmarking Survey.
decisions to be fairer.
Note: Total does not equal 100% due to rounding.

© 2016 CEB. All rights reserved. TR163936PRINT

In practice, managers
focus on reflecting small
MANAGERS FOCUS ON SMALL DIFFERENCES
differences in employee
performance through pay.
IN PERFORMANCE
Managers Make Incremental Differentiation Decisions to Align Pay with Employee Performance
■■ Managers want to reflect small
differences in performance
to be fairer, but they end up
making many time-consuming No Target Two Times
trade-off decisions. Payout Target
1.1x

Monique

(0.2)x

Lloyd Managers spend an average

of 8 hours per year on pay
1.3x
decisions.a
Gilberto
n = 9,686.
1.05x Survey: CEB 2016 Pay for Performance Employee Survey.
a
Manager time spend includes time spent making and
Marvin calibrating pay decisions and was calculated estimating
that managers have four direct reports.
1.17x

Taylor
Source: CEB analysis.

© 2016 CEB. All rights reserved. TR163936PRINT

Differentiate Pay Between Core and Top Contributors 39

 Rewards in the Era of Performance Management Transformation 40

Small pay differentiation

decisions within a
DIFFERENTIATION WITHIN A GROUP DOES NOT DRIVE
performance group do
not affect employee
PERFORMANCE
performance.
Impact of STI Differentiation on the Performance of Employees Rated “Meets Expectations” a
■■ Although employee 100
performance varies within the Differentiation within a group hurts
“meets” category, recognizing perceptions of fairness as employees
those small differences struggle to understand pay decisions.
through pay does not improve
employee performance.

■■ Employees actually perceive

Employee Performance

this type of differentiation as

less fair because they struggle
to understand the rationale for
small differences in their pay.
80

60
0(1.20) 100
Target 200
1.20
Payout as a Percentage of Target
n = 3,732.
Source: CEB 2016 Pay for Performance Employee Survey.
a
Employee performance is measured using an index of individual and network performance.

Consistency Across Regions

The relationship between employee performance and incentive payout is consistent across Europe,
North America, Latin America, and Asia–Pacific.
© 2016 CEB. All rights reserved. TR163936PRINT
Organizations should
shift from finer pay
FOCUS DIFFERENTIATION DECISIONS BETWEEN
differentiation decisions
within performance groups
PERFORMANCE GROUPS
to larger distinctions
between top and core Impact of Pay Differentiation Strategy Eliminating Incremental Differentiation Motivates
contributors. on Employee Performance the Core

x + 9%
47% more employees improve
coworker performance.

39% more employees introduce

improved work processes.

37% more employees transfer skills

x
to coworkers.

35% more employees share solutions

to common problems with peers.

34% more employees deliver projects

Incremental Large Differentiation
Differentiation Within Between Performance on time.
Performance Groups Groups
n = 9,686.
n = 9,686. Source: CEB 2016 Pay for Performance Employee Survey.
Source: CEB 2016 Pay for Performance Employee Survey.

Consistency Across Regions

Large levels of pay differentiation for top
contributions equally impact performance
for employees from Europe, North America,
Latin America, and Asia–Pacific.

© 2016 CEB. All rights reserved. TR163936PRINT

Differentiate Pay Between Core and Top Contributors 41

 Rewards in the Era of Performance Management Transformation 42

Organizations can
significantly improve
LOTS OF UPSIDE FROM STI DIFFERENTIATION
employee performance by
rewarding top contributors
Impact of STI Differentiation on Employee Performancea
two times what core
contributors receive.

■■ Core contributors, not just top Optimal Level

contributors, are motivated by of Differentiation
the opportunity to earn larger 2.00x
awards.
Employee Performance
Regional Differences
There are diminishing
Meaningful Threshold
∆ = 4% marginal returns above
of Differentiation
1.25x 2.00x for all regions, but
the minimum threshold
to drive performance
varies:
■■ 1.12x in Europe

■■ 1.48x in North America

■■ 1.23x in Latin America

■■ 1.23x in Asia–Pacific

1.00x 1.50x 2.00x 2.50x

STI Differentiation
STI Pay Multipleb Between Top and Core Contributorsc
n = 4,496.
Source: CEB 2016 Pay for Performance Employee Survey.
a
Employee performance is measured using an index of individual and network performance.
b
Pay multiple refers to how much additional incentive pay top contributors receive relative to core contributors.
A pay multiple of two means that, on average, a top contributor receives twice the pay of a core contributor.
c
“Top contributor” is defined as scoring in the top 25% on our Index of Employee Performance.
Meaningful Levels of
Differentiation
For differentiation to be
meaningful, it should increase
employee performance by at
least 1%.
© 2016 CEB. All rights reserved. TR163936PRINT
More differentiation is
needed for base pay
MORE DIFFERENTIATION NEEDED FOR BASE PAY
increases to significantly
improve employee
INCREASES
performance.
Impact of Base Pay Increases on Employee Performance a

Optimal Level
of Differentiation
Employee Performance
3.00x Regional Differences
There are diminishing
marginal returns above
3.00x for all regions, but
Meaningful Threshold
∆ = 5% the minimum threshold
of Differentiation
1.60x to drive performance
varies:
■■ 1.36x in Europe

■■ 1.89x in North America

■■ 1.92x in Latin America

■■ 1.58x in Asia–Pacific

1.00x 2.00x 3.00x 4.00x

Base Pay Differentiation

Base Pay Increase Multipleb Between Top and Core Contributorsc
n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.
a
Employee performance is measured using an index of individual and network performance.
b
Pay increase multiple refers to how much additional base pay top contributors receive relative to core contributors.
A pay multiple of three means that, on average, a top contributor receives three times the base pay increase of a
core contributor.
Meaningful Levels of c
“Top contributor” is defined as scoring in the top 25% on our Index of Employee Performance.
Differentiation
For differentiation to be
meaningful, it should increase
employee performance by at
least 1%.
© 2016 CEB. All rights reserved. TR163936PRINT

Differentiate Pay Between Core and Top Contributors 43

 Rewards in the Era of Performance Management Transformation 44

Despite its much lower

cost, recognition is
RECOGNITION MORE POWERFUL THAN INCREMENTAL
significantly more effective
at driving performance
DIFFERENTIATION FOR THE CORE
for core contributors
Impact of Strategy on the Performance for Core Contributors
than differentiating small
pockets of money across
traditional incentives.
6.0%

Regional Differences
The impact of recognition on
performance varies by region:
■■ 4% in Europe

■■ 6% in North America

■■ 7% in Latin America

0.2% ■■ 9% in Asia–Pacific

Receiving Incremental Receiving

Incentive Differentiation Recognition Award
n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.

Resource
Visit our Reward and Use Other Levers to Motivate Core Contributors
Recognition Topic Center Reward the progress of core employees by offering other personalized forms of
to learn how to develop recognition outside of traditional programs, such as a new development or stretch
an effective reward and opportunity, a flexible work schedule, or mentoring experiences.
recognition program that will
drive employee performance
at your organization.
© 2016 CEB. All rights reserved. TR163936PRINT
Psi Corporation focuses
FOCUS ON HOW TO MANAGE PAY FOR DIFFERENT
1

compensation guidelines
on how to reward each
type of talent to align
GROUPS
compensation with each
Psi Corporation’s 1 Compensation Planning Guidelines for Managers
employee’s impact on the
Excerpt
business.

■■ Streamlined guidelines focus

Compensation is an important business investment decision. We rely on our leaders to align pay
managers on prioritizing
investment in top contributors. with each employee’s impact on the business to ensure high returns from compensation spending.

Top contributors receive larger

Salary Short-Term Incentive Long-Term Incentive
■■

incentive awards and salary

increases to accelerate their
pay relative to market. Top Contributor Pay above the market Award 1.5 times the Award grant.
Differentiated midpoint (increases average.
■■ Core contributors receive up to 2 times the
target awards and smaller
Pay
average).
salary increases that align their
pay with market.
Core Contributor Pay near the market Award near target. Do not award grant.
■■ Low contributors receive
Competitive Pay midpoint.
limited investment as
managers address their
performance or role fit. Low Contributor Do not award increase. Do not award Do not award grant.
Limited or No incentive.
Investment

Impact: Focusing on how to manage pay for each group encourages managers to make a few
decisions about who should receive the largest awards.
Source: Psi Corporation; CEB analysis.

1
Pseudonym.
© 2016 CEB. All rights reserved. TR163936PRINT

Differentiate Pay Between Core and Top Contributors 45

 Rewards in the Era of Performance Management Transformation 46

Organizations should make

REACHING HIGHER LEVELS OF DIFFERENTIATION
1

it easier for managers to

allocate larger base pay
increases and differentiate
Strategies to Increase Pay Differentiation
short-term incentives for
top contributors. Base Pay Increases Short-Term Incentives

Challenge Challenge
Conservative budgets make it difficult STI budgeting practices often make it difficult
to increase pay for all employees and to differentiate without taking money from
differentiate for top contributors. the core.

Solution Solution
Move to a prioritized approach that Make it easier to differentiate STI without
emphasizes large base pay increases for those negatively affecting the core.
who need it most.
1. Create Reserve Budget: Create separate
1. Move to a Market-Based Model: Make funding for top contributors, either by
base pay increases market based, and changing the bonus funding mechanism or
provide larger increases to align pay with pooling other funds (e.g., consolidating spot
an employee’s value relative to market (e.g., bonus budgets).
60th percentile performers paid at the 60th
percentile). 2. Increase Budget Flexibility: Establish
central mechanisms to reallocate unused
2. Provide Cost of Living Adjustments budget from one group to another.
(COLAs): Provide smaller COLAs for all
employees, and use remaining funds to 3. Reduce Performance Inflation: Shift the
target top contributors or those who are distribution over several years by equipping
furthest from their desired positioning. HRBPs to influence rating decisions,
changing the culture around what it means
3. Provide Larger Off-Cycle Adjustments: to be rated “meets,” etc.
Supplement the typical base pay process
with larger off-cycle increases for top 4. Reduce Targets or Eligibility: Reduce
contributors following the talent assessment targets or eligibility where plans are more
process. generous than market. This is easiest during
a strong financial year or when paired with a
positive change (e.g., base pay increase).
Source: CEB analysis.
© 2016 CEB. All rights reserved. TR163936PRINT
Our dynamic diagnostic
enables you to determine
COST-NEUTRAL DIFFERENTIATION CALCULATOR
what levels of differentiation
are right for your
organization—and how Cost-Neutral Calculator for
Your Organization’s Inputs
to reach them without STI and Base Pay Increases
increased spending.

■■ Performance Distribution
––Percentage of high performers
Cost-Neutral Differentiation
––Percentage of core performers
Calculator
––Percentage of low performers
Performance Distribution Needed to Achieve
■■ Workforce Parameters Differentiation
––Employee segments
––Median salary Differentiation Differentiation
Level Level
––Median payout for core performers
■■ Organizational Considerations 2x 3x
––Budget flexibility Shift Distribution Shift Distribution
––Manager discretion
Top xx% Top xx%
––Manager communication
effectiveness Core xx% Core xx%

Source: CEB analysis.

Access the Cost-Neutral Differentiation Calculator on our website.

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Differentiate Pay Between Core and Top Contributors 47

 Rewards in the Era of Performance Management Transformation 48

Organizations should stop

incrementally differentiating
PUTTING IT ALL TOGETHER: FOCUS DIFFERENTIATION
pay within all performance
groups, and focus on
ON TOP CONTRIBUTORS
differentiating pay between
performance groups across
all reward vehicles.
Differentiation Strategy

D
 O try to achieve large differentiation between top contributors and core contributors.

DO prioritize differentiation strategies across vehicles if there are limitations to the degree
of changes that can be made.

  D
 ON’T differentiate within performance groups because this approach leads to pay decisions
that are too small to drive employee performance.

STI Differentiation Base Pay Increase Differentiation

D
 O increase STI differentiation to 2x. D
 O increase base pay differentiation
to 3x.
D
 O consider regional variation
in thresholds needed to drive D
 O consider regional variation
performance for STI differentiation. in thresholds needed to drive
performance for base pay increases.
D
 O make it easier to differentiate STI
without negatively affecting the core. D
 O take a prioritized approach that
emphasizes large salary increases
  D
 ON’T differentiate STI lower than for those who need it.
1.25x.
  D
 ON’T differentiate base pay lower
than 1.60x.
Source: CEB analysis.

© 2016 CEB. All rights reserved. TR163936PRINT

DIFFERENTIATE PAY BETWEEN CORE AND TOP CONTRIBUTORS

Current Approach Best Practice

Differentiate Pay Within Performance Groups Differentiate Pay Between Core and Top
Managers reflect small differences in performance Contributors
through pay decisions. Managers reward larger distinctions between
top and core contributors.

Implications
Action Plan
■■ Pay decisions involve many small trade-offs and
are time consuming. 1. F ocus managers on how much to differentiate pay
■■ Top contributors do not receive awards that align between groups, not within groups.
with their performance. 2. Identify ways to enable managers to differentiate
■■ Incremental differences in payouts for core pay for top contributors without taking away from
contributors yield no impact on employee the core.
performance. 1

The Benefit
Rewarding larger differences between top and core contributors increases employee performance by 9%.
Source: CEB analysis.

1
Pseudonym.

© 2016 CEB. All rights reserved. TR163936PRINT

Differentiate Pay Between Core and Top Contributors 49

 Rewards in the Era of Performance Management Transformation 50

FOCUSING DIFFERENTIATION ON TOP CONTRIBUTORS AT YOUR

ORGANIZATION
Key Action Items

Determine How to Increase Determine the best way to enable higher levels of differentiation, including:
Differentiation for Top ■■ Prioritizing base pay increases to emphasize large increases for the employees who need it most,

Contributors and
■■ Making it easier to differentiate STI without negatively impacting payouts for the core.

Focus Managers on Larger Focus managers on larger differentiation decisions for top contributors by:
Differentiation Decisions ■■ Communicating that differentiation within a performance group fails to drive performance,

■■ Teaching that larger differentiation between groups can improve performance by up to 9%,

■■ Changing pay guidelines to focus on how much differentiation to achieve for top contributors, and

■■ Using calibration sessions to encourage managers to identify and reward top contributors.

Equip Managers to Engage Educate managers on how best to engage the core by communicating that:
Core Contributors ■■ Incremental pay differentiation for core contributors fails to drive performance and engagement

because it decreases perceptions of fairness, and

■■ More personalized recognition and rewards (e.g., opportunities to telecommute, mentoring) are

the most effective way to reward the progress of the core.

Communicate the New Communicate the change in a way that motivates employees by explaining that:
Strategy to Employees ■■ Managers will make large differentiation decisions between performance groups, rather than

smaller ones within, to improve pay consistency and fairness;

■■ Employees who have a disproportionate impact on the business will be rewarded more, which will

better align employee pay with performance; and

■■ The organization will continue to recognize and invest in the development of all employees.

Source: CEB analysis.

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REWARDING TOP CONTRIBUTORS

Identify and reward the talent that has the greatest impact on the business
rather than aligning pay with all levels of employee performance.

1 2 3
Assess Who Differentiate Pay Between Explain Pay Decisions
Contributes Most Core and Top Contributors Through Narratives
Equip managers to make a decision Stop differentiating pay in small Shift the focus of pay conversations
about who had the most impact on increments within a performance from the process used to determine
the business rather than relying on group, and focus on large decisions pay to the contributions that led
traditional performance assessments for top contributors. to an employee’s pay decision.
to identify top contributors.

1
Pseudonym.
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Explain Pay Decisions Through Narratives 51

 Rewards in the Era of Performance Management Transformation 52

Managers often focus

on the process used to
MOST PAY CONVERSATIONS FOCUS ON PROCESS
determine employee pay,
which fails to convey how What Managers Say to Link Performance What Employees Understand
an employee’s performance and Pay
influenced his or her pay.

My pay is linked to my rating...

You are a “meets expectations”… which of my contributions earned
me this reward?

My pay is determined through a

When evaluating your compa-ratio…
compa-ratio...what is a compa-ratio?

My pay depends on the organization’s

Our budgets for this year
performance...how did my
were reduced to 2%…
contribution influence my pay?

…therefore your pay is…

Managers explain the various inputs to Employees understand how their pay
pay decisions and how each was used was determined but not how it was linked
to determine an employee’s pay. to their most important contributions.

Source: CEB analysis.

© 2016 CEB. All rights reserved. TR163936PRINT

To effectively link
performance and pay,
FOCUS PAY CONVERSATIONS ON CONTRIBUTION,
managers should focus
pay conversations on the
NOT PROCESS
contributions an employee
made that led to their pay
Percentage of Employees Who Understand the Link Between Their Performance and Pay
decision.
80%
∆ = 48% 75%

40% Regional Differences

Focusing on contributions
instead of process increases
27% the percentage of employees
who understand the link
between their performance
and their pay:
■■ 41% in Europe

■■ 45% in North America

■■ 45% in Latin America

■■ 61% in Asia–Pacific

0%
Pay Conversation Pay Conversation
Focuses on Process Focuses on
Contributions
n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.

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Explain Pay Decisions Through Narratives 53

 Rewards in the Era of Performance Management Transformation 54

Research shows narratives

are an effective way to
INCREASING USE OF NARRATIVES TO FACILITATE
communicate information
because our brains are
UNDERSTANDING
hard-wired to absorb and
Neuroscience Research Indicates Our Brains Are “Wired” to Understand Narratives
understand stories faster
than facts and logic.
“Our brains are not hard-wired “While facts and figures “In a direct comparison with
■■ An effective narrative to understand logic or retain engage a small area of the expository text, narrative text
helps the audience absorb facts for very long. Our brains brain, stories engage multiple was read twice as fast and
and understand facts and
are wired to understand and brain regions that work recalled twice as well,
processes by highlighting only
retain stories.” together to build colorful, rich regardless of topic familiarity
the most significant pieces of
information and interpreting three-dimensional images and or interest in the content
Jennifer Aaker
complexities. emotional responses.” itself.”
Professor of Marketing
Stanford University Jenny Nabben Michael F. Dahlstrom
Founder, Nabben Greenlee School
Communications of Journalism and
Communication

Source: CEB analysis; Scott Schwertly, “The Neuroscience of Storytelling,” Ethos3, 22 October 2014, https://www.ethos3.com/2014/10/
the-neuroscience-of-storytelling; Michael F. Dahlstrom, “Using Narratives and Storytelling to Communicate Science with Nonexpert
Audiences,” PNAS 111 (2014): 13614–13620, www.pnas.org/content/111/Supplement_4/13614.full.

Narrative Defined

A story describing connected events and experiences that:

1. Highlights the most significant pieces of information and
2. Interprets complex information for the audience.
Source: Andy Jolls, “Why Story Telling Is the Key to Your Research Findings,” Elevate,
29 April 2015, blog.ama.org/why-storytelling-is-the-key-to-your-research-findings.

© 2016 CEB. All rights reserved. TR163936PRINT

NARRATIVE-BASED COMPENSATION CONVERSATIONS

OVERVIEW

Compensation conversations often focus on performance ratings and plan mechanics, which makes it difficult
for employees to understand how their impact on the business affected their compensation. Pfizer addressed
this challenge as part of an organization-wide transition away from ratings by enabling managers to develop
personalized narratives about each employee’s performance to explain compensation decisions.

KEY PRACTICE LESSON

To ensure employees understand the link between their performance and their compensation, organizations
should enable managers to use narratives about an employee’s overall contribution—not performance
ratings—to explain compensation decisions.

COMPANY SNAPSHOT

Pfizer Inc.
Industry: Pharmaceuticals Pfizer applies science and global resources to bring
2015 Revenue: US$49 Billion therapies to people that extend and significantly improve
their lives through a global portfolio that includes
2015 Employees: Approximately 97,000
medicines, vaccines, and many of the world’s best-
colleagues around the globe
known consumer health care products.
Headquarters: New York, NY; sells products
in 175 markets around the
globe

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Explain Pay Decisions Through Narratives 55

 Rewards in the Era of Performance Management Transformation 56

Enhancing compensation
conversations was a key
RE-INVENTING COMPENSATION CONVERSATIONS
component of aligning
performance management Strategies to Align Performance Management and Compensation Practices with Pfizer’s
and compensation “OWNIT!” Culture
practices with Pfizer’s
“OWNIT” culture.
Ownership Eliminate ratings to foster manager
■■ Pfizer wanted to encourage ownership over performance
managers to explain how management and compensation
an employee’s impact on decisions.
the business affected their
compensation rather than
Impact Encourage more frequent Planned Changes to Compensation
focusing on their performance
rating.
conversations that help managers Conversations
maximize and reward employee
Move away from using ratings
contributions.
to explain compensation
Trust Enable candid conversations about decisions.
performance and compensation.  nable managers to link
E
performance and compensation.
Source: Pfizer Inc.; CEB analysis.

“Enabling good compensation conversations was an integral part of aligning our performance and
compensation practices with our culture. We wanted to shift the focus of conversations from ratings
to how managers understood and rewarded employee impact on the business.”
Rob Lewis
Senior Director, Performance Excellence
Pfizer Inc.

© 2016 CEB. All rights reserved. TR163936PRINT

Pfizer enables managers
to develop personalized
USE NARRATIVES TO LINK PERFORMANCE
narratives about each
employee’s impact on the
AND COMPENSATION
business to demonstrate
Pfizer Enables Managers to Use Narratives—Not Ratings—to Explain Compensation Decisions
the link between their
performance and
compensation.
Sample Narrative-Based Compensation Conversation

“You were new to role but had a great start

and contributed positively to the team…You
met four out of five objectives...met stretch
goal…given the overall impact you were
able to create…I’ve planned a target bonus
payment and merit increase in line with
your contribution.”

Why a Narrative Works

It represents an employee’s impact by describing the full set of ways they created value.

 I t is personal because it focuses on what the employee did rather than on the rating or the plan
design.

 I t clarifies the role of individual performance in determining compensation relative to other

factors.

Source: Pfizer Inc.; CEB analysis.

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Explain Pay Decisions Through Narratives 57

 Rewards in the Era of Performance Management Transformation 58

Pfizer teaches managers the

components of an effective
TEACH MANAGERS THE COMPONENTS OF
performance narrative
to enable them to build
AN EFFECTIVE NARRATIVE
personalized narratives for
Pfizer Deconstructs a Sample Narrative to Teach Managers the Essential Components
each employees.

■■ Pfizer deconstructs a sample

Sample Narrative Components of an Effective Narrative
narrative to teach managers Illustrative
the essential components of a What You Say Why You Say This
narrative and the right order
for those components.
1 You were new to role but 1 Summarize Lead with a …to provide a sense
■■ An effective narrative leads had a great start and Overall summary of the of the holistic value
with an overall summary of contributed positively Contribution employee’s impact the employee
how an employee contributed to the team by bringing on the business… delivered.
to the business and is followed strong project and people
by supporting evidence that management talents.
describes the most important
2 Cover Provide a brief …to objectively
Performance description of capture what
and notable accomplishments. You met four out of your
2 Against Goals the employee’s the employee
five objectives, of which
■■ Additional context is provided performance against accomplished.
one was a stretch goal.
only at the end and is carefully expectations…
chosen to clarify the role that
3 You used the objective you
an employee’s performance
didn’t meet as a learning 3 Mention Describe anything …to explain how and
had on compensation relative
opportunity and stretched Notable notable about why the employee’s
to other factors.
to exceed your already Accomplishments the employee’s performance
ambitious sales goal. accomplishments… created impact.

Considering the overall

4 4 Sum up the Explain how all …to emphasize the
impact you were able Compensation these factors led to role of individual
to create for the team Decision the compensation performance on
despite being new to role, decision, and provide compensation
I’ve planned a target context only when relative to other
bonus payment and merit necessary… factors.
increase in line with your
contribution.

Source: Pfizer Inc.; CEB analysis.

© 2016 CEB. All rights reserved. TR163936PRINT

Moving to a narrative-
based approach
NARRATIVES ARE A WIN-WIN FOR MANAGERS
to compensation
conversations made it easy
AND EMPLOYEES
for managers to explain
Number of Managers Requesting Support I Am Rewarded According to My Performance
how an employee’s impact
for Performance and Compensation Conversations Percentage of Employees Agreeing
on the business affected
his or her compensation.
∆ = 33% ∆ = 12%

2014 2015 2012 2015

Source: Pfizer Inc.; CEB analysis. Source: Pfizer Inc.; CEB analysis.

“Moving to a narrative-based approach helped managers communicate compensation in a way that

improved employees’ understanding of the link between their performance and compensation.
We also received significantly fewer questions about compensation decisions after moving to
narratives.”
Rob Lewis
Senior Director, Performance Excellence
Pfizer Inc.

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Explain Pay Decisions Through Narratives 59

 Rewards in the Era of Performance Management Transformation 60

EXPLAIN PAY DECISIONS THROUGH NARRATIVES

Current Approach Best Practice

Explain Pay Decisions Through Process Explain Pay Decisions Through Narratives
Managers explain the various inputs for pay Managers explain pay decisions using a narrative
decisions and how each was used to determine an that describes how each employee contributed to
employee’s pay. the business.

Implications Action Plan

■■ Employees understand how their pay was 1. Focus managers on using narratives about an
determined. employee’s contribution to explain pay decisions.
■■ Employees do not understand how pay was linked 2. T
 each managers the components of a good
to their most important contributions. narrative to enable them to build personalized
narratives for each employee.

The Benefit
Using performance narratives to explain pay decisions significantly improves employee understanding of the link
between performance and pay.
Source: CEB analysis.

© 2016 CEB. All rights reserved. TR163936PRINT

INTRODUCING NARRATIVES AT YOUR ORGANIZATION

Key Action Items

Change the Nature Partner with the performance management team and leaders to change how the organization views
of Performance and communicates performance by:
Conversations ■■ Shifting the focus of performance conversations from ratings to employee contributions,
■■ Encouraging more frequent conversations about employee contributions to the business, and
■■ Introducing narratives as a better approach to talking about employee contributions.

Secure Manager Buy-in Position narratives as a better approach to pay conversations by showing that narratives:
for Narratives ■■ Are more representative of how an employee contributes to the business,
■■ Focus pay conversations on information managers know well rather than pay processes, and
■■ Reduce the potential for difficult follow-up questions because they are harder to push back on.

Ensure Managers Make it quick and easy for managers to use narratives by:
Use Narratives ■■ Providing sample narratives and videos managers can use to learn about narratives,
■■ Offering templates that help managers quickly develop narratives of their own, and
■■ Setting expectations that managers should use narratives for both performance and pay
conversations.

Prepare Employees Build employee knowledge before pay conversations so managers can focus on narratives by:
for Pay Conversations ■■ Delivering foundational information about how pay is determined,
■■ Collecting and responding to any questions employees have directly before pay conversations, and
■■ Providing employees with a conversation guide so they know what to discuss with their manager.
Source: CEB analysis.

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Explain Pay Decisions Through Narratives 61

 Rewards in the Era of Performance Management Transformation 62

SAMPLE NARRATIVES

Top Contributor Receiving Above-Target Payout Core Contributor Receiving Target Payout

Payout Aligned with Employee Expectation Payout Aligned with Employee Expectation

You had another great year and exceeded four of your five You are a valued contributor to our team and the business.
goals. The one goal you did not meet was a stretch project You had another good year and met all five of your goals,
that was deprioritized by the business. Despite the change including one big stretch goal. Your team and stakeholders
to our business priorities, we were impressed by how you continue to recognize and value your generosity and
redirected your time and effort to developing processes collaboration. Your skills are at the expected level for your
and networks that will undoubtedly help us when we reboot tenure, and I look forward to working with you to develop
this project. In addition, your colleagues have been very them further.
appreciative of your coaching and mentoring efforts.
We see a lot of potential in you and your ability to contribute
Given the impact you’ve had on the business over the last even more over the next year. Considering your overall
fiscal year, your payout for the year is significantly above contribution this year, I am pleased that your merit increase
target. Congratulations! and bonus will be paid out at target.

Payout Greater Than Employee Expectation Payout Less Than Employee Expectation

You have had a great year and were able to create exponential You’ve consistently contributed to the organization in your
impact by expanding the organization’s footprint in Europe. role and are a dependable member of the team.
You exceeded expectations in two of your four goals and You met four out of five objectives despite turnover of two
met your stretch goals. Senior stakeholders and your direct reports, which is truly commendable. You’ve cultivated
sales partners were impressed with your creativity and productive partnerships and contributed to establishing
independence in closing important sales deals, and your work quality control standards in our processes as expected for
had a ripple effect across the organization. someone at your level.
While I know you tend to think “I’m just doing my job,” We are pleased with your level of contribution to the business
I wanted to highlight that your results were well above this year and will be awarding your merit increase and bonus
expectations, earning you a reward that is significantly above at target payout.
target despite reduced budgets. Congratulations! Let’s talk about what you can do to potentially improve your
pay next year.

© 2016 CEB. All rights reserved. TR163936PRINT

REWARDING TOP CONTRIBUTORS

Identify and reward the talent that has the greatest impact on the business rather than aligning pay with all levels
of employee performance.

Assess Who Differentiate Pay Between Explain Pay Decisions

Contributes Most Core and Top Contributors Through Narratives

■■ Equip managers to make a decision ■■ Move from incremental differentiation ■■ Shift the focus of pay conversations
about who had the most impact on that aligns pay with different levels of from the process used to determine pay
the business rather than relying on performance to large differentiation for to the contributions an employee made
traditional performance assessments top contributors only. that led to their decision.
to identify top contributors. ■■ Update pay guidelines to focus ■■ Focus managers on using narratives
■■ Provide managers with simple managers on managing pay between about an employee’s contribution to
questions that enable them to identify groups, not within groups. explain pay decisions.
who had the greatest impact on ■■ Identify ways to enable managers to ■■ Teach managers the components of
the organization’s ability to achieve differentiate pay for top contributors a good narrative to enable them to
outcomes. without taking away from the core. build personalized narratives for each
employee.

Focusing pay for performance on the talent that has the greatest impact on the business improves employee performance by 18%
and increases employee engagement by 11%.

1
Pseudonym.
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Explain Pay Decisions Through Narratives 63

Appendix

Methodology Overview
■■ Employee Survey Demographics
■■ Participating Organization Demographics

Additional Best Practice Resources

■■ BP US Lower 48: Contribution-Focused Approach to Performance and Rewards
■■ Eta Manufacturing 1: Guided LTI Differentiation

1
Pseudonym.
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Appendix 65
 Rewards in the Era of Performance Management Transformation 66

EMPLOYEE SURVEY DEMOGRAPHICS

Survey Participation by Region
Percentage of Participants

Africa | 3%
South Africa | 3.0%

Latin America | 10%

Argentina | 2.0%
Brazil | 3.1%
Chile | 2.4%
Mexico | 2.9%

North America | 48%

Canada | 3.4%
United States | 44.2%

Asia | 17%
China | 4.4%
India | 10.5%
Japan | 2.1%

Europe | 22%
Denmark | 2.0%
France | 3.4%
Germany | 2.6%
Netherlands | 2.7%
Norway | 0.9%
Sweden | 1.8%
Switzerland | 1.3%
United Kingdom | 7.3%
n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.
Note: Totals may not equal 100% due to rounding.
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EMPLOYEE SURVEY DEMOGRAPHICS (CONTINUED)
Survey Participation by Organizational Size Survey Participation by Industry
Percentage of Participants Percentage of Participants

9% 1%
Other Aerospace
3%
2%
Construction
Utilities
2%
4% Consumer Goods
Travel/Transportation
9%
Education
19%
50,000 or More 13%
Technology 7%
Employees 40% Financial
1,000–4,999
Employees 7%
Retail 11%
18% Government/
10,000–49,999 Nonprofit
Employees 1%
Restaurant 11%
Health Care
0%
Real Estate
23%
5,000–9,999 Employees 4% 2%
Professional Services Insurance
n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey. 2%
Pharmaceuticals 1%
Leisure
2%
Oil and Gas/Mining
1% 10%
Media Manufacturing
n = 9,686.
Source: CEB 2016 Pay for Performance Employee Survey.
Note: Total does not equal 100% due to rounding.

© 2016 CEB. All rights reserved. TR163936PRINT

Appendix 67
 Rewards in the Era of Performance Management Transformation 68

PARTICIPATING ORGANIZATIONS DEMOGRAPHICS

Survey Participation by Country Survey Participation by Region
Percentage of Organizations Percentage of Organizations

8%
Australia
7%
Austria
2%
Brazil 2%
8% Africa
7% Canada
United Kingdom 10%
2% Asia–Pacific
Chile
3%
Colombia
37% 29%
5% 46%
United States Europe
Denmark North America
of America
4%
Finland
2%
France
2% 2% 13%
Switzerland Germany Latin America
2% n = 113.
3% Guatemala
Sweden Source: CEB 2016 Pay for Performance Benchmarking Survey.
1%
Ireland
2% 1%
South Africa Malaysia
5%
1% Mexico
Saudi Arabia 3%
Netherlands
1% 1%
Philippines Peru
n = 113.
Source: CEB 2016 Pay for Performance Benchmarking Survey.
Note: Total does not equal 100% due to rounding.

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PARTICIPATING ORGANIZATIONS DEMOGRAPHICS (CONTINUED)
Survey Participation by Organizational Size Survey Participation by Industry
Percentage of Organizations Percentage of Organizations

15% 2%
Other Aerospace
3% 4%
7%
Utilities Construction
More Than 100,000
Employees 8%
1%
Consumer Goods
8% Travel/Transportation
3%
50,001–100,000 33% 11% Education
Employees 1–5,000 Employees Technology
5% 14%
Retail Financial
2%
36% Real Estate 4%
10,001–50,000 Health Care
2%
Employees 16% Professional Services 8%
5,001–10,000 Insurance
Employees 4% 8%
n = 113. Pharmaceutical Manufacturing
Source: CEB 2016 Pay for Performance Benchmarking Survey.
6% 1%
Oil and Gas/Mining Media
n = 113.
Source: CEB 2016 Pay for Performance Benchmarking Survey.
Note: Total does not equal 100% due to rounding.

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Appendix 69
 Rewards in the Era of Performance Management Transformation 70

CONTRIBUTION-FOCUSED APPROACH TO PERFORMANCE

AND REWARDS

OVERVIEW

Organizations often struggle to motivate the agile performance they need because their performance
management and pay systems are overly focused on how employees perform against job expectations.
Lower 48 addresses this issue by refocusing performance management practices on helping employees
identify ways to add value to the business and rewarding those who contribute most.

KEY PRACTICE LESSON

Organizations should re-focus performance management and rewards on how employees contribute to the
business rather than how employees perform against job expectations.

COMPANY SNAPSHOT

BP US Lower 48
Industry: Oil and Gas Lower 48 comprises BP’s onshore oil and gas operations in
2015 Production: 293,000 Barrels the lower 48 US states. In 2015, Lower 48 began operating as
of Oil per Day a separate business, with its own governance, processes, and
systems.
2015 Employees: 1,000–5,000
Headquarters: Houston, TX

© 2016 CEB. All rights reserved. TR163936PRINT

Lower 48 realized that,
with a growing number
INCREASING AGILITY IN A COMPETITIVE LANDSCAPE
of local competitors, the
organization’s performance
management and pay
practices needed to Number of Local Competitors Implications for Performance Management
promote a more agile type and Pay Practices
of employee performance.
 upport agility and faster decision
S
making.
 ncourage employees to focus on work
E
that matters most.
Foster a growth mind-set.
 ngage employees in contributing to
E
organizational outcomes.
2010 2015

“As our competitive landscape changed, we identified an opportunity to revisit our performance
management and rewards practices to ensure they promote agility and encourage employees to
focus on the work that matters most to the company at any given time.”
Ron Echols
HR Shared Services Manager
BP US Lower 48

Source: BP US Lower 48; CEB analysis.

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS APPENDIX
FOUNDATION

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Appendix 71
 Rewards in the Era of Performance Management Transformation 72

Lower 48 shifts focus

from performance against
FOCUS REWARDS ON EMPLOYEE CONTRIBUTIONS
expectations to employee
contribution in all steps
TO THE BUSINESS
of the performance
Traditional Approach Lower 48’s Approach
management and rewards
processes.
Optimize Job Performance Optimize Business Contribution
■■ At the start of the year,
Lower 48 defines how Performance management and rewards Performance management and rewards
employees can contribute to
focus employees on achieving role focus employees on ways they can add
business needs, rather than
defining role expectations.
expectations. value to the business.

■■ Lower 48 then enables

ongoing feedback on business
priorities by equipping Four Shifts in Refocusing Performance Management and Rewards on Business Value
employees to own check-in
conversations.

■■ Managers use the performance

review to evaluate how an Set Performance Provide Assess Reward
employee added value to the Objectives Feedback Performance Employees
business, not whether they
met role expectations.
Define how employees Equip employees, Evaluate how Determine who
■■ Lower 48 asks managers to
determine which employees
will support business not just managers, employees add value should receive more
are top contributors needs instead of to own check-ins to to the business, not instead of aligning
and should receive the defining role encourage ongoing whether they meet rewards with all levels
largest payouts instead of expectations. feedback on business expectations. of performance.
differentiating rewards for all priorities.
performance levels. Source: BP US Lower 48; CEB analysis.

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS APPENDIX
FOUNDATION

© 2016 CEB. All rights reserved. TR163936PRINT

Lower 48 uses objectives
to define the most
DEFINE OBJECTIVES BASED ON BUSINESS NEEDS,
important ways employees
can contribute to the
NOT ROLE EXPECTATIONS
business at a given
Lower 48 Uses Objectives to Help Employees Prioritize Contributions to the Business
time, rather than setting
expectations for their role.
Objectives are How I will add value while being safe and compliant and managing risk:
■■ Lower 48 refers to objectives rebranded as My top priorities for 2016 are—
as an employee’s “priorities” “priorities” to Employees
to signal that they represent convey that Safety Priority: My top priority is safety. I will… Click here to enter text. work
the most important ways an they represent Job Priority 1: Click here to enter text. with their
employee can add value to the the most manager
business at a given time. important ways Job Priority 2: Click here to enter text. to identify
employees can their two to
■■ Lower 48’s priorities are Job Priority 3: Click here to enter text.
add value. three most
flexible and reflect business
Developmental Priority: My priority for personal development is Click important
needs, unlike traditional
here to enter text. priorities.
objectives that are set once a
year and limit contribution by
focusing employees on role Shift in How Employees Should Use Objectives
expectations.

Traditional Approach Lower 48’s Priorities

 epresent goals relative to an employee’s
R 
Represent the most important ways an
job responsibilities employee can contribute to the business
 eflect how an employee can meet the
R 
Reflect business needs as well as each
expectations of his or her role employee’s strengths and interests
 evised annually after assessing whether
R  evised regularly as business needs
R
they have been achieved change

Source: BP US Lower 48; CEB analysis.

PRACTICE
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS APPENDIX
FOUNDATION

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Appendix 73
 Rewards in the Era of Performance Management Transformation 74

Lower 48 equips
employees to own check-
MyIMPACT
ENABLE BUSINESS CONTRIBUTION THROUGH
Employee Led 1:1 Conversations
ins to encourage the more
frequent conversations
ONGOINGEmployee
FEEDBACKConversation Planning Guide
needed to keep up with
business priorities and
Lower 48’s Conversation Guidetofor
This tool is designed Employee-Owned
assist Check-Ins
you in planning your 1:1 conversations with your manager and can serve as a
handy record you can refer back to later on. The form is optional and you are not required to submit it to
create value for the anyone. Ultimately, it is up to you how formal (or informal) your check-in will be. You set the tone.
business.
SHARE SOME GOOD NEWS! (Share a project or assignment that you’re pleased about and is going well for you 2
(e.g. positive feedback, a project that’s ahead of schedule, etc.)
■■ Lower 48 realized that • Frequent
employees would need more • conversations
•
frequent conversations with ensure
their manager to ensure their My MITs (Most Important Things to talk about) employees are
1
priorities remain aligned with Team Priorities Individual Priorities Other Key Activities prioritizing
Equipping • • •
business needs. the most
• • •
employees to • • • important
■■ Lower 48 provides employees own check- Any “Hot” items on the horizon? ways to add
with a check-in guide they can ins enables •
value to the
use to structure conversations •
more frequent • business.
effectively and receive the
conversations
feedback they need.
about What Else Is On My Mind? (Work Related or Personal Items)
priorities and •
•
employee • 3
impact.
Overall, How Am I Doing? (Discuss How Your Performance Is Trending Against Your Priorities)
Providing a
Out In Front On Target Falling A Bit Behind Developing Concerns template with
topics to
consider helps
What Feedback Did I Receive? (Based Upon Work Products or Personal Interactions) employees
structure
conversations
Preparing Managers
effectively.
Lower 48 encourages
employees to share their Source: BP US Lower 48; CEB
Careeranalysis.
& Development Items (What actions have/will you take regarding your own development plan?)
Development Opportunity Key Action
check-in agenda with their
manager in advance to
ensure their manager has an
opportunity to prepare and 1:1 Follow up Action Items (What actions will you take as a follow up to the discussion?)
consider what feedback Key Actions
PRACTICE Comments Date Due
SITUATION COMPONENT 1 COMPONENT 2 COMPONENT 3 COMPONENT 4 RESULTS APPENDIX
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Lower 48 refocuses
the year-end review
ASSESS FOR BUSINESS VALUE, NOT FOR
on evaluating how an
employee added value
COMPLETION
to the business rather
Lower 48’s Review Focuses on Business Value Rather Than Role Performance
than assessing employee
performance against role
expectations. Traditional Performance Review BP’s Performance Review
■■ Traditional performance Performance Objectives (50%) Priority 1 Priority 2 Priority 3
reviews ask managers to
evaluate whether an employee
■■ Objective 1 2.0 ■■ What did ■■ What did ■■ What did
Objective 2
Overall
met a series of expectations ■■ 2.0 they do? they do? they do?
for their role, which provides Performance
limited insight into their
■■ Objective 3 1.0 How did How did How did
Score: 2.1
■■ ■■ ■■

impact on the business. ■■ Objective 4 3.0 they add they add they add
value? value? value?
■■ Lower 48’s new simplified Behavioral Objectives (50%)
performance review provides Employee has met the expectations of his
a more accurate assessment ■■ Behavior 1 2.0 or her role and added value in such a way
of each employee’s impact ■■ Behavior 2 3.0 that qualifies him or her to participate in the
by directly asking managers
Behavior 3 reward process:
to consider how their ■■
2.0
contributions created value for
Behavior 4 Yes No
the business.
■■
2.0

 ocuses on small differences in whether

F Focuses on the most important contributions
an employee met expectations an employee made to the business
 rovides limited insight into the employee’s
P 
Asks how contributions added value to
impact on the business provide better insight into the employee’s
impact on the business
Source: BP US Lower 48; CEB analysis.

PRACTICE
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Appendix 75
 Rewards in the Era of Performance Management Transformation 76

Lower 48 uses calibration

sessions to focus managers
DETERMINE WHO GETS MORE
on rewarding those who
contributed most rather Calibration Sessions Focus on Rewarding Those Who Create the Most Business Value
than asking them to align
pay with all levels of
performance.

■■ Calibration sessions help

managers determine the bar
for top contribution in their 1 2 3
business unit and identify
those who meet that bar.
Define the Bar for Top Identify Top Contributors Differentiate for Top
Contribution Build consensus on the Contributors
■■ Focusing on the bar for being
Discuss and share examples individuals who have met the Determine who should receive
a top contributor helps ensure
managers accurately identify of how top contributors bar for top contribution. more than their target pay.
and differentiate pay for their impact the business. DO 
Only focus on DO 
Ensure top
best performers.
DO Build a shared identifying contributors receive
■■ The rewards team ensures understanding of the top contributors. more.
that budget-setting practices the bar for top DON’T 
Rank each DON’T 
Focus on small
enable managers to contribution. employee’s distinctions within
disproportionately reward top
contributors and shift budgets  iscuss the
DON’T D performance level. performance groups.
across groups as needed performance of each
based on actual performance employee.
distributions.

“Our rewards team supports managers by ensuring that budget-setting practices allow differentiation
for top contributors and by reallocating budgets across groups so that all employees identified
as a top contributor can be rewarded as such. The goal is to focus managers only on accurately
identifying who should get more.”
Ron Echols
HR Shared Services Manager
BP US Lower 48
Source: BP US Lower 48; CEB analysis.

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Focusing performance
management and
INCREASING EMPLOYEE FOCUS ON WHAT MATTERS
pay practices on how
employees contribute to
TO THE BUSINESS
the business has increased
Changes to Performance Management Practices
workforce agility and
Help Employees Deliver More Value to the Business “Although we are still in the early stages,
ultimately improved
Percentage of Employees Who Agree it is clear that our new performance and
business results.
rewards system is enabling the more agile
performance we need today. Employees
are focused on work that matters
most and contributing to the business
effectively.”
Ron Echols
74% HR Shared Services Manager
BP US Lower 48

“We are already getting positive reviews

Source: BP US Lower 48; CEB analysis. on this shift. Over 90% of employees
surveyed told us that their performance
conversations were improved relative to
previous years. The business has begun
generating strong returns as a result, and
our continued focus should translate into
even greater opportunities for our people
to generate more value for themselves
and the business.”
John Kruep
Vice President, HR
BP US Lower 48

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Appendix 77
 Rewards in the Era of Performance Management Transformation 78

Lower 48 sets employee

expectations up front
SET EMPLOYEE EXPECTATIONS UP FRONT
that the organization is
refocusing performance Lower 48’s Performance Management and Rewards Rollout
and rewards on ways Excerpts
employees contribute to
the business.
MyIMPACT Program
■■ At the start of the year, Lower
“Adding Value – Safely!”
48 distributes a series of
communications about how
the performance management We are creating a performance review process
and rewards systems are that is better aligned with our business model
being redesigned to focus on and the unique space in which we must
employee contributions to the compete.
business.

■■ Lower 48 highlights what it To do this, we believe, will require us to Lower 48 sets employee
wants employees to take away deliver a robust performance management expectations up front that
from the communication— and pay process that focuses on value-added performance management will
that the new system will help
contributions. refocus on helping each employee
employees contribute and will
reward them for it.
contribute to the organization…
We define contribution as how an employee
adds value to the business; employees should
feel free to contribute in different ways based
on their interests and strengths.

MyIMPACT Objectives
■■ Enable employees to focus on work that
matters most.
■■ Empower employees to get the feedback
…and the organization will reward
they need to contribute effectively. those who contribute most.
■■ Reward those who help BP win in the

marketplace.

Source: BP US Lower 48; CEB analysis.

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EXPLAIN HOW THE ORGANIZATION EVALUATES VALUE

4.
L48 Performance Management Introduction How
How Is The Value Determined? Will we do
it?

Evaluating Contribution

Your Manager has the discretion to determine

if your priority item added value to the
business…and how significantly.
Some criteria a Manager may use to determine
the value of a contribution might be…

15

Source: BP US Lower 48.

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Appendix 79
 Rewards in the Era of Performance Management Transformation 80

SCENARIOS HELP EMPLOYEES UNDERSTAND HOW REWARDS

ARE DETERMINED

18

Source: BP US Lower 48.

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GUIDED LTI DIFFERENTIATION
1

OVERVIEW

Managers often struggle to differentiate pay for leaders because their performance ratings
cluster toward the higher end of the scale. Eta Manufacturing’s compensation team increases LTI
differentiation by providing managers with more information than just performance ratings to
support pay decisions and only asking managers to decide whether a leader should receive no LTI
grant, their target payout, or two times their target payout. Having additional criteria to use makes
pay decisions more objective for leaders’ managers and enables the senior management team to
calibrate payouts to ensure that leaders are rewarded consistently.

KEY PRACTICE LESSON

To increase pay differentiation for leaders, organizations should provide managers with information
that helps them distinguish among the high-performing group and bound their flexibility in
determining payouts to help them arrive at higher levels of pay differentiation.

COMPANY SNAPSHOT

Eta Manufacturing
Industry: Manufacturing
2012
Employees: 10,000–50,000
2013 Sales: US$5–US$10 Billion
Headquarters: United States;
offices in more
than 20 countries
worldwide

1
Pseudonym.

 81
 Rewards in the Era of Performance Management Transformation 82

Managers at Eta
DIFFICULT TO DIFFERENTIATE PAY BASED
1

Manufacturing struggled to
significantly differentiate
long-term incentive grants
ON PERFORMANCE RATINGS
among a group of leaders
2012 Leader Performance Rating Distribution 2012 LTI Grant Decisions
who fell within a tight
Illustrative
range of performance.
Leaders fell within a relatively tight range of …which led managers to shift small amounts of LTI
■■ Most leaders at Eta performance… between leaders and created a narrow range of pay
Manufacturing were rated as
differentiation.
either “meets” or “exceeds
expectations.”
60% 55% Leader No Target Two Times
■■ As a result, pay decisions Grant Target
focused on how to best shift 0.7x
small amounts of LTI between 40%
average- and high-performing Janine (3)
leaders. 30% 1.3x
■■ LTI grants ultimately fell within Lloyd (4)
a narrow range, creating little
pay differentiation. 0.9x
2% 3%
0% Andrea (3)
■■ Eta Manufacturing’s 0%
compensation team wanted to 1 2 3 4 5 1.2x
identify a solution that would Does Meets Far Exceeds
Not Meet Expectations Expectations Selma (3)
enable the organization to
Expectations
better reward its top talent Source: Eta Manufacturing; CEB analysis.
while it gradually changed the Source: Eta Manufacturing; CEB analysis.
culture around performance
ratings.
“We knew it would take some time to change our performance management culture for leaders.
In the meantime, we saw the opportunity to ensure that our top talent gets recognized through
pay regardless of performance differentiation.”
Director, Global Compensation and Benefits
Eta Manufacturing

1
Pseudonym.

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Eta Manufacturing’s
MORE INFORMATION AND BOUNDED CHOICE
1

compensation team
increases LTI differentiation
by providing managers Eta Manufacturing’s Guided Approach to LTI Differentiationa
with more information to
support pay decisions and Provide managers with additional data to help them Ask managers to select either no payout, target
bounding their flexibility to distinguish among the high-performing group. grant size, or two times target for each leader to
determine grant sizes. ensure significant differentiation.

■■ Managers receive additional Leader Profiles Manager LTI Options

data on each leader’s
performance and criticality to Leader Performance Three-Year Talent Position Market
Two Times
help them distinguish among Rating (1–5) Average
Performance
Designation Designation Position Target
the group. Rating

■■ Managers must then select

from a predefined set of grant
sizes for each leader. Target
■■ Each leader must receive
either no payout, their target
payout, or two times their
target payout.
No Grant
■■ A recommended distribution
ensures managers do not give Recommended
Distribution ~20% of ~72% of ~8% of
all leaders the target payout.
leaders leaders leaders
■■ Distribution guidance varies by
salary grade with any business Source: Eta Manufacturing; CEB analysis.
exceptions requiring corporate
a
Eta Manufacturing is using LTI to pilot this approach to differentiation and plans to extend its use to other types of pay.
compensation approval.

1
Pseudonym.

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Appendix 83
 Rewards in the Era of Performance Management Transformation 84

The compensation team

HELPING MANAGERS MAKE OBJECTIVE
1

provides managers with

data on each leader’s
performance and criticality
DIFFERENTIATION DECISIONS
to ensure they make an
Leader Profiles Provided to Managers to Support LTI Differentiation Decisions
objective talent investment
decision based on the right
Illustrative
inputs.
Although many leaders
■■ The compensation team are strong performers...
provides managers with data
on each leader’s current and
Leader Performance Three-Year Talent Position Market Manager LTI
historical performance, talent
and position designations, and Rating (1–5) Average Designation Designation Position Decision
market position. Performance
Rating
■■ The data helps managers
distinguish leaders from Janine 3 2 Core Talent — 99% No Grant
one another in a way they
Andrea 3 3 Emerging Talent — 102% Target
could not using just formal
performance ratings.
Selma 3 3 Core Talent Pathway Role 103% Target
■■ Although managers know
Knowledge
most of the information, Jasmine 4 3 — 101% Target
seeing the criteria they should Expert
use at the time they make
Two Times
their pay decision makes Suzanna 3 4 Emerging Talent Critical Role 96%
Target
allocating grants easier and
more objective.
Two Times
Lloyd 4 4 Domain Expert Critical Role 95%
Target

…the additional data gives managers an objective

way to identify how much to invest in each leader.
Source: Eta Manufacturing; CEB analysis.

1
Pseudonym.

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Seeing the full set of
USING LEADER PROFILES TO CALIBRATE
1

leader profiles for their

group along with manager
grant proposals enables
PAY DECISIONS
the senior management
Business Unit Review Process for Manager LTI Proposals
team to ensure leaders are
rewarded consistently.
Illustrative

■■ As managers submit Proposals Submitted Review by Direct Review by Senior

grant proposals, their by Managers Managers Management Team
recommendations are rolled
up along with those of other Managers submit Leader profiles and Proposals are calibrated
managers for review by the proposals based on grant proposals are in aggregate by the
senior management team in the profiles provided rolled up for review senior management team
each business unit. by the compensation by the next-level for inconsistencies in how
team. manager. leaders are rewarded.
■■ The management team
reviews the list of decision
criteria along with each Manager Pay Decisions to Push Back On
recommendation to identify
instances where leaders with
Leader Performance Three-Year Talent Position Market Manager LTI
similar profiles are rewarded Rating (1–5) Average Designation Designation Position Decision
differently. Performance
Rating
■■ Seeing the leader profiles and
pay decisions in aggregate Selma 3 3 Core Talent Pathway Role 103% Target
makes it more clear when the
management team should
Yuan 3 3 Core Talent Pathway Role 99% Target
push back on manager pay
Two Times
recommendations. Jeff 3 3 Core Talent Pathway Role 99%
Target

Igor 3 3 Core Talent Pathway Role 98% Target

Owen 3 3 Core Talent Pathway Role 99% Target

Irene 3 3 Core Talent Pathway Role 100% Target

Source: Eta Manufacturing; CEB analysis.

1
Pseudonym.

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Appendix 85
 Rewards in the Era of Performance Management Transformation 86

Eta Manufacturing’s
TALKING POINTS HELP MANAGERS
1

compensation team
provides managers with
talking points to help
DELIVER DECISIONS
them communicate
Manager Talking Points for Delivering LTI Decisions
differentiated decisions
given their reduced
Select Excerpts
Managers must
flexibility on the grant
Note: As a supervisor, even if you may not have had ownership for the ultimate understand and
amount. explain the pay
LTI planning decision, you are part of the leadership structure of the company and
decision even if they
your support for the new program is critical. Understand why this individual was did not fully own it.
■■ Manager training materials set
expectations that even when not selected, and be prepared to give supportive coaching on ways the person may
a manager does not fully own improve his, her performance and/or grow/develop in his/her career. Managers should
a pay decision, it is his or her provide specific
It is okay to say this… It is NOT okay to say this… coaching on how
responsibility to understand
leaders can improve
and explain the decision to the You are among a select group of The program does not let us provide their performance
leader. employees who are being awarded this awards to all employees, so we’re going and pay.
■■ Managers must also provide
new form of long-term incentive. to rotate who gets them each year. You
guidance on how the leader or won’t be getting one this year but are on
can improve his or her You have not been selected to receive an the list for next year.
performance and pay in the LTI award this year.
future. Criteria used for selecting who receives “They” forced ranked employees to
■■ They should not explain the
an award may include many factors decide who gets an award.
pay decision by saying they such as the employee’s base (fixed)
were not allowed to give the pay relative to their competitive market
leader more. position, talent designation, performance
history, criticality of the skill set or the
role, and criticality to retain.
Managers should not
No one will receive an award I wasn’t allowed to give you an LTI cash say that they were
automatically, and not everyone is eligible. award this year, but I will next year. not allowed to give
or the leader more.
You will get an award every year.

Source: Eta Manufacturing; CEB analysis.

Pseudonym.
1

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Eta Manufacturing’s guided
MORE MEANINGFUL PAY DIFFERENTIATION
1

approach has made it

easier for managers to
differentiate LTI grants. LTI Differentiation Ratio
Indexed to Meets Expectations
■■ Business unit and HR
leadership feedback reveal 2.0
that managers find it easier 2.0
Before Change
to differentiate LTI and that
After Change
they feel more confident
differentiating.

■■ As a result, Eta Manufacturing

has achieved significantly 1.2
more LTI differentiation
between low, core, and high
1.0 1.0
1.0
performers. 0.8
■■ HRBPs also report the
quality of differentiation
conversations and decisions
has improved.

■■ The approach has been 0.0

so effective that Eta 0.0
Manufacturing is also Does Not Meet Meets Expectations Exceeds Expectations
Expectations
considering applying it to the
merit program. Source: Eta Manufacturing; CEB analysis.

“Rather than trying to decide who should get a few extra units, managers are asking bigger questions,
like who should we be giving disproportionately more to? Managers are more focused on managing
pay investments in top leadership talent.”
HR Business Partner
Eta Manufacturing

1
Pseudonym.

PRACTICE
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Appendix 87