How to Make the Coexistence of Pay Transparency and Performance-Based Pay in the Organization

In order to adopt a performance-based pay system, a corporation would need to communicate to managers pay levels for various sorts of occupations as well as the positioning of strong performers within those levels. As a result, if the company pays higher-performing employees more, managers who implement wage increases will need to understand how to position high-performing employees in comparison to mediocre performers

How to Make the Coexistence of Pay Transparency and Performance-Based Pay in the Organization

Pay transparency and performance-based pay appear to be diametrically opposed, with pay transparency emphasising openness and fairness in compensation and performance-based pay rewarding individuals for their accomplishments and contributions to the firm. Can “Pay Transparency and Performance-Based Pay” coexist in the organisation, and if so, how?

We gathered some HR leaders’ perspectives on “Pay Transparency and Performance-Based Pay” and how they can coexist in an organization’s single system.

While “Pay Transparency” and “Performance-Based Pay” are distinct concepts, many top HR leaders believe they may coexist in the same compensation structure.

Vivek Tripathi, VP-HR of NewGen Technologies, stated, “Pay transparency is higher in companies that truly give performance-based pay.” He also mentions that organisations who refuse to accept or successfully implement performance-based pay have lesser pay transparency.

For example, in order to adopt a performance-based pay system, a corporation would need to communicate to managers pay levels for various sorts of occupations as well as the positioning of strong performers within those levels.

As a result, if the company pays higher-performing employees more, managers who implement wage increases will need to understand how to position high-performing employees in comparison to mediocre performers. As a result, if there is no open communication, the compensation system may be less transparent.

A Thiru, a C-suite HR professional leader, agrees with Tripathi, and said, “The policy guidelines on eligibility, maximum limit (say 10 to 40 percent of basic or CTC of the eligible employee based on work levels), annual goal setting and its proportionate percentage to company level, division /department/ individual level, and if necessary, milestone-based achievements for projects are to be communicated ahead of the year and payment to be effected on the following month along with w The only thing that should be kept private is the amount paid to people, not the eligibility requirements.”

“A performance-based pay system combined with pay transparency is one of the most dependable ways to bring transparency to an organisation because it is based on employees’ performance orientation,” stated Pradyumna Pandey, head-HR, manufacturing, Hero MotoCorp.

Because performance-based compensation is intended to reward individuals based on their individual contributions to the organization’s goals, it has the potential to drive employees to perform at their peak and improve their overall job performance.

Compensation transparency, on the other hand, can help to increase employee trust and engagement by offering clear and open communication about how compensation choices are made. Employees are more likely to feel valued and driven to do their best when they understand how their pay is calculated. “It’s also about explaining why and how we, as employers and an organisation, want to reward them.

“So, I always feel that when we talk about performance pay and show our commitment to performance pay, that’s part of performance transparency,” Pandey says. He also mentions how digitization and technology innovation have made the procedure much more convenient.

Employees get easy access to data through their portals. Communicating pay transparency through performance-based pay also helps minimise employee concerns about distinct positions.The next stage of pay transparency would entail providing employees with salary ranges without exposing individual compensation.

This can be accomplished by articulating the company’s compensation policy, which involves placing good performers at the top of the pay scale and new hires at the bottom. The first step is to communicate salary ranges or levels to managers and connect them to the market. “The second step is to make this information known to employees as well,” Tripathi expressed.

Many businesses are using this strategy by publicly disclosing salary ranges for specific job profiles, such as software engineers at level one, who may earn between Rs 5 and 8 lakhs. High performers earn Rs 6 or 6.5 lakhs or more, while moderate performers earn between Rs 5 and 6.5 lakhs.

Employees will be aware of the pay ranges and how their performance affects their position within the range. “I had the opportunity to establish this in Vedanta Resources, not only in terms of performance pay, but also while awarding stock options of the London-listed entity to employees across levels, including MTS and GETS,” Thiru adds.

“In reality, during the dipstick conducted among the young talents to determine whether they would prefer a fixed retention bonus or market-linked stock options, they unanimously preferred stock options due to their transparency.”

“Sharing the entire pay process with all employees—the pay structure, the philosophy behind the pay—with clarity helps employees engage more as that clarity motivates them.” “The rationale behind fixing these performance-based pay parameters must be communicated to employees,” Pandey adds.

Pay transparency and performance-based pay, in general, are not mutually exclusive and can coexist together. It is up to the organisation, however, how much differentiation they wish to establish based on performance.

“There are two aspects to consider when it comes to performance: the accuracy of measuring performance and how much of a difference in performance actually contributes to the organization’s output,” Tripathi explains. In circumstances where performance is impossible to evaluate, such as in creative or collaborative roles, one can nevertheless generate an assessment based on input from leaders and colleagues.

However, while considering how much the difference between a top performer and an average performer, the job’s importance and the impact the role has on the organisation must be considered. If a job cannot demonstrate its efficacy, it may need to be redesigned to ensure it adds value.

Product businesses, for example, may dramatically distinguish pay for top performers who create significant income, perhaps giving them a three-times higher rise than the ordinary employee.

Manufacturing firms, on the other hand, may have a reduced degree of distinctiveness because individuals may operate in teams and have no individual impact on sales. Furthermore, if organisations seek to combine pay transparency and performance-based compensation, they must have the proper performance-management system in place.

“Companies must have a process in place to persuade their top performers that they are receiving appropriate performance pay.”

In a product company, for example, a product development engineer who develops a concept that generates millions of dollars in sales may be deemed a high performer and may be paid substantially more than an average engineer who merely completes assigned tasks.

In contrast, in a manufacturing organization where operators execute similar activities, the more efficient operator may be paid slightly more than the typical worker.

However, without an adequate performance management system in place, correctly measuring performance and determining the extent to which it contributes to the organization’s output can be difficult.

This is particularly true for positions requiring collaboration or creative effort. Even in such instances, quantifying performance is achievable. In an HR function, for example, the leader can assess the responsiveness of the HR person.

Some professions, such as creative or collaborative roles, may make objective performance evaluation difficult. In such instances, relying simply on performance measures to decide remuneration may not be a viable method. As a result, organisations may need to examine alternate pay-determination methodologies, such as peer reviews or market data.

In conclusion, while pay transparency and performance-based compensation can live peacefully, organisations must be aware of potential challenges that may cause stress or defy each other.

Organisations can develop a pay system that fosters justice, engagement, and trust by being honest about the pay system and recognising employees’ privacy concerns, balancing objective performance measurements with other techniques, and matching performance goals with organisational values.

“There are two main factors that affect employee engagement.” The first step is to put in place transparent systems to foster discipline. The second factor that influences motivation is leadership behaviour.

When it comes to transparent processing systems, these two criteria are critical. Having such mechanisms in place can promote employee engagement and, as a result, productivity,” Pandey concludes.

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