Continuous Compensation Reviews

Recently I have been reading a lot about how systems are ready to support continuous compensation reviews, however what I am unsure is whether the industry is prepared to move to such a model. 2/3rd of the people I connected with are not willing to adopt this model. I remember, a decade ago, when companies onboarded the band wagon of continuous performance reviews, it was also faced with mixed reviews however there have been companies who have been successfully doing the continuous reviews and then there are companies who stuck with the traditional approach toward performance management. Only time will tell whether Continuous Compensation Reviews has the same future or whether companies will refrain using this model. Below is what i think are some of the benefits or drawbacks of this model

A Cost Effective Model

Continuous Compensation reviews definitely has a positive impact on company's PnL. This is true with an assumption that increment happens for an employee once a year at the anniversary of the last review or date of joining. Let me explain this with a simple example: Lets say you have 100 employees each at $100,000 salary. The compensation review for these employees are scattered in a manner that 8-10 employees will see a salary change every month. Below is how much your PnL will be impacted with a budget of 5% per employee

• Annual Compensation Review - 5%*100*100,000 = $500,000
• Continuous Compensation Review - Its surprising to see that with same 5% increment per employee, Company's PnL impact for the year is only $280,000 Vs $500,000

Better employee messaging

I have seen a lot of companies giving pro-rata increments to employees who have joined during the year. So in a 5% budget per employee, an employee may only see 1-2% increment towards the salary since employee joined on the later half of the year. I have personally experienced this messaging and must confess that its not an easy messaging for the manager as well as employee especially when you have a Solid performer. So with continuous compensation review you can hit two birds with one stone

1. Look at full year performance while deciding compensation Vs a pro-rata performance
2. Use the full increment budget Vs pro-rata increments - Logically continuous compensation process is already taking care of the pro-ration for the year

Intrigued by the above benefits of the Continuous Compensation review process. Hold your horses and lets answer few questions before you decide to adopt this approach.

What is the Continuous Compensation Review Process

What is this continuous process review? What is the right frequency of the review - daily, weekly, bi-weekly, monthly, quarterly - and how do we decide what frequency works the best? Does this reward consistent performance over a period of time or flash-in-the-pan performance? How do we ensure that this process does not inculcate a culture of "Crying baby gets the milk"?

"In my opinion, the annual comp review works because you are not looking to reward flash-in-the-pan performance streaks and are willing to take decisions basis certain level of consistent performance demonstration." This is what a senior HR professional said when I discussed the topic of continuous compensation reviews.

What is the the objective that you want achieve?

One of the biggest question to answer is what problem are you trying to solve, what behaviours would you want to drive and what behaviours would this change? One of the starting points would be to identify why your current process (Annual/Bi-Annual Compensation review) not working and what are the gaps? Would this new process help filling those gaps or would it create more problems? If you are looking at addressing issues like bias - i would suggest dive deep to understand what is the root cause of the bias as i dont think changing the frequency would really reduce the bias from the system. Also if there is an equity problem, rather address that problem proactively in your current process. The new process has to be a more strategic decision than anything else.

How to manage the Budget?

Before onboarding this journey, you may need to address several budget related questions:

1. How would overall budget get managed for such a dispersed exercise?
2. How do we ensure equitable distribution of the budget when decisions are happening so far apart from each other?
3. How to avoid lopsided budget distributions where 1. Employees with reviews during the first half of the year get first mover advantage or 2. Employees with reviews during the second half of the year get more due to availability of the budget?
4. What happens to the budget due to drastic change in market scenarios or company's results during the year?

How to ensure Performance Differentiation?

One of the key aspects of annual compensation reviews is performance differentiation where your increments are directly proportionate to your performance ratings. Even companies with no performance rating create buckets which ends up differentiating performance to ease the overall reward process. So what do we do in case of continuous compensation reviews w.r.t performance differentiation? Also while Continuous performance reviews addresses the element of Absolute individual performance, how would we bake in aspect of relative performance?

Availability of Resources

One of the big resource which companies struggle with is "Time". The entire compensation review process demands time from all the stakeholders involved in the process. Does making this process continuous going to increase the Time commitment from each of the stakeholder or is it going to save time?

Integration with performance systems

All these compensation systems which I have seen are standalone systems which address the compensation problems but do not provide solutions to the criteria which is commonly used as base for any compensation decision i.e. Performance. Also are we mixing things by saying continuous performance review should lead to continuous compensation reward?

"If goals are set to be achieved in a definitive time period, how can compensating that goal achievement be continuous? Would that allow time for employees to perform and then be rewarded? Or would it simply mean that reviewing compensation is a standalone task for HR?" says a Total Rewards profession who participate in the online survey on Continuous Compensation Review