Paying for performance
Lynn Hong, Director of HR at McDonald’s Singapore, says the concept of “pay-for-performance” is akin to dangling the carrot to entice better performance through tangible rewards.
“This kind of enticement for better performance or desired workplace culture and output is common for goal-oriented organisations,” she says. “Studies have also indicated that employees find the process of appraisal more satisfying and credible when it is linked to reward outcomes.”
Michael Goh, Chief HR Officer, Jurong Port, concurs.
“Pay for performance requires that a portion of a staff menber’s compensation is contingent on the achievement of performance targets,” he says.
Arindam Mukherjee, Group Head of Compensation and Benefits at DKSH Management, says the concept of “pay for performance” is closely linked to “pay for position”.
“For each position, there is a pay reference point in the market which represents the ‘right’ pay if the job holder is able to achieve 100% of the job requirements,” he elaborates.
“Pay for performance is a concept of paying employees according to performance against that pay point.”
For example, he says a high performer who has achieved 120% of their job requirement should be rewarded with 120% of the target pay point.
“In cases where companies categorise performance into only a few levels, the better performer would also be better rewarded,” says Mukherjee.
Hence, he stresses a pay-for-performance plan should incorporate a strong link between performance and reward, and a significant reward differentiation across different performance levels.
“Paying incentive can be broadly divided into short-term incentives and long-term incentives,” Mukherjee explains. “A short-term incentive is utilised to drive short-term business goals, which are typically based on performance criteria and metrics.”
“A long-term incentive is more for long-term goals, retention of key talents, and value creation over the years.”
Does the concept work in Singapore?
According to Hong, this concept of pay-for-performance is “very much applicable” in Singapore.
She says McDonald’s incentivises better performances through its key performance metrics.
“Examples of performance-based incentives include our variable bonus scheme, where individual performance is the main component in determining the final payout, and restaurant incentives,” Hong explains.
According to the Ministry of Manpower (MOM), variable payments are common but not mandatory, unless stipulated in the employment contract or collective agreement.
MOM’s Report on Wage Practices 2015 noted that the introduction of a monthly variable components (MVC) to wages was recommended by the Tripartite Taskforce on Wage Restructuring.
“Though the taskforce recommends a wage structure with 10% of total wages attributed to MVC, it is not an official rule as it recognises that different companies and industries could have different needs,” the report found.
Hong says McDonald’s looks at the total salary and the market comparability when it comes to determining the MVC component.
“As a rule of thumb, we always like to keep 10% of the pay variable,” she says.
Goh says a pay-for-performance culture is well-embedded in Jurong Port’s rewards framework.
“We adopt a ‘corporate scorecard’ approach to drive the focus of the company for each financial year. The achievements of the targets will determine the size of the variable bonus pool available for distribution to our employees,” he explains.
“The distribution matrix takes into consideration the achievements of the division’s key performance indicators (KPIs), as well as the individual’s performance rating, which is in turn determined by his achievement against his own personal KPIs.”
Mukherjee notes that it is important to recognise that other aspects also play a part in determining the pay of employees.
“For example, in a more hierarchical and traditional organisation, seniority is always a consideration,” he says.
The flexible wage system
The Report on Wage Practices 2015 revealed that most businesses in Singapore have adopted some form of flexible and performance-based wage system.
Ninety percent of private sector employees were placed under some form of flexible wage system in 2015, the highest proportion since 2004.
“Having a narrower maximum-minimum salary ratio (the difference between the highest and lowest salaries in any given job) remained the most common wage recommendation adopted, covering two in three (66%) private sector employees in December, 2015,” the report advised.
“This was followed by linking variable bonuses to KPIs (52%) and having the MVC in the wage structure (32%).”
Goh says a flexible wage system allows, on the one hand, companies to reward employees satisfactorily when they are doing well. “Conversely, it allows the company flexibility to also adjust wages downwards to manage costs and avoid redundancies when times are hard,” he explains.
Hong echoes Goh’s sentiments, saying a flexible wage will allow firms to adjust wage costs quickly in severe business downturns.
“The MVC also gives employers the flexibility to take a percentage out of the total wage to reduce the absolute wage cost – usually done before retrenchments are considered,” she elaborates.
Mukherjee says in past recessions, private-sector businesses have relied on cuts to employees’ Central Provident Fund contributions to keep their wage bills in check.
“However, with the lowering of employer’s contribution rates, there will be little room for fund cuts in the next downturn. Thus, the flexible wage system has become even more important for business sustainability,” he shares.
What do employees prefer?
A survey by recruitment firm Hays shed light on Singaporeans’ sentiments towards performance-based bonuses when it was released last year.
According to the poll, 63% of Singaporeans would have taken a base salary cut for the chance to potentially command more total income through performance-based bonuses.
Forty-six percent would have accepted a base salary cut of up to 20% so as to garner a bonus based on their actual performance.
An additional 17% would have accepted a cut of over 20% for a similar chance.
The final 37% said they would not reduce their base salary to potentially rake in more via a performance-based bonus.
Goh says it boils down to the question of whether staff are able to see the big picture.
“For someone who is confident of their abilities, a pay-for-performance compensation scheme is always more attractive, as it would offer more upside,” he states.
“Of course, they would need to be assured of the company’s willingness and ability to reward outperformers with upsized bonuses.”
Hong questions if the survey is reflective of the mood of the overall workforce today, as compensation plans varies depending on the industry, job type and the number of employees within the business.
“My experience tells me that Singaporean workers prefer stability and certainty in their pay. Between earning a higher base salary and receiving performance-based bonuses, most will prefer the former,” she suggests.
She notes, for example, that not all roles can have the variability required for performance-based bonuses.
“Performance-based bonuses should complement the overall company’s compensation and benefits objectives, targeting specific groups of employees to drive a specific behaviour or performance,” she says.
Setting the foundation
Hong says McDonald’s’ compensation and benefits philosophy aims to strike a balance between a fixed base and variable components.
“With our diverse workforce demographics, our employees are given the option to earn more when they increase their productivity and work during peak periods,” she explains.
Hong adds that the organisation believes in offering solid rewards and recognition in order to engage and retain a committed workforce, regardless of age, religion and gender.
“It also shows our appreciation for their efforts in making McDonald’s a great business and a great place to work. Our awards and recognition cater to all levels of employees based on their productivity and achievements,” she elaborates.
Hong says fostering such a performance culture requires discipline and a systematic approach in managing performance.
“It guides how employees think, act and feel,” she says. “Given this, the company advocates strong constant communication from the boardroom all the way to the crew room on the company’s goals and focus for each year.”
On a micro-level, Hong says McDonald’s’ appraisal system focuses on a holistic process by communicating expectations, having ongoing feedback, and coaching sessions with each employee.
“Progress and performance tracking are rolled up into the annual performance appraisal where the individual’s past performance will be discussed and used as a determinant factor of the overall compensation.”
Meanwhile, Goh says where appropriate, productivity targets are cascaded down into the KPIs of Jurong Port employees.
“This motivates them to achieve, and even exceed, the productivity targets for better rewards,” he explains.
Goh says his HR team believes that maintaining a robust performance management culture is the responsibility of every people manager in the organisation.
“HR facilitates this by creating and maintaining a performance management framework, and ensuring all managers and employees are well-educated on its objectives and workings,” he says.
“We worked closely with the CEO and the senior leadership team to ensure that the ‘corporate scorecard’ targets are cascaded down appropriately to the respective division’s KPIs, and then further into the department’s KPIs.”
Goh says his team has spent time with each manager to ensure these KPIs are aligned with the overall company objectives, before they cascade them downwards to their teams and employees.
He says effective KPI-setting is just the start.
“Well-crafted KPIs will then allow us to measure the performance of our employees, teams, departments and divisions as objectively as possible,” he says.
“Through careful deliberations with our board, compensation committee members, and the union, we then determine the bonus payout matrix, rewarding each staff member according to their respective performance levels,” Goh explains.
“This will motivate our employees to strive to perform their best, knowing and trusting in the pay-for-performance culture.”
Steps to managing performance
Arindam Mukherjee, Group Head of Compensation and Benefits at DKSH Management, says a robust performance management system should at least comprise of: