How will performance management and compensation models change when the work environment has changed?

After the tumultuous last three quarters, performance and compensation management in 2021 must reassure employees, ensure job security, and provide the confidence to fearlessly pursue growth.

But this could be a challenge in the current economic landscape. Organizations globally are expected to share the financial burden created by COVID-19 through uniform compensation, while also contributing to the rebound through astute goal setting and performance management. Gartner found that 37 percent of organizations plan on shrinking their merit budget.

Organizations that support employees through this difficult period with a more agile approach to employee development, smart performance management and contextualized compensation will win employee loyalty for years to come. To address this, it is important to do three things:

1. Realign leadership and organizational vision for the current work and business environment

2. Make the most of available budgets by restructuring the benefits component of compensation

3. Listen to the voice of the employee via continuous performance feedback

Realign leadership and organizational vision

The first step for managing and improving performance amid a climate of uncertainty and change is to prepare your leadership. Performance management in 2021 shouldn’t just be about setting short-term productivity goals or tangibles for front-line workers. Company leaders (team leads, vertical heads, middle managers, C-level and C-minus level professionals) also need new goals. A Gallup analysis found that there are four universal needs the leadership must fulfill - trust, compassion, stability, and hope. These are enacted in the form of readily available team support, transparent communication, clear expectations and other behavioral changes that will ultimately “trickle-down” to your grassroots workforce.

For employees, you need to set goals that make sense in the new normal, within a refreshed work and business context. Old targets involving presenteeism, volume-based productivity, or solo work may not apply in this new remote, collaboration-focused work environment. Gartner found that for 82 percent of employees, everyday performance and task completion involves working closely with their colleagues. Yet, team-based goal setting is practiced by just 20 percent of teams; a paltry 3 percent involve peers in the goal-setting process. This must change in 2021, as organizations define contextualized goals that resonate with the employee.

Restructure the benefits component of compensation

The days of “one-size-fits-all” generic benefits packages are over. The pandemic revealed several underlying employee expectations from organizations, spread across a breadth of benefits types. A recent survey found that employee demands from their workplace range from on-site gyms, retreats, free F&B, and free daycare to loan assistance, flexible hours, more vacation time, and better medical coverage. Benefit requirements will invariably differ from one employee to another, depending on their personal context (e.g., free daycare for new parents, or a gym membership for someone trying to meet their fitness targets).

Personalizing the benefits component can offset challenges in hiking the in-hand wage component without compromising on employee satisfaction.

Further, physical and mental well-being benefits require special attention in 2021. Work from home influenced people’s mental and physical health in unexpected ways, allowing some to catch up on their work-life balance while forcing others to alienate themselves in a solo, contactless work environment. A peer-reviewed study in BMC Public Health explored these impacts in detail -- but the bottom line is that employers must take stock of their workforce’s mental and physical health requirements before finalizing a compensation plan.

Worryingly, 35.8 percent of employees admitted to lying about their employer about why they took sick leave, a number which rises to 51.7 percent among those diagnosed with mental health issues. There is an urgent need for organization-specific assessments and surveys to pinpoint the best-fit compensation structure for you in 2021.

Get the full picture using continuous performance feedback

An important characteristic of the new work environment is that one’s manager doesn’t have full visibility into their workflow or performance. Even before the pandemic, multi-rater or 360-degree feedback systems were recommended for a more holistic and non-biased understanding of employee performance. This extends from front line workers to senior leaders, whose unique traits such as conflict resolution, communication, and foresight need to be reviewed from multiple perspectives. For instance, the UN has already piloted implementations of multi-rated feedback among its senior staff members. Post-anonymized feedback collection, your performance management plan should include follow-up conversations for continuous monitoring.

The power of collective opinion and insights can also be harnessed via employee surveys, useful for checking the pulse of employee preferences in order to shape rewards packages. Pulse surveys can reveal important data on changing employee sentiment and behavior in the new normal so that your rewards and benefits components stay in-sync during this crucial year.

In conclusion: Centering your organization for the new normal

While resource constraints will no doubt influence your performance management and compensation model in 2021, they shouldn’t shape it. Employees were always your biggest assets and now is the time to show them that you care, are hearing (and acting on) their voice, and paying attention to the things that matter.

This will start with leadership repositioning at the top, enabled by on-ground initiatives like continuous performance evaluations/feedback and an emphasis on mental and physical health in the context of the pandemic. With time, merit, long-term, and short-term incentive budgets will undoubtedly regularize, and during that journey, it is vital to deliver meaningful total rewards offerings that acknowledge the employee’s incredible contributions in the last few quarters.