The Performance Review Process Video Transcript
- How much do you make? That sounds like a simple question, doesn't it? Most people think
immediately of their annual salary or their hourly rate of pay. Neither answer is correct. Both
answers underestimate how much a person actually makes. It's important that you understand
how much you're really being paid for the work you do. I'd like to walk you through the
components of total compensation. Compensation refers to anything that an employer is willing
to offer in return for an individual's contributions of time, knowledge, skills, abilities, and
commitment to an organization or to a project.
Total compensation refers to monetary compensation as well as your benefits. Monetary
compensation includes base pay, which is the monetary compensation that an employer pays
for the work that is performed. Merit increases are in addition to base pay and are based on
past performance. Whereas a merit bonus is also based on past performance but paid as a
onetime lump sum. Short-term incentives are one-time payments that do not increase the base
wage and that have to be re-earned each period.
Bonuses and commissions are examples of short-term incentives. Long-term incentives focus
on multiyear results such as stock grants or options to buy stock at a fixed price. Both of these
lead to monetary gain if the stock price goes up over time. Let us say you have had a great
year at work and in your performance review your boss says, "Kelly, based on your past
performance, you've earned a merit increase of 6% on top of your base pay.
In addition, you'll receive a bonus of 15% of your base pay and a stock grant equal to 10% of
your annual salary.” Your boss has generously included each element of monetary
compensation in this year's raise. Of course, your total compensation also includes a variety of
benefits. Income protection is made up of benefits that are legally required such as Social
Security, Workers' compensation, and Unemployment insurance.
Those that an employer offers voluntarily like Medical insurance, Retirement programs, Life
insurance and Savings plans. Work, Life Fit programs help employees integrate their work and
life responsibilities. They may include time away from work, access to services to meet specific
needs, like childcare, counseling for substance abuse, or financial planning. They might also
include flexible work arrangements like telecommuting and non-traditional work schedules or
non-paid time off.
Allowances may include transportation or housing while miscellaneous benefits might include
employee discounts on goods and services purchased from one's employer, employee
meals, or education expenses. Think of your total compensation as the sum of three forms of
pay. The challenge is to design total compensation so that it helps an organization to succeed.
By the way, all those benefits we listed, average almost 40 cents for every dollar you make at
So the next time someone asks how much do you make, be sure to tack on that extra 40% on
top of your monetary compensation. It provides a more accurate picture of the total financial
rewards that you get from work.
- Would a great coach ever go into a game or match without a strategy to win? Would a great
General ever engage the enemy without a battle plan? Of course not. And just as you need
strategies to win at sports and in battle, you also need them to succeed in business. In a
business setting, strategy refers to the decisions, processes and choices firms make to position
themselves for long-term success. It answers questions such as why should customers buy
from you? What do you do better than anyone else? What do you offer that's valuable,
rare, difficult to imitate? If you're going to be part of your company's long-term success, it's
important that you understand the connection between an organization's competitive
strategy and its compensation strategy.
Competitive strategy is about being distinctive by providing a superior product or service in the
eyes of the customer. And it might include developing products or services that no other
competitor can match such as a patent protected miracle drug. Offering the cheapest products
and services or the highest quality. Or maybe you offer the fastest order fulfillment process or
superior customer service. The challenge is to align the entire organization to execute that
The company's compensation strategy must compliment and align closely with competitive
strategy. To do that well, the company maps a total compensation strategy by answering some
key questions. What objectives do you want your compensation strategy to achieve? Does your
company want to be viewed as a fun place to work to provide special benefits to
employees? Does your company demand a lot from its employees but pay much higher than its
competitors? How should the different levels of skills and work be paid within your
organization? Do you want to establish differences in pay based on the relative worth of the jobs
that people do or on the skills and competencies that they have to demonstrate to do their
work? How should we position our total compensation compared to competitors? For
example, do we want to lead, lag or match going rates of pay across the various jobs in our
organization? How should pay increases be determined? Should they be based on individual or
team performance on experience or on improved skills? Or should increases be based on each
business units performance or on changes in the cost of living? Who should be involved in
designing and managing the system to ensure that it complies with legal requirements? And
what information will you communicate to various groups in your organization? For example to
executives, supervisors and employees? How open and transparent should paid decisions be to
employees? Let's say you manage a fast food restaurant that is staffed primarily by teenagers.
To appeal to new employees, you focus on three themes. Fun, family and flexibility. So you offer
a fun working environment where crews welcome new hires to their family that are extremely
flexible with work hours. In addition, you choose to match the competition on payand to offer all
legally required benefits. You also offer opportunities for training. And as employees increase
their skills, their pay rises accordingly.
In this example, you can see how compensation strategy aligns with and reinforces the
restaurant's approach to competing for business in the marketplace. Taken together, decisions
about these issues form a pattern that becomes your organization's compensation strategy.
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