Case study: Philip Morris International

Chinmay Sharma, head of human resources for the Hong Kong, Macau and Asia HQ at Philip Morris International, talks about the importance of structuring effective metrics to pay-for-performance successfully, and how to decide which type of cash rewards to award to employees.

Faced with tight corporate budgets and flimsy economic climates, employers are increasingly turning to bonuses and performance-based pay as a strategy for retaining top-performing workers.

Importance of bonuses and pay rises

Human resource experts say this approach to compensation is attractive because it is flexible and allows companies to reward good work without creating additional fixed costs.

“In Philip Morris International, bonuses and pay rises are strongly linked to performance and pay-at-risk (bonus/incentives) is linked to the level of the job,” says Chinmay Sharma, head of human resources for the Hong Kong, Macau and Asia HQ.

“It works well for us in rewarding our people in a fair and consistent manner while helping the company achieve business results.

“Both bonuses and pay rises are purely linked to performance and, hence, I do not see one as more important than the other.”

He adds, however, that in the long-term pay rises play a greater role in retaining employees compared with bonuses.

“The decision regarding how much salary we put at risk (bonus) should be linked to the level of the job (higher at senior levels due to the impact on the overall company performance),” Sharma says.

Additionally, HR leaders should also look at the nature of the job role in question, and how important it is to the company’s business model.

Importance of developing a good performance management system

But pay for performance is only as good as the metrics used to determine it – and therefore, the effectiveness of bonuses and pay rises

According to Mercer’s 2013 Global Performance Management Survey, however, only 3% of companies worldwide believe their overall performance management systems provide exceptional value.

The study, which surveyed performance management leaders at more than 1,050 organisations from 53 countries, also found many aspects of these organisations’ approach to performance management were “ineffective”.

In such a case, how can organisations be trusted to have effective pay for performance measures in place?

“Rewarding and retaining high-performers is one of the most critical responsibilities of HR leaders. A fair and consistent performance management process is the key enabler towards that,” Sharma says.

“A robust performance management process and a supporting culture towards the same can address many people issues.”

To allow that, he says, performance should always get the priority. However, the criteria for assessing performance should be robust.

“Ideally, pay rises should have a longer term (three to four years) horizon with a performance track record, years spent at a job level and a future career plan of the employee being the key decision-making criteria,” he says.

However, bonus/incentives should be purely linked to performance in the short-term.

Adopting a holistic approach

While the importance of pay can’t be overstated, Sharma admits it remains true that not everyone is motivated by pay. Some employees are motivated by praise, recognition or the opportunity for better assignments. Employers will have to offer more than money to get the most from these folks.

“While cash is still the most important element of C&B, the importance attached to it can differ based on career and life stage,” he says.

A fresh graduate will have different needs versus someone who is in a management position with a family to support. With the workforce getting more diverse, no single reward element will be a value driver in itself. C&B elements around health and wellness, personal development, support for family, etc, are increasingly gaining ground.