With the economy still down and unemployment rates up, compensation has had its share of recent bad press—particularly when there are some companies still shelling out high-dollar bonuses and other inflated pay packages to top execs. The reality is that many employees are struggling through this time to maintain some semblance of stability in their personal finances, so when they hear about compensation these days, they often sense a painful lack of equity in how money is distributed.

 If these are your employees grumbling, you cannot afford to disengage them right now. Earlier this month, in a special talent management feature, Forbes writers reminded us “a company is only as good as the people it keeps.” Deloitte also recently issued the last publication of the results of their survey series “Managing Talent in a Turbulent Economy” and identified guideposts for executives to consider when moving past the recession. Way up on the list is, of course, employee engagement. And one of the most critical means of engaging—and thereby retaining—your workers is by ensuring compensation is properly aligned to performance.

 It’s no secret that people are motivated by money. They are also motivated by non-monetary “perks,” such as flexible work schedules, reimbursable expenses like cell phones, and opportunities for paid training or tuition. But people are equally driven by fairness, and by the knowledge that they will be rewarded  for the quality of their work and the effort they expend. That’s why we’re seeing a growing trend toward “performance-based pay” strategies, where companies try to link compensation to an employee’s goals and objectives, as well as to the company’s overall success.

 Yet while we’re seeing this trend, we’re also dealing with lingering budget crunches.  A Hewitt survey of 640 companies found they planned to raise hourly wages only 2.5% this year. That’s the smallest raise since 1976. The same companies also said executive pay increases would drop from 3.8% to 2.2% in 2009. These decreases might strike some as an implication that it’s time to curtail compensation hikes altogether—but that’s not the case at all. In fact, now is precisely the time to focus on your compensation processes so you can get the most benefit from your budget.

Your employees want a piece of the pie, and—if they’ve earned it—you want to give it to them because it helps drive them to increased productivity and value for the company. But if you have ever tried to divide one cupcake to a group of toddlers, you know that the smaller the pie the more difficult it gets to split up.  Just because you have a much smaller pie to divide than in previous years doesn’t mean you don’t offer it to anyone, don’t get everyone the same tiny percentage and it definitely doesn’t mean you just hand it over to the C-level tier. What you do is make certain you divide it accurately and equitably across the entire organization.

 How do you know who gets what? In essence, you establish a direct link between performance appraisals and compensation processes. But you can take this further to ensure greater ease and advantage:

  • Automate compensation management and link to performance appraisals. Automation is key because it reduces time and effort, quickly pinpoints top performers, and helps guarantee you are using valid and relevant data.
  • Improve compensation alignment. When you are properly aligned, you pay employees at the right market rates based on accurate performance data.
  • Look past the wallet. Remember the other forms of compensation that motivate the workforce, including time off, paid perks, and career development.
  • Avoid errors. Both compensation and performance management are tricky endeavors, full of confidential data. Don’t rely on manual-entry spreadsheets to track this kind of information—they are notoriously easy to botch. Automated and integrated systems help reduce the need for data entry and eliminate human mistakes.

For more information on how your company stacks up when it comes to delivering performance-based pay, I’ve written an article that helps you score your efforts and take steps toward improvement.  Above all, remember that your employees are your greatest asset. If they’re worth keeping, they’re worth rewarding the right way.