Prioritizing Performance: How Might This Push Impact Pay Strategies?

Forty percent of HR professionals said performance management is at the top of their list of priorities for 2026, with engagement right behind it at 39%. That is according to a new State of People Strategy Report by Lattice, a human capital software company. It’s the first time in the report’s six-year history that engagement has not held the number one spot.

“Businesses, and HR teams as a result, demonstrated a shift toward back-to-business basics, with performance management leading the way,” said Sophie Hurcombe, Lattice’s vice president of people. “After years of disruption from the global pandemic, cultural shifts and rapid tech adoption, HR teams are reorienting toward what makes their companies succeed.”

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• How to Identify the Linkages Between Performance and Pay

The increased focus on performance management also reflects shifting employee priorities, said Tom McMullen, a senior client partner at consulting firm Korn Ferry.

“Employees, particularly newer entrants in the workforce, increasingly expect ongoing feedback and career development, pushing HR to evolve its systems and processes from annual reviews toward continuous performance conversations,” he said.

Lisa Stella, a partner and career practice leader at consulting firm Mercer, added the renewed focus indicates the process needs to evolve.

“Quite simply, performance management hasn’t lived up to its promise,” she said. “[Research shows] only 4% of leaders believe their approach delivers exceptional value — a figure that has barely shifted in a decade. Executives question results, managers are stretched thin by competing demands and employees can be disengaged as a result. Especially in today’s climate of efficiency and productivity, these broken traditional systems are in urgent need of a fundamental overhaul.”

How Performance Management and Engagement Connect

Even though performance management surpassed engagement in the new Lattice report, the fact that the two continue to be prioritized so consistently indicates they are inextricably linked.

“I see them as twin stars — interconnected forces that sustain each other and drive long-term business success,” said Hurcombe.

By regularly offering coaching and feedback and clearly communicating expectations, McMullen said organizations increase the likelihood that their workers understand how efforts contribute to business success, leading to higher engagement.

“When leaders and HR invest in both areas, the result is a flywheel of success, where strong performance management practices foster engagement, and engaged employees help sustain a culture of accountability and growth,” he said.

Stella noted a shift in perspective from performance management to performance enablement, where organizations offer growth-focused conversations rather than simply checking a performance review box.

Kristy McClellan, the director of work and rewards at consulting firm WTW, said effective performance management helps employees truly understand how their work propels the business forward — a key driver of engagement.

“Good performance management processes ensure that individual goals are cascaded from strategic business objectives; this creates a direct line of sight from an employee’s daily activities to the company’s long-term goals,” she said. “Employees are more likely to feel accountable and motivated when they know their work matters — and that their progress is being supported and recognized.”

Where DEIB Factors In

Diversity, equity, inclusion and belonging (DEIB) initiatives (also known as the push toward equitable and diverse workplaces) have consistently moved down Lattice’s report, dropping from a leading priority for 44% of HR leaders in the report’s first year to 16% this year. It’s an almost perfectly inverse trajectory to the rise of performance management.

McMullen noted that while HR teams may be shifting internally to focus on priorities that deliver swift and measurable impacts, he would not describe the two goals’ trajectories as a “causal inverse relationship.” Rather, he said, “These two focus areas should ideally be seen as integrated rather than seen as competing.”

Hayley Bakker, the head of customer journey and digital enablement at total compensation software company beqom, added that decreased stated focus on DEIB reflects the greater integration of diversity and equity efforts in all aspects of HR, as opposed to positioning the goal as a standalone priority with its own budget.

“When a company is running better performance management or better compensation processes, it’s actually embedding equity and inclusion into the processes themselves,” she said. “If you run a more standardized, more objective, straight process for performance management as a system, you’re essentially making it more inclusive and equal.”

According to Lattice’s research, the highest-performing HR teams are five times more likely to prioritize diversity- and equity-focused initiatives.

“DEIB isn’t separate from performance; it’s a catalyst for it,” Hurcombe said. “It’s critical that we continue to uplift diverse perspectives. When employees feel seen and valued, performance and engagement follow.”

Establishing Effective Performance Management

To take a fresh look at aligning performance and pay, Mercer’s Stella advised organizations to outline what great performance means to the business using data that correlates with outcomes. With that determined and applied, the organization and its HR and total rewards (TR) professionals can decide how they will pay for that performance across various roles.

“Companies should consider all the options in the toolkit — base pay, short- and long-term incentives, recognition awards, career progression, development programs and opportunities — and align on the relationship of each one to performance,” she said.

By using technology-backed, consistent processes to simplify the performance management process, HR/TR pros can unlock capacity to focus on coaching, feedback, talent development and aligning work with business priorities, WTW’s McClellan said.

When tying performance to pay, employees should be invited to the table to truly make it work.

“Reframing performance management as a collaborative process significantly improves its effectiveness,” McClellan said. “When employees are active participants, they’re more likely to be engaged, motivated and aligned.”

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Compensation
• Employee Recognition
• Equitable and Diverse Workplaces
• Workforce Engagement