A compensation carve-out refers to the policy of keeping away a portion of the increase in compensation budget for the highest performing employees.
This carve-out approach impacts various points in the pay determination process- budgeting, communicating, inculcating expectations, evaluating performance and distributing rewards.
This method is used as a pay for performance measure by many organizations to induce performance amongst its employees.
A modest carve out by a high number of performers can lead to significant rewards for the performers.
During budgeting, a portion of the entire bonus pool is allocated for the high performing employees to avoid any future conflicts.
Example: Out of 100% bonus, 30% bonus could be allocated just for the high performance employees.
During communication, however, the carve-out bonus is not announced. Generally, average bonus level is announced so that expectations are not too high and the high performers feel recognised upon receipt of higher bonus.
This is followed by performance rating and then distributing rewards as apportioned as per the performance ratings.