For those of us who work in compensation, the “peanut butter” approach to pay-for-performance may not be new. This approach consists of taking merit increase and variable pay budgets and spreading them thinly and evenly across the employee population. However, thin swipe of peanut butter may not make a very filling sandwich for the high performers who have been working through their lunches and missing dinners with their families. So how do we use limited compensation dollars to recognize the contributions of our top-performers, while also keeping the rest of the employee population happy?
As managers and organizations, do we step up and take a stand on how and why we made our compensation decisions? Do we truly reward those who excel? Or do we choose not to rock the boat by obviously differentiating and committing to pay-for-performance? No doubt there are pros and cons to either approach. Setting aside the unpleasantness of telling a perfectly competent employee that they make less than the “rock stars,” many managers are simply unable to articulate how the merit increase and compensation benchmarking process works. Or they’re not encouraged to do so by the organization.
In the IBM 2012 Global CEO Study, CEOs cited human capital as the single biggest contributor to sustained economic value. It’s also the largest expense for most organizations. Our researchalso shows employee engagement increases with a clear understanding of compensation and a direct link to performance.
With such a high investment and critical part in company success how are companies investing these dollars and communicating the rationale of their distribution? We asked practitioners in HR and compensation questions about their variable pay practices and pay-for-performance strategy. Not surprisingly there was a range of conceptions about what this means and how it’s executed.
REWARDING THE HIGH PERFORMERS
Less than 8 percent said that a separate budget exists for compensating those whom the company deemed “high performers”, most commonly through merit increases. Most organizations have a merit increase budget in the range of 3 percent. So, how is this used in a meaningful manner to differentiate and incent the 15 percent of workers highlighted as top-performers in organizations?
53 percent of companies said they target pay for top-performers above market rate for their positions, while the rest admitted to either paying at market or having no pay philosophy. This leaves almost half of companies compensating their best employees at what would be considered an average rate for all incumbents in their job role. So how are they differentiating?
RECOGNIZING THE HIGH PERFORMERS
The possible answers are many. Maybe they’re not differentiating and hoping for the best. Or maybe they’re trying to make up for potential compensation short falls with other things that surveys say are equally or more important than compensation such as career path, training and acknowledgement in non-monetary (i.e. job flexibility or a simple “job well-done”).
However, one startling fact revealed in our survey was that while 53 percent of organizations track high-performers, only 48 percent of organizations formally tell those individuals that they are tagged as such. Is this simply because we’re not good at communication? Or are we afraid our top-performers will start making demands or choose to leave?
VARIABLE COMPENSATION
Another option for differentiating pay-for-performance through variable compensation beyond merit increases. 59 percent said they use individual bonuses as a reward, and another 29 percent use long-term incentives to serve the dual purpose of reward and retention. 18 percent use spot awards to provide immediate and targeted rewards for a specific accomplishment. Another 7 percent said they award bonuses to teams for group efforts.
While organizations still report having reductions in force and unemployment rates remain high, HR and compensation practitioners are still concerned with succession planning and a scarcity of talent. Ensuring that employees feel recognized and fairly rewarded are important in both retaining top performers and creating a culture that attracts the right kind of candidates.
At Kenexa, we’ll continue to track and report on what the compensation community is doing to tackle these challenges. Feel free to share your thoughts on what is being done (or not done) in your organization.
By Deborah Nielsen, from: http://blog.kenexa.com/the-challenge-of-pay-for-performance-whats-the-real-value-infographic/