Safeguard Your Compensation Investments

Safeguard Your Compensation Investments

by Jason Adwin & Jim Kochanski | Talent Management

 

Organizations should consider compensation expense to be an investment in talent, one that, much like any other investment, requires a return. While the return on compensation is more difficult to measure than the return on traditional capital investments, prioritized investments in talent produce better returns than homogeneous or entitlement approaches.

 

When compensation is mismanaged, it can demotivate employees and decrease the organization's return on compensation. The most prevalent forms of compensation mismanagement that demotivates employees include lack of pay differentiation, pay system secrecy, internal inconsistency or inequity, less than competitive pay levels and a sense of entitlement to pay increases or bonuses.

 

Progressive organizations leverage compensation to foster employee engagement and motivation. These companies regularly assess compensation expenses and pay administration practices, looking for ways to improve results.

 

The following approaches have a proven record of success in motivating the workforce and improving return on compensation:

 

1. Organizational goal alignment:

Goal setting across the organization should be aligned at corporate, divisional, functional and individual levels. The process begins in the executive suite and cascades down throughout the organization and laterally across units and functions. If goal setting is broken, it becomes difficult to align efforts across the business, measure results and differentiate rewards appropriately.

 

2. Performance management calibration:

Formal performance management calibration sessions, within and between functions, ensure consistent application of performance standards and ratings. Calibration guarantees the integrity of the data used to make reward decisions based on employees' contributions - pay for performance, for example. In the absence of calibrated performance data, managers' individual performance standards may lead to inequitable ratings and pay investments, which lowers motivation.

 

3. Pay system transparency:

According to Sibson Consulting's 2009 "Rewards of Work Study," employees who are satisfied with their understanding of the compensation process and believe decisions are fair are substantially more satisfied with their compensation outcomes. The implication is clear: Organizations that manage compensation in a "black box" face a headwind with regard to pay satisfaction. Those that communicate a pay philosophy and the rationale for pay decisions and place appropriate context around how they arrived at individual decisions are more likely to motivate employees with compensation.

 

4. High-performer pools:

Explicitly carving out dollars from salary increase budgets and incentive pools to reward high performers lead to more effective talent investments. Even with a modest salary budget, say 2.5 percent, if 0.5 percent is carved out for high performers, average performers get 2 percent, and if 25 percent of the population is high performers, they can get as much as 4.5 percent increases. The same concept holds true for funded bonus pools. When communicating reward decisions, allocations from the high-performer pools can be used as a tool to recognize top talent while managing broader workforce expectations.

 

5. Manager empowerment:

Organizations that hold managers accountable for pay decisions need to provide them with training and tools to do the job effectively. Too often managers are given only a pool of dollars and loose allocation guidelines that can be confusing. Providing managers with more sophisticated and nuanced information will help them effectively allocate salary and incentive pools. Additional information that improves rewards decision-making quality includes: external market competitive benchmarks; internal average salary benchmarks; time in role and role history; performance rating history, such as longer-term performance data; compensation history; depth of responsibility; role criticality and talent scarcity assessments. The best compensation investments are made when managers can leverage all of the appropriate pay, performance and business planning data available.

 

6. The compensation scorecard:

A compensation scorecard that tracks key metrics provides business intelligence with which to assess pay program effectiveness and improvement over time. By creating a compensation scorecard, the business makes a commitment to continually improve its pay programs.

 

For organizations looking to improve compensation as a driver of employee motivation, change does not occur overnight. For best results, businesses should slowly transition from legacy approaches to focus on execution. Too often there is a vision for the future and an aggressive desire to implement change swiftly with a heavy hand. When this occurs, program results often fail to match the rhetoric, further demotivating employees and challenging the organization's credibility.

 

 

[About the Authors: Jason Adwin is a vice president in the New York office of Sibson Consulting. Jim Kochanski is a senior vice president in the Raleigh, N.C., office of Sibson Consulting.]