Talent Management - September 2008 - (Page 28)

recruitment & retention assessment & evaluation compensation & beneﬁts performance management learning & development succession planning [compensation & beneﬁts] by Erik Berggren and Christopher Lozaga Doing Compensation Right: The Winning Spread Creating a pay-for-performance strategy requires that talent managers go beyond the standard peanut-butter approach to compensation. Spreading dollars around evenly does little to reward high performers and too much to encourage the continued behavior of low performers. C ompanies talk a lot about compensation planning and pay-for-performance, but even organizations that consider themselves progressive on compensation fall back on the old peanut-butter approach to pay: allowing managers to spread the budget for merit increases somewhat evenly to their people. It is conventional wisdom that peanut-butter pay just doesn’t work; yet, it still is a ubiquitous practice. If a company was to ﬁnd out its manufacturing process wasn’t producing the results required, chances are it would tackle the problem immediately. Organizations should tackle ﬂaws in their people processes with the same urgency. Is the Peanut-Butter Approach Really That Bad? When using the peanut-butter approach, typically the majority of people will get a 2-5 percent pay increase. According to Manpower Professional, a stafﬁng ﬁrm and collector of labor statistics, the average tenure for an employee is down to 3.6 years. The difference between 2 and 5 percent is almost meaningless given the short tenure of today’s worker. Therefore, how can companies expect this approach to motivate and retain their best people? When top performers get a 5 percent raise when they could demand a 10 percent higher salary at a new company, they leave for the better opportunity. Spreading pay around also means lower performers and average performers still might get a pay increase. This has two consequences. First, high performers feel they are getting a raw deal. They think, “Why put in extra effort when the weakest link on the team gets almost the same increases that I do?” In this scenario, reward is not commensurate with performance. Second, peanut-butter pay keeps company payrolls fat with low performers, who tend to stick around when they cannot pull their weight but still get a raise. Instead, managers should increase the spread difference between raises for low and high performers. Clearly the peanut-butter approach is bad, but is there any proof that increasing the spread is better? To help determine the answer, SuccessFactors Research re- 28 September 2008 talent management magazine www.talentmgt.com http://www.talentmgt.com

Table of Contents Feed for the Digital Edition of Talent Management - September 2008

Talent Management - September 2008 Editor's Letter Contents Human Performance: Stop Wasting Money on Training Leading Edge: No Whining, No Excuses Learning Connections: Do You Get It? The Untapped Resource Reinventing HR Doing Compensation Right: The Winning Spread Managing Performance in the Knowledge and Innovation Worker Age Stop-The-Clock Time Management Preparing for the Future in the Public Sector SAS: Connecting People, Process and Products Talent Transformation at Textron The Price of Finding the Right Gen Y Candidate Advertiser's Index Editorial Resources Full Potential: Do What You Love, Love What You Do

Talent Management - September 2008

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