Talent Management - September 2008 - (Page 29)

Aligning Compensation With Employee Performance Phil Casman According to the “TalentKeepers 2008 Employee Turnover Trends” survey, more than 80 percent of business executives consider employee retention a top priority. According to a Plateau “Pay-for-Performance” report, on average, employee salaries account for 70 percent of organizational expenses and often exceed 80 percent, tying effective retention and compensation strategies to business performance and ﬁnancial goals. Designing competitive compensation packages has emerged as a way for HR and compensation professionals to attract, retain and motivate top talent. As executives strive to increase shareholder value and corporate revenue while ensuring cost and expense containment, talent managers must compensate employees without disrupting the bottom line. According to the 2007 “WorldatWork Salary Budget Survey,” U.S. companies planned an overall 2008 salary budget increase of 3.9 percent across all employee categories, regions and industries. This seems like good news for employee salaries. A deeper look reveals increasing employee salaries across the board may not actually beneﬁt organizations as a whole. Without visibility into market competitiveness and compensation, many organizations risk over or underpaying talent, which can result in increased turnover and decreased productivity. To remain competitive, many organizations are taking a merit modeling approach to retain top performers. Often referred to as pay-for-performance, merit modeling seeks to reward employees based on their individual performance and contributions. The concept of awarding higher pay for higher performance isn’t new. Neither is the strategy of using pay incentives to align individual-employee performance with business objectives. Metrics indicate pay-for-performance programs deliver results. For example, the Watson Wyatt Human Capital Index shows the total return to shareholders in organizations that make substantial pay distinctions based on performance is 49 percentage points higher than in organizations that do not. With the promise of such compelling return on investment, it is easy to see why at least 80 percent of U.S. organizations report using some form of performance-based compensation, as documented in the Plateau report. Unfortunately, implementing a merit-based compensation program doesn’t ensure ROI of this scale. Anne C. Ruddy, president of WorldatWork, said successful compensation programs require HR professionals to utilize total rewards to attract employees. To do this, one must ﬁrst understand compensation planning in the context of holistic talent management. Through this lens, compensation planning becomes about far more than an employee’s salary. It’s aligning rewards with employee performance to drive and sustain measurable contributions to organizational success. Understanding the organization’s strategic business objectives is an essential component of making performance-based compensation work. By working with key organizational goals stakeholders and members of the learning, career development and successionplanning teams that touch the talent management life cycle, compensation professionals can better understand the speciﬁc knowledge, jobs and skill sets that play vital roles in the organization’s future. Compensation planning also should be aligned with employee performance management initiatives to match employee and organizational and to integrate the review process with the compensation planning process. For example, planning should include discussion of goal evaluation for so-called overachievers who meet stretch objectives. Don’t stop at deﬁning objectives; prioritize them so appropriate weight can be given to employee contributions that meet strategic objectives. Incorporating compensation planning into the total talent management life cycle creates the foundation for a pay-for-performance program that enables employees to understand expectations and what they will receive when they achieve performance goals. This also enables the HR team to create a predictable performance calendar with early-warning checkpoints to keep employees from falling behind and show them exactly how much time they have to bring their performance up to speed to earn their desired reward. Ultimately, by integrating compensation planning into an organization’s talent management strategy, pay-for-performance becomes a strategic asset. It motivates individual performance and aligns employee performance with the organization’s goals. Phil Casman is director of compensation and performance services at Plateau Systems. He can be reached at editor@ talentmgt.com. talent management magazine www.talentmgt.com 29 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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