Talent Management - September 2008 - (Page 31)

Companies that reward their higher performers more perform better overall. cently conducted a study of 157 enterprise and mid-market companies to see if there was a relationship between peanut butter and performance and to see how compensation management makes a difference in their organizations. The study found compensation management does matter. In the test sample, the 41 companies using compensation management experienced better revenue growth (33.8 percent more) and net income growth (8.5 percent more) than those that don’t. Compensation management had the clear value proposition, but research also delved into those companies to ﬁnd out what makes them the best of the best. The hypothesis was simple. Companies with the biggest difference would do better. To test this, the spread in merit increases for each organization was compared to each one’s ﬁnancial performance. Speciﬁcally, research examined the percent increase relative to employees’ base salaries across the 41 companies and then calculated the standard deviation in the percent increase in pay to show the spread for each company — and the higher the standard deviation, the bigger the difference evident in the average annual raise. Performance-based Compensation Works Better The results showed companies with a bigger pay spread between high and low performers outperformed companies with a smaller spread. Furthermore, the three companies with the largest spread beat the other companies soundly in net income growth, and the data shows a 0.4 correlation between the standard deviation in pay and the net income growth of the sample. Companies that reward their higher performers more perform better overall. If organizations still are using the peanut-butter approach or even rewarding employees on a linear scale, they could be leaving some potential untapped. While it is challenging to design an effective compensation model, getting there is probably easier than most people think. Empowering managers to increase the spread relies on two key factors: global measurement — a company must have a consistent way to measure the performance of its people — and transparency — people who allocate budgets must be able to see how the distribution of dollars relates to distribution of performance across the organization. It may not be possible to transform an organization overnight, but to drive the transition companies can start small. They should focus on one department or geography to prove increasing the spread works. The argument likely will make itself. There is a great deal of synergy between performance management and compensation management. The difﬁculty in creating a consistent process to measure employee performance scales with size, geography, scope, job levels and many other factors. A real pay-for-performance system looks across an entire organization, something that is impossible to do if every manager is using a different system. How can a manager look across 300 Excel ﬁles, adjusting the rating scales and metrics to be comparable, in an efﬁcient manner? It can’t be done, at least not in a way that makes effective use of time and resources. http://www.spectrumhr.com http://www.spectrumhr.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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