Talent Management - September 2008 - (Page 32)

recruitment & retention assessment & evaluation compensation & beneﬁts performance management learning & development succession planning Dedicated performance management is the foundation of a successful pay-for-performance system, and compensation planning the right way requires a bottom-up approach. Typically, companies allocate pools of money for raises and bonuses to departments based on head count. This is terrible for the company and its people. Consider two departments, A and B, that get $300,000 each to distribute among 150 workers after performance reviews. If team A has many high performers and team B has only a few, the pay-for-performance The right way to budget is to do performance reviews ﬁrst, then build from the bottom up. Measure the performance of individuals ﬁrst, then allocate the budget between groups based on their relative performance, not on head count. This will empower managers to avoid the peanut-butter approach, as more money will end up allocated to the higher performing groups. This can’t be done unless a fair and transparent system of measurement is put into place ﬁrst. Managers must be empowered to pay their best performers more. Fixing how the budget for pay increases is allocated is integral to putting this power in managers’ hands. Once in place, high performers can be rewarded consistently across the entire organization, showing low performers there are concrete consequences for their actions, or lack thereof. Transparency matters to the individual too. Pay-for-performance requires disciplined and deﬁned actions in response to people performance, good or bad. After all, that is what pay-for-performance is all about: creating a transparent environment in which actions have clear consequences or rewards. People must understand how their positive and negative actions will be measured and responded to, particularly in the case of pay. Clearly deﬁned expectations for individuals are the strongest weapon a manager has to combat those most likely to complain about a pay-for-performance system: the slackers. When expectations and measures are made clear up-front, low performers won’t be able to blame their low scores on an unfair process. Measure the performance of individuals ﬁrst, then allocate the budget between groups based on their relative performance, not on head count. system likely will fail. Because team A has many high performers but the same budget at team B, the high performers on team A will be paid less than the high performers on team B. In fact, in some extreme cases, a high performer on team A will get less than a low performer on team B, all because they were given the same budget based on head count. Team B should get less than team A to distribute amongst its workers. Now imagine this effect in a large organization, where the payout pools are ﬁrst divided between the large business units, then divided between divisions, then divided between departments. If the payout pools are allocated by head count, the distortion will be multiplied each time the money is divided up between groups. Mathematically, this will normalize raises and bonuses. For instance, the spread between high performers and low performers will not be as great as it should be. Second, this pay methodology actually discourages high performance. Rock stars will see their extra effort is not reﬂected in their compensation, while low performers will see they are being rewarded for low engagement levels, pushing both groups toward lower performance. Today, people are the greatest differentiator between companies as organizations compete for global talent. Holding on to the best performers while driving attrition of low performers is more important than ever. Compensation strategy must allow managers the ﬂexibility to allocate rewards where they are needed most. Perhaps most importantly, this strategy should increase the spread of payouts between low and high performers. Not only can this increase company performance, research shows it also can prevent top performers from jumping ship and encourage low performers to look elsewhere. Winning the talent war isn’t just about recruiting and retaining employees; it also is about tapping the unused potential of talent already within an organization. Moving away from the peanut-butter approach toward a winning spread will help companies tap into that potential and get the best from the best. Put a transparent and consistent review system in place, and use it to drive performance from the bottom up. Erik Berggren is a director with SuccessFactors global research group, and Christopher Lozaga is a research analyst. They can be reached at editor@talentmgt.com. 32 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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