August 16, 2011

Be Bold and Reward Only What You Want

It’s challenging to design an incentive program that actually rewards top performers, and only top performers. But, it is more expensive, in the long run, to leave them under-rewarded. If you don’t believe that is true, keep reading. If you are afraid you don’t have the time and resources to reward their success, keep reading, too. In business, you will pay when you reward them or pay when you lose them. You decide.

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It’s not so much about the money, it’s more symbolic than that. It’s about top performers knowing they are noticed, recognized and appreciated by the company, way beyond the attention, money and recognition that low performers receive. It has to be a significant difference in pay and that requires tough decisions by company leaders and management.

Rewards Are Costly

I understand that paying base salaries plus incentives strains your budget. It does for every company.

For example, at the beginning of 2011, Google made an announcement that they were giving every employee a 10 percent raise and a $1,000 cash bonus. The financial analysts on Wall Street went nuts. Why? Because even for a multi-billion dollar company like Google, that’s a big spend.

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Response to Google’s Decision

After the announcement, everyone expected all of Google’s employees to be really excited. Comments on stories about the move had people saying, “Wow, I wish my company would do that.” But, there were other observers who started saying it was “unfair.” Why? Because people performing poorly were getting the same increase as those performing well.

Even something as generous as that choice by Google is going to be attacked on some level. Especially top performers don’t like the idea. They think, “That guy is going to get as much as me? My contributions are not rewarded in a way that matches what I add to the organization.”

Crafting Rewards Requires Hard Work

It’s hard to pay for performance. It’s really hard. It’s much easier to give across-the-board increases. It’s easier to give increases that are only differentiated by 1-2 percent – much easier.

But, the problem is that over time it will have a devastating effect. You get what you measure and reward. If you measure and reward mediocre performance, that is what you get. If you measure and reward longevity (how long you have been with the company), that is what you will get. So, you have got to make sure that whatever you are designing in terms of who gets paid more links back to what it is you want more of.

I am going to make a strong case that that should be performance.

Take On the Challenge

Healthy competition is better than a low-performance harmony. The low-performance harmony is, once again, easy. But, that does not mean that that is better for your organization.

I wouldn’t mind someone coming to me and saying, “What do you mean I got that kind of increase? I heard that someone got this other kind of increase.” That opens up a wonderful dialogue with that employee about where they are falling short, what they can do to improve their performance and what success looks like.

We shouldn’t be afraid of those challenges and those conversations, yet many organizations are. Remember that encouraging competition, creating a challenge and formalizing that you are an organization that pays for performance breeds a high-performing culture and it drives out an entitlement mentality when it comes to employees and their pay.

Make Tough Decisions to Stay on Budget

Most organizations have significant budget restrictions. If we all had unlimited budgets and could do whatever we wanted, I would say, “Go ahead and give cost-of-living increases and then build incentives on top of that.” But, the reality is that most organizations don’t.

Going back to the Google example, here is one of the most profitable and successful companies in this country and analysts freaked out when they did an across-the-board increase because that’s how much it affects their bottom line. Your company, certainly, has the same restrictions. You don’t have unlimited budgets. So, when you have fewer dollars, make them more impactful.

Make the Incentive Worthwhile

A SHRM whitepaper written on incentive pay said, “to get the attention of your better-performing staff members, you must offer a variable pay rate of seven to eight percent, in addition to their base pay.”

Most very company varies merit increases according to performance but if the difference between low performance and high performance is a rate of four percent, I think is that is not significant enough. When you start getting into seven and eight percent, that starts capturing people’s attention. That starts driving people’s behavior.

It’s tempting to avoid taking this approach because managers forces them to decide who deserves those increases. But, if you want to truly reward performance and stay on budget, you must embrace those decisions, not avoid them. Be brave and reward only what you want.

Regards,

Stacey Carroll, CCP, SPHR
Director of Professional Services and Education
PayScale, Inc.

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