- They provide a consistent and meaningful level of differentiation in pay for their top-performing employees;
- They make performance management a centerpiece of their reward efforts;
- They act on the fact that today's employees want very different kinds of things from their employers than prior generations;
- and they communicate more often and more openly about the pay and rewards available for strong individual contributions.
“One of the key findings of our study is that there are no shortcuts when it comes to getting the pay thing right," states Diane Potter, the consultant who undertook the study. "The great companies put programs in place, just like everyone else. But they support those programs with interrelated processes that transform seemingly random and disconnected activities into a meaningful and sustained vision of their corporate mission. This is as true in the United States as in the United Kingdom, Canada, France, Germany, Italy or Spain."
Going Beyond Pay and Traditional Benefits
The study found that today's workers have higher expectations of their workplace. In addition to their paychecks, they seek things like intellectual stimulation, the ability to master new skills, and the promise of advancement. Indeed, the U.S. respondents cited challenging work and work climate as the no. 2 and 3 reasons employees join their companies, right behind base pay. And they put base pay third in a list of reasons why employees stay with the company, behind work climate and challenging work. The Canadian respondents showed a similar pattern, although they didn't feel that base pay was ever the top reason that employees joined, stayed or left their organizations.
At the high-performing companies in both countries, the reasons for employment decisions differ considerably. Here, base pay is relatively less important - and benefits aren't in the equation at all.
At these companies, factors such as challenging work, quality of top management and stock options are important variables in employees' decisions to join, stay or leave a company.
In Europe, a similar pattern appears. While base pay remains a critical aspect of the deal, respondents across all of the countries also ranked bonuses and organizational reputation and culture as among the most effective elements in recruiting and retaining high caliber staff.
Using Pay to Reward Performance
One of the hard choices that distinguish high-performing companies from others in the survey is a willingness to provide higher salary increases and bonuses to top-performing individuals to encourage continued dedication. This is the first key thing that separates high-performing companies from those that don’t perform as well. On the other side of the equation, they are also willing to send clear messages to under-performing employees through such things as reduced pay, constructive feedback and mentoring.
"Companies that are not willing to risk losing their average or below-average performers by giving them lower raises are then constrained from giving their better performers higher increases," noted Potter. "As a result, these companies have less latitude to use salary to distinguish performance and build a higher-caliber workforce over time."
Highest Performers Get Much Bigger Raises
The study found that roughly half of the high-performing companies in the U.S. give their top employees increases of one-and-a-half to two times the average, while 13% differentiate significantly, giving their best people between two and three times or more the average. But even among this group, a full one-third provide little or no differentiation.
In Europe, where pay increase budgets have been about the same as the US, high performers receive greater pay differentiation. One-third of European companies give pay increases of at least two times the average to their best people, compared with only 13% who do so in the US. This is perhaps because the unemployment rate is higher in Europe, and employers are more willing to give lower raises to average and below-average employees.
Growing Use of Variable Pay
The survey found that variable pay - in the form of a range of incentive plans - is a growing phenomenon in both regions. In North America, for instance, fully 88% of the companies surveyed provide some kind of non-executive, non-sales incentive to some proportion of their workforce. In Europe, the number is even higher – 93% – although that includes executive plans.
For many companies, variable pay has become a competitive necessity. It may also be a companies' best route to distinguishing among high- and lower-performing employees and establishing a performance-oriented culture. Incentives offer a way to raise and lower total compensation each year in some proportion both to corporate or business unit results and individual performance. This, in turn, helps reinforce employees' sense of connection and contribution to the business and provides a tangible means of aligning goals.
Communication
Communication is at the heart of success in virtually every people management area and is the second key to success in high-performing companies. It is what transforms sterile programs into vital points of connection between employer and employee by informing, educating, exciting, reinforcing and creating bonds.
Overall, European companies are more likely to communicate about the pay process than are North American companies. But there is a need for great improvement in both regions. Once again, the top-performing companies help point the way. They are considerably more likely to do it right. Both in North America and Europe, the top performing companies:
- are significantly more likely to communicate employees' performance ratings and ways to maximize compensation;
- are more likely to feel employees have a reasonably good understanding of the key aspects of pay determination;
- are more quickly mastering new communication media, including the Web and e-mail;
- have been more likely to invest in rewards communications over the last few years;
- are about twice as likely to measure the success of their communication activities and somewhat more likely to communicate the value of total rewards.
The Distinguishing Factor
"While we don't know precisely how the high-performing group of companies in our survey became great, we do know they consistently do the hard things well," notes Potter. "They act in areas in which most companies give lip service. This not only includes paying for performance and linking individual goals to business goals, but also consistently providing performance feedback and communicating not always popular information about how the pay process works. These companies not only deliver the message that performance counts, they live the message.
"They consistently give their high-performing and high potential employees a better return on their individual performance than they give other employees, via bigger base pay increases, bigger variable pay awards, bigger stock option grants and a host of other rewards. And they follow through on the hard things not once, twice or a few times, but consistently," adds Gherson.
For more information about how to make your company better see the following articles:
