Tie Pay to Value, Not Market Data, Experts Advise

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"Organizations that pay for performance are more likely to attract those interested in performing," said Jay Schuster, a partner at consultancy Schuster-Zingheim & Associates, speaking at the 2013 WorldatWork Total Rewards conference, held April 29-May 1.

The rewards package is "a powerful communications tool that defines the kinds of people who will want to join the organization,” he explained. “You can't change the corporate culture without changing rewards."

CEOs are looking for their total-rewards programs to support the achievement of business goals, Schuster noted, citing his firm's research with 21 midsize U.S. companies across a range of industries, using structured phone interviews with CEOs and senior line executives.

"HR's priority of reflecting competitive practice and 'best' practice in their rewards programs does not make it onto the CEOs' list of priorities," he said. HR professionals "keep buying solutions that import the value systems of someone else." As a result, "we price jobs based on how some other people have valued their positions," instead of customizing compensation "to reward the people who produce the most value for our organizations."

What CEOs Want

CEOs told Schuster that the following rewards practices don't work:

  • Frequently changing the program and using numerous purchased solutions, which create confusion.
  • Change for change’s sake by each new HR person.

Improvements CEOs would like to see include:

  • Using business metrics to measure how employees influence return on investment (ROI).
  • Tying incentives to those outcomes and differentiating pay based on employees' performance.
  • Helping top performers catch up in compensation.
  • At public companies, using stock grants to give employees a "piece of the action" mentality, varying grants based on individuals' value to the company.

The metrics used to value performance should always be business-driven, Schuster said. For instance, a retailer may determine ROI based on measures such as sales per square feet, best customer service, net income and managing expansion of new stores. For other organizations, measuring performance may be more of a judgment call.

The Value Proposition

"We need to provide market data [on compensation], but it can't be the be-all and end-all," concurred Patricia Zingheim, also a partner at the firm. "CEOs are telling us there has to be a compelling value proposition underlying the rewards program."

When evaluating pay programs, she advised, ask key questions including "Does it reward people who add to business success?" "Does it make it worthwhile for high performers to contribute?" "Does it encourage the right people with essential capabilities to stay?"

"Don't waste money rewarding the wrong people," Zingheim added. Instead, "fast-track the top 40 percent for base pay and incentive growth. They typically add five times the value to the business as the other 60 percent. Annually re-evaluate who the best performers are."

Use individual and team rewards when appropriate, she said. "Where teams are effective, reward the team. Where they aren't, don't."

There may be resistance when companies shift toward higher pay for performance, Zingheim noted, but "It's in everyone's interest to have a successful organization that's moving forward—not least the employees who benefit from career advancement in a growing business."

Concurring Viewpoints

"HR does too little in terms of reward ROI assessment," said Dow Scott, professor of human resources at Loyola University Chicago, speaking at a related conference presentation. "One of the issues top executives say they are most concerned with is aligning human capital and reward systems to business strategy," he noted. Yet a 2013 survey of WorldatWork members, mainly North American rewards professionals, showed that 74 percent of organizations said their current rewards focus is on market pricing.

"Best practices are usually more likely to be common practices," added Tom McMullen, North American reward leader at pay consultancy Hay Group, who co-presented with Scott. A majority of organizations don't evaluate the ROI on their rewards investment, he pointed out. "Instead, they are pursuing a me-too strategy based on benchmarking pay to their competitors."

The benchmarking approach is being challenged, however. As more organizations tie their scarce compensation dollars to business returns that improve competitive effectiveness, "organizations are seeing a greater need to differentiate pay," McMullen noted.

Scott said incentives payments to sales representatives have traditionally been given out in full view of others, which is intended to motivate the reps’ colleagues to sell harder. He suggested it might be time to consider doing the same with nonsales incentive compensation.

Stephen Miller, CEBS, is an online editor/manager for SHRM. To read the original article on shrm.org, please click here.