DALLAS—Rewards leaders from McDonald’s, Home Depot and Kraft Foods shared what their companies are doing to differentiate and reward performance during a panel discussion at the 2014 WorldatWork Total Rewards Conference, held here May 19-21. The discussion was moderated by Hay Group, a pay consultancy.
McDonald’s: Driving Differentiation
Lisa Emerson, vice president for global total compensation at McDonald’s Corp., explained the hamburger giant’s shift toward “a culture of accountability that truly rewards” employee achievement.
Over the past decade McDonald’s has redesigned its performance management system, adopting distribution guidelines of 20 percent (top performers), 70 percent (midrange), and 10 percent (under performers), she explained. “Up to that point, about 80 percent of our population was consistently rated in the top two tiers. When you have 80 percent of your population that are ‘superstars,’ rewards become mediocre because everyone’s great so you just spread the peanut butter.”
As it modified its performance appraisals, McDonald’s also redesigned its compensation programs to force through more differentiation. “When you have an incentive design where bonuses are awarded based 70 percent on overall business results and 30 percent on individual results, the difference resulting from individual performance is pretty small because in the main everybody is getting the same. So we decided to start with someone’s target award and multiply that by overall business performance, so individual performance leverages the total reward. And that helps us drive greater differentiation in actual dollar awards.”
Every year before and after McDonald’s annual reward cycle, “we sit down with business leaders and take them through a scorecard for their particular area,” Emerson said. The message from the top down, enunciated at strategy meetings and then emphasized in calibration sessions, is that recommended rewards must reflect what the company is trying to accomplish. “Rewarding for performance has become part of the dialogue at McDonald’s,” she noted.
To further drive that differentiation, McDonald’s is looking at separating the timing of its stock grants from its annual salary and bonus cycle, so that managers think about the stock program as a way to recognize potential and encourage retention, rather than as reflection of the past year’s performance.
Home Depot: Awarding Performance and Potential
“Because we have a highly variable pay program, both our store operators and merchants [i.e., store employees] have a lot of pay at risk,” said Scott Smith, vice present for compensation at The Home Depot. The company has a 70/30 incentive pay split, where 70 percent is based on financial performance and 30 percent is individual. The 70 percent is driven by financial metrics: “Our store operators earn their bonuses based solely on the performance of their store, and our merchants earn their bonuses solely on the basis of their product categories [sales],” Smith explained. While 70 percent is driven by “what they accomplished,” the other 30 percent is based on “how they accomplished it” and involves operational metrics such as leadership and team-building. Transparency is important here, so that everyone understands what the merit budget is and how incentives are calculated.
“A big change that we’ve made over the past several years applies to the discretionary component of the bonus,” Smith said. “We wanted our leaders to think about differentiating in a more thoughtful way. It’s not just about performance, it’s also about developing potential talent and about retention. The onus is on managers to make those decisions, and also to justify to their people why they’re making those decisions.”
As part of their training, Home Depot managers are encouraged to apply incentives with an appropriate time frame. “If someone had a great year but doesn’t have a ‘long runway’ ahead of them, reward them with short-term rather than long-term incentives,” Smith said.
Kraft Foods: A Necessary Journey
“Our CEO’s mantra is to recruit, train, develop and reward the best talent,” said Sanjay Patel, vice president for compensation and HR operations at Kraft Foods Group. “We’ve been on a very uncomfortable but necessary journey managing differentiation and rewarding performance. We have a philosophy of managing performance aggressively.”
Kraft moved from a five-level to a three-level rating system for performance—with a 20/70/10 differentiation model—to place stronger emphasis on rewarding its best employees. “We go to great strides to differentiate that top 20 percent of high performers” who receive the best pay and are given the best access to training, Patel said.
The top 20 percent are awarded 50 percent to 80 percent higher bonuses than average performers. Similarly, “with our stock and long-term incentives, the difference for our highest performers is in the neighborhood of 30 to 50 percent.”
Patel called off-cycle (not year-end) recognition rewards “powerful,” and said Kraft now bestows cash recognition rewards throughout the year to some 25 percent of its employees.
Finally, Kraft is focusing on providing financial analytics to its managers, “showing them what their practices are and how they can potentially be better,” Patel said.
Observed Tom McMullen, North American rewards leaders at Hay Group, “A key theme of what we’re hearing is that there needs to be increased focus on building up the capability of our people managers and giving them adequate tools in order to differentiate performance and rewards.”
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