rewarding your top talent - talent management handbook chapter - february 2011

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Rewarding your top talent 1

Rewarding top talent is, obviously, a critical element of every organization’s talent management and business strategy. This fact has been made even more apparent in the recent past where the business recession has put a lot of stress on payrolls, salary increases, and other human resources expense and management concerns, such as retention.

While professional sports is not always the best place to look for compensation comparability and logic, given the “entertainment” nature of that business, all one needs to do to understand the importance of rewarding top performers and star power is to look how sports franchises actively

manage their staffi ng and payroll in getting ready for each new season. You can argue with their generally perceived excesses but not with the concept of rewarding top talent—they do it to enhance their ability to outpace and one-up the competition, which is good business under any circumstances.

However, you cannot isolate the idea of rewarding your top talent from how you reward all others. There needs to be a “system,” an overarching philosophy as well as practices that articulate the how, what, and why of your organization’s approach to rewards across the board. Rewards should be considered in the broadest terms and should include

This chapter is reprinted from The Talent Management Handbook (second edition) – creating a sustainable competitive advantage by selecting, developing and promoting the best people. >>

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2 Rewarding your top talent

elements that can be assigned a monetary value as well as the intangible rewards that are provided, as both are key to retention of top talent. Many might argue, and rightfully so, that the intangible rewards actually carry more weight in talent retention. So, we’ll start there, with an overview of rewards.

Total Rewards When most people think of “compensation,” the fi rst thing that comes to mind is what they see each payroll period: their net paycheck. Beyond that, some may also include any variable-pay opportunity (i.e., incentive or bonus) they may earn. While these amounts are real and tangible, the concept of reward is much more far-reaching.

“Reward” signifi es different things to different people, and its meaning depends on the context in which it’s used. Consider, for instance, those “Reward” posters on old TV Westerns. In the context of business, however, while things can often feel like the Wild West, rewards are traditionally interpreted as an employee’s pay (base salary, incentives, or bonuses) and the value of benefi t plans. Yet the concept of “total rewards” goes beyond these tangible elements. Total rewards

also includes intangible elements that are harder to see and touch but are real enough to affect an employee’s level of engagement and satisfaction while contributing to attraction and retention of key staff. A working defi nition of rewards is “anything that the organization provides that is of perceived value to employees.” So, in the spirit of rewarding your top talent, you have to be aware of and pull on all the available levers to maximize your offering and the messages you want to send.

Figure 27-1 highlights these distinctions. Base salary forms the foundation for all other tangible reward elements. Beyond that, there can be bonuses, long- and short term incentives, and, of course, a variety of considerations that contribute to the benefi ts plan. The message here is to move beyond the obvious, yet important, elements of pay, benefi ts, and perquisites to explore all the intangible aspects of an employee’s work experience that compose an organization’s total rewards offerings. When properly orchestrated, these offerings can be synergistic and a true competitive advantage that cannot be easily duplicated. As Herb Kelleher, founder of Southwest Airlines, has said, “It’s the intangibles that are the hardest things for a competitor to imitate. You can get airplanes, you can

COMMON EXAMPLES REWARD ELEMENTS DEFINITION

• Career development• Work-life balance• Safety and security

Non-financial rewards

Totalreward

• Social security Statutory benefits Totalremuneration plus

• Retirement provision• Death / disability / medical• Cars• Benefit allowances / loans

Non-statutory benefits

Totalremuneration

• Executive share options• Restricted / performance share• Long term cash schemes

LTITotaldirect compensation

• Sales commission• Annual bonus• Annual incentive

Annual variable Totalcash

• Basic salary• Fixed payments• Near cash allowances

Guaranteed cash

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Figure 27-1 Total Reward Elements




get ticket counter space, and you can get baggage conveyors. But the spirit of Southwest is the most diffi cult thing to emulate. If we ever do lose that, we will have lost our most valuable competitive asset” (Jensen, McMullen, and Stark 2007).

You cannot effectively consider or make good on how best to reward your top performers if you’re only looking at the most obvious pieces of the puzzle. It will take more work and creativity, and it will demand more of the organization, its managers, and HR leaders. But isn’t that comparable to what you expect of your top performers?

Return on Investment It is often said that people are an organization’s greatest asset, but they are also one of its greatest expenses. Remuneration tends to be one of the worst-managed parts of an organization’s cost structure. Yet with 10 to 70 percent of total costs wrapped up in it, reward cannot be ignored, particularly in challenging economic times.

Most organizations wouldn’t purchase a $10,000 copier without calculating its ROI, but many will spend hundreds of millions of dollars on their compensation programs without considering an ROI analysis. In recent research conducted by Hay Group, WorldatWork, and Loyola University Chicago, we found that approximately 62 percent of employers in a general industry survey reported that they don’t even attempt to measure ROI of the compensation programs. Of the 38 percent that do, most do so informally by talking with managers and employees about their perceptions of program effectiveness. The balance of organizations that measure ROI (18 percent) use formal measures such as employee opinion surveys and comparisons of the investments in people and their productivity.

You have probably heard the saying, “If you don’t know where you are going, any road will get you there.” That’s especially true when it comes to reward programs. Rewards, whether tangible or intangible, are tools for increasing organizational effectiveness. The employment relationship involves an exchange of organizational “carrots” for employee contributions. A well-designed reward program focuses those offers to attract and retain the talent the organization requires and incent

employees to act in ways consistent with business objectives. Accordingly, a total reward approach should be both about organizational needs and employee wants.

Figure 27-2 highlights Hay Group’s Total Reward Framework. As the graphic illustrates, a well-designed reward program needs to focus fi rst on developing a total reward strategy that is aligned with and designed to support the organization’s business strategy and people strategy. Equally important, reward programs need to maximize employee engagement levels in the organization. In addition, changes to reward programs must be carefully managed and communicated during implementation to ensure adequate understanding of rationales and implications behind decisions.

When considering the motivational impact of reward programs, the manager must note that one size is unlikely to fi t all business and employee groups. What motivates a late-career manager, for example, may not be the same as what motivates a newly hired entry-level employee. What motivates employees in a start-up entrepreneurial technology organization may fail in a highly regulated public services organization. Critical to the ROI of total reward programs is tailoring those reward offerings to the unique interests of particular employees or employee groups.

Figure 27-2 Hay Group Total Reward FrameworkTM




Promoting High Levels of Employee Engagement Retaining top talent is a key concern in both good times and bad, given the importance of these employees to a company’s success and competitive edge. Many organizations turn primarily to compensation for the answer. But dissatisfaction with pay is generally not what leads employees to begin exploring job alternatives, although the prospect of better compensation elsewhere may solidify the decision to leave. To keep and motivate their talent, organizations should focus on increasing employee engagement and developing systems that provide better support for employees’ success.

Engagement refers to the commitment employees feel toward the organization (e.g., their willingness to recommend it to friends and family, their pride in working for it, and their intentions to remain a part of it). But it’s also about employees’ discretionary effort—their willingness to go the extra mile for the organization. As organizations need to do more with less and strive for greater effi ciency, tapping into the discretionary effort of employees is all the more essential. And in the rapidly changing environment where roles and responsibilities are continually evolving, organizations must count on employees to act on their own in ways consistent with organizational cultures, objectives, and values.

We have conducted extensive research on the characteristics of work environments that promote high levels of engagement among employees. While we see some variability from industry to industry and organization to organization, common themes of high-engagement work environments emerge.

Clear and promising direction. Ensuring that the practical implications of organizational directions are clear to employees is essential to effective execution. But connecting employees with the big picture is equally important from a motivational perspective. In their work, most employees are looking for an opportunity to contribute to something larger than themselves, a chance to make a difference. Appealing to this sense of purpose is the essence of transformational leadership and critical to promoting high levels of employee engagement.

Confi dence in leaders. If faith in the direction of the organization is critical for fostering high levels of employee engagement, so too is ensuring that employees have confi dence that there are strong hands on the wheel at senior levels that are capable of executing strategic objectives. Today’s employees recognize that their prospects for continued employment, career development, and advancement are dependent on their companies’ health and stability. They cannot be expected to bind their futures to those of their employers unless they are confi dent that their companies are well managed and well positioned for success.

Quality and customer focus. Demonstrating to employees that the organization is focused on its customers, delivers high-quality products and services, and is innovative in developing new offerings is critical to building employee confi dence in the direction and future market position of the organization. For any employees in customer-facing roles, there is no more important dissatisfi er than the sense that the organization doesn’t “get it” when it comes to what customers require.

Respect and recognition. Employee engagement involves striking a new employment bargain with employees. Organizations invest in creating the conditions that make work more meaningful and rewarding for employees. And employees, in return, pour discretionary effort into their work and deliver superior performance. Employees cannot be expected to take a personal interest in organizational objectives unless organizations make a reciprocal commitment to employees as more than factors of production. Instead, it is critical that organizations demonstrate a basic respect for employees as individuals.

Development opportunities. Employees are increasingly aware that they are responsible for managing their own careers and that their futures depend on continuous elevation of their skills. If employees are not expanding their capabilities, they risk compromising their employability—within their current organizations or elsewhere. Accordingly, opportunities for growth and development are among the most consistent predictors of employee engagement.




Pay and benefi ts. With today’s organizations operating increasingly lean, employees are being asked to do more with less. In high-workload environments, employees are generally sensitized to compensation issues. Acutely aware of all that they are contributing, employees are inclined to pressure their organizations to balance rewards and contributions. In this context, it is more important than ever that organizations ensure compensation systems are perceived to recognize employee efforts adequately. Clarifying the equity of pay systems both internally and externally is critical to building employees’ confi dence that they are receiving an appropriate return on their investments in the organization.

Where the Rubber Meets the Road Though we’ve called out the importance of total rewards as the right means to rewarding your top talent, there’s an old adage that “cash is king.” Employees may not remember all of the objectives in their organization’s incentive program or be able to recite their employer’s core values. But they do know their base salaries and likely their variable-pay opportunities, they understand what relative fairness and competitiveness are, and they probably have strong opinions about why their last raises weren’t big enough.

Base pay is the foundation of any compensation program and the most visible component to the vast majority of employees. Every paycheck is a reminder of the link between their efforts over the last pay period and how the organization perceives their value. Clearly there is a critical need to “get base pay right” and to use it as one important means of rewarding top talent. But there are a number of core elements that must work together to manage base pay and overall cash compensation effectively and that contribute to your ability to deliver effective and meaningful rewards to your top talent.

The fi rst core element is having a philosophy and a set of guiding principles that highlight the organization’s intent regarding reward. Examples include where the company targets its pay—base and total cash—and why, how it balances and mixes the various reward components, and its perspective on pay for performance—and how all these factors are intended to impact on individual employees, what

they’re expected to do every day, and, ultimately, how they contribute to the organization’s success. But it’s not suffi cient to only have a sense of one’s philosophy; it has to be effectively communicated and understood. Hay Group research has shown that while almost 90 percent of surveyed companies say they have a compensation philosophy, only two thirds acknowledge that it has been committed to writing. However, and this is the point of primary concern, when asked about communication to staff, only one-third believe they have effectively communicated about compensation.

The second core element in cash compensation management is allocating salary increases relative to performance. Organizations need to ensure that performance ratings translate into differentiated rewards. Many organizations spend an agonizing amount of effort to ensure that managers comply with some sort of a distribution curve of performance ratings. But what value is this if the highest performer still receives only marginally more rewards—whether in merit pay, variable pay, or options—than the average performer? The ratings are merely a means to an end. And the end is higher rewards for the highest performance, not just a perfect distribution curve.

Most managers and employees agree that rewards should be differentiated based on performance (and the best organizations make this happen), leading to better execution and employee behaviors. At many organizations, managers want to give their stars bigger increases. But many see it as a zero-sum game. Providing larger increases to certain employees means that other employees get less, which requires managers to make some diffi cult decisions. Many managers choose to take the path of least resistance, giving employees roughly the same increase, rather than confronting and addressing poor performance. This can be avoided by having an ongoing dialogue with employees throughout the year and truly differentiating rewards. Ongoing dialogues eliminate the element of surprise, which can lessen the impact of giving a smaller increase. Managers weak in conducting performance oriented discussions should seek coaching to improve their skills. This type of management “courage” can go a long way to improving the climate of the organization. Nearly a third of workers surveyed by




Hay Group agree that poor performance is tolerated in their organization.

The “merit increase matrix” provides a tool to allocate a merit budget based on individual performance and the position of an employee’s salary relative to the overall salary range and can be used as a reference for competitive market pay. But the tool itself will prove insuffi cient and merely a crutch if managers are not prepared with the right information and tools to tell employees about the company’s reward program as well as to effectively counsel them about why they earned the increase they did and what needs to change to improve future opportunities.

The other component which is also frequently awarded as cash is variable pay, often referred to as a “bonus” or an “incentive.” However, we think use of these terms interchangeably is lazy and reduces the organization’s quiver of reward offerings. For clarity, we suggest you consider the following distinctions. “Incentives” should be predetermined, communicated, and known by the employees. The measures should be clear and trackable so that at different points of the year the company and employees get a sense of how they’re doing and at year end there are few surprises. Employees may know about “bonuses,” on the other hand, but bonuses are typically determined after the fact and are highly discretionary. Accordingly, using these terms interchangeably limits the organization’s ability to offer bonuses; however, they may be described and awarded, in addition to an incentive.

Beyond the defi nition of these two approaches to variable pay, in order for the programs to be effective (i.e., motivating, if so intended, and as a way to offer a simple thank-you in recognition for something well done), they should be rooted in the organization’s overall compensation philosophy and operating culture. In addition, their amounts should be meaningful and relevant to that philosophy and culture.

There’s a disconnect and a lack of logic if, on the one hand, the organization promotes itself as fi ercely competitive with a take-no-prisoners approach to business development but then offers an incentive plan without much upside. For those who worked hard and got good results, what will be the

message and the motivational intent in subsequent years?

Similarly, what’s the message you’re communicating if overall the organization has a “passable” year and employees don’t really see their work connected to the end result but then the organization makes lavish bonus payments? We’re sure it will be well received, but what signal are you sending about future expectations? And are you running the risk of creating an entitlement mentality?

Help Me Help You Identifying top talent is critical to driving performance. Using research-based competency assessment and modeling with a more direct line of sight to the characteristics of those who truly make a difference in the organization is one approach that can help. Assessments can be seen as another way to reward your top talent. It’s clear that not every organization offers, and certainly not every person gets, the opportunity to have a professional assessment of his or her skills and development needs. Done well, it is often seen as a gift by those who participate. The process can yield some revealing information and needs to be managed in the most professional way, especially as it relates to feedback that can be quite sensitive. Still, there is a wealth of applications to fi t a variety of needs and budgets. Hay Group has developed and makes extensive use of some very effective tools in this domain such as the Inventory of Leadership Styles, Organizational Climate Survey, and the Emotional and Social Competency Inventory.

Assessment information is a way to help those invited to participate (“help them”) to determine the best way to contribute on a higher level for the company (“help you”). And if you choose to focus this type of opportunity on top performers, it can be promoted and seen as a piece of their total reward offering. They get the chance to obtain insights that otherwise would have gone unnoticed and use those to enhance their self-awareness and focus their development efforts. It’s also happened that after involvement in an assessment process, people determine that “this is not the right place for me.” But is it not better for all concerned to have this epiphany earlier in their career or at least before




time and money is spent on a less-than-desirable situation and employment track? This could be the best gift of all.

Further Enabling Employees to Succeed The assessment process outlined above is an example of what Hay Group would describe as one element of enablement. Our research shows that employee engagement alone does not guarantee an organization’s effectiveness. Studies we have conducted in the last fi ve years involving hundreds of companies in diverse industries worldwide confi rm that many companies enjoy high levels of engagement yet still struggle in terms of performance. What’s missing is real “employee enablement” to position motivated employees to succeed. In an enabled workforce, employees are effectively matched to positions such that their skills and abilities are put to optimal use. Likewise, employees have the essential resources—information, technology, tools and equipment, and fi nancial support—to get the job done. They are able to focus on their key responsibilities without wasting time navigating such obstacles as procedural restrictions or nonessential tasks in the work environment. A cross-industry analysis we conducted in 2009 involving over 400 companies represented in our global employee opinion database suggests that while organizations in the top quartile on engagement demonstrate revenue growth 2.5 times that of organizations in the bottom quartile, companies in the top quartile on both engagement and enablement achieve revenue growth 4.5 times greater.

To get the most from engaged employees, organizations must position them to channel their extra efforts productively. That is, motivation to contribute has to be matched with the ability to contribute. Unfortunately, most organizations employ a sizable number of “frustrated” workers—individuals who are highly engaged but are not suffi ciently enabled to be fully effective and successful. Frustration is a signifi cant problem for organizations and employees. In the short term, these motivated but poorly enabled employees may suffer in silence. But over time many can be expected to turn off and disengage—or tune out and leave.

Bottom Line A common dictionary defi nition of “reward” is “something given in return for some service or attainment.” We believe that reward is considerably more than “some thing”; in fact, rewards that the organization should provide are numerous and come in various forms—monetary and otherwise. In order to be effective, responsible management should be aware of all such reward opportunities and actively manage the money, mix, and message in order to make rewards the dynamic management tools they are meant to be.

References Jensen, Doug, Tom McMullen, and Mel Stark. 2007. The manager’s guide to rewards: What you need to get the best for—and from—your employees. New York: Amacom, 61.

Mel Stark can be reached at Hay Group’ in Metro New York at +1.201.557.8466 or [email protected].

Mark Royal can be reached at Hay Group in Chicago at +1.312.228.4835 or [email protected].


rewarding your top talent - talent management handbook chapter - february 2011

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