Employers should make market data a smaller part of their compensation decisions and should focus on performance-driven strategies that will motivate and retain employees, according to Brad Hill of Tandehill Human Capital.
Hill outlines 10 steps employers should take in order to maximize their return on investment in employee pay.
Step 1: Compensation will become part of the employment value proposition.
Hill notes that most employees leave their company for reasons other than pay, such as a lack of career development or unhappiness with management. He says that instead of a compensation philosophy, employers should develop an attraction, retention, or a development philosophy that discusses pay policy within a broader array of tools.
Step 2: Market pay data must ride in the back.
Hill says that employers should stop throwing money at the market. He says that if employers choose to pay at market, they may hinder their ability to maximize ROI. He says that even if a company pays the median pay level, 50 percent of companies will pay more. He says employers should focus on rewarding peformance.
Step 3: Every dollar in base pay increase will be viewed the same as a $5 bonus.
Hill says base pay increases are long-term rewards and should be tied to long-term accomplishments, such as improving skills, competencies, and responsibilities. A bonus payment should reward short-term accomplishments, such as having a good year, he says. He claims that for performance reviews, employers should have two ratings: a growth-in-skills rating that is tied to base pay and a results rating that is tied to incentives.
Step 4: Cost of living changes will have no effect on pay.
Cost-of-living increases are not a way to maximize ROI on employee pay, according to Hill. He adds that for most companies, it would be irresponsible to give cost-of-living increases every year at a rate that is unrelated to the performance of the business. He says having cost-of-living increases can also limit the resources an employer has to reward top performers.
Step 5: The term "target incentive" will be replaced by the term "entitlement."
Hill says employers create an entitlement mentality with target incentives because a target incentive payout is "what the employee ought to earn on average given satisfactory performance." He says employers should "blow up" target incentives. Hill says incentive pay should compensate employees for performance above expectations and base pay should compensation for base performance expectations.
Step 6: Incentive pay opportunity will be based on "performance risk."
Hill says that performance risk is the difference between what the employer expects the job to contribute and what it actually contributes. He adds that with small differences, there should be small incentive opportunities and with large differences, large incentive opportunities.
Step 7: Broad-based incentives will be provided to all employees.
Broad-based incentives for all employees ensure that all employees are thinking about improving processes, according to Hill.
Step 8: Stock options will be replaced with motivational incentives.
Hill says that stock options are not a motivational tool for improving the business.
Step 9: Executive pay will be capped at a multiple of average worker pay.
He says that executive pay has to be based on an executive's contribution, not on the market. He notes studies that have found that the difference between executive pay and average worker pay has grown astronomically in recent years.
Step 10: If the cash is preferred to the perquisite, eliminate the perquisite.
If used correctly, perquisites can be a magical program because the value far exceeds the cost.
Hill states that pay is one investment in a company's people, but it's one investment of many. He says employers should stop thinking so much about the market and start thinking about motivating employees.
By Sean Dean, Associate Editor, HR.BLR.com
This article is reprinted with permission from the HR information site HR.BLR.com, a subsidiary of Business & Legal Reports, Inc.