How do top performing companies use compensation to attract and retain the best talent? Surprisingly, it's not a matter of dangling large paychecks before promising recruits.
"You can't buy people," says Jay Schuster, the cofounder of Schuster-Zingheim & Associates Inc. in Los Angeles, which advises companies on how to align pay and rewards with business strategies. "In fact, the top companies are not the top payers. They understand that trying to retain people using high base-pay creates a culture of ambivalent workers who can't afford to quit."
Key Strategies
According to a study published this year by Towers Perrin and titled "Meeting the Global Rewards Challenge," high-performing companies use some common strategies when structuring their pay systems:
- They provide a consistent and meaningful level of differentiation in pay for 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 things from their employers than what previous generations wanted.
- They communicate more often and more openly about the pay and rewards available in return for strong individual contributions.
Total Compensation: Each Element Plays a Part
Schuster and his partner, Patricia Zingheim, extol the principal of "total rewards" in their books, Pay People Right! Breakthrough Strategies to Create Great Companies and The New Pay: Linking Employee and Organizational Performance. Each component of compensation has its particular uses, Schuster explains, and when deployed in concert, they become "the glue that holds your workforce together."
Base Pay
Base pay should not be used as a hiring lure, or as a means of retention, but as a way to pay people gradual increases as they develop and grow within the company. "People are worth more as they become good at their jobs and become more valuable to the company, and the base pay reflects that," says Schuster. Keeping annual salary on track with overall performance also prevents a person's paycheck from getting ahead of his or her true value. "We do a really unfair thing to people when pay gets ahead of value. They know they can't find another job elsewhere that pays as much, so they essentially lose their motivation and 'retire in place,'" Schuster says.
Incentives
Another key component of total pay is incentive, or variable, pay—those forms of compensation that don't fold into base pay, such as bonuses and stock options. "Incentives do a good job of rewarding short-term performance, like the completion of a project," says Schuster. "This type of compensation is agile and versatile. Managers can do a lot with it."
A good example is the American Water Works Association, in Denver. The nonprofit organization retooled its pay program two years ago with an eye to breaking down departmental "silos" and rewarding cross-functional teamwork. It created an annual bonus system that pays each of its 160 employees if the company meets specific goals.
"We identified three areas where we want to excel: the bottom line, internal customer service, and external customer service," explains Robert Campoy, AWWA's human resources director. "We set objectives for the year, and earmark 2 percent of our salary budget for rewards. If we meet our budget, we'll spend one-third of our reward budget. If we exceed our internal goals, we get to spend another third, and if we exceed our external goals, we get to distribute the entire pot."
Last year each AWWA staff member received $2,200 in rewards. "For an employee who makes $20,000 that's a pretty hefty incentive," says Campoy. He reports that turnover at AWWA is about 15 percent, while the rate for all nonprofits in Colorado is closer to 30 percent.
Recognition
Another form of compensation that's not necessarily monetary is what Schuster calls "recognition and celebration." This boils down to acknowledging star performers. "The praise could come in the form of gifts, prizes, or special events. Your compensation budget should set aside money for managers to plan their own recognition events. These activities get people excited and motivated."
Benefits
The final component is the benefits program. Although benefits might not be a deal-breaker for a candidate, they add to the company's overall image as an employer of choice. So don't skimp, says Schuster, "and try to brand them. Set yourself apart as unique, and get some mileage out of it."
Let Eagles Soar
At the best-performing publicly held companies, "Priority goes to the top 20 percent of performers," says Schuster. "Their compensation structures are not neutral programs where pelicans and eagles are treated the same. You have to somehow sort out the top echelon, and demonstrate to the other 80 percent that performance pays off. Cultivate role models and leverage them to improve total workforce achievement," Schuster says.
Review Regularly
Shuster recommends reviewing base and variable pay figures at least every six months. "And every year, put a thermometer in your total pay system and take its temperature," he says. You must remain agile enough to change your system quickly in today's competitive marketplace, he adds. "Most people don't like messing with their reward systems, but this is a mistake. If companies treated the rest of their business like they tend to treat their compensation plans, they'd still be using manual typewriters and carbon paper."
-Martha Frase-Blunt
Martha Frase-Blunt is a freelance business writer and editor based in Alexandria, Virginia.
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