Paying for performance: The reward-results linkage

The excerpt from Chapter One of the Book Paying For Performance: A Guide To Compensation Management from Mercer Human Resource Consulting included below overviews the critical techniques and tools needed to connect employee data to operational, financial, and marketplace outcomes in order to link people practices to economic results.

Paying for Performance:
Chapter one excerpt

The HR industry has traditionally looked at employee data from a “compliance” perspective. Today, it is possible to create much more value using this information – by connecting these data to operational, financial, and marketplace outcomes in order to link people practices to economic results. This section looks at how HR can leverage data to contribute to its organization’s bottom line – through a combination of current techniques and some new tools.

(a) Information is power
When your car’s engine just does not sound quite right, you obviously know something is wrong. Furthermore, you know that the problem is under the hood or in the car body, and that there generally is a good explanation and remedy. All the information you need to diagnose and fix your car is right there at your fingertips. But, where exactly do you look? What is the problem? How do you fix it? How can you make sure it remains fixed? For most people, a trained mechanic with diagnostic tools is the best answer. The good mechanic can study the “symptoms,” diagnose the problem, make repairs, retest to be sure it was fixed, and, in the end, hand you the keys to a car that’s “good as new.” The only caveat to this analogy is that the mechanic must be someone with the integrity and know-how to offer you the best and most cost-effective solution.

An organization contains a vast amount of valuable information, but, like a good mechanic, you must know where, and how, to look. A good place to start is to ask people in the company two basic questions:

What is currently rewarded in our organization?
What should be rewarded to support our organization’s business objectives?

Rarely is there complete agreement between the two or even clear concurrence on either point. For example, we often find that rewards emphasize current performance but overlook their influence in motivating and driving the development of the critical skills and competencies needed to meet future business demands; however, management must have perspective about what the root causes of the problem are before presenting a case for change. A good HR executive, like a good mechanic, needs to diagnose the problem, have an action plan for fixing it, and show that the resolution will create value — in this case, through better strategic alignment and a stronger ROI.

Not to mix metaphors, but, there’s a treasure trove of information stored away about employees. The difficulty is finding, reading, and correctly interpreting the treasure map. This complex process requires a disciplined combination of content knowledge and statistical modeling expertise (linking and evaluating data from multiple sources) to identify untapped opportunities. But, the effort is well worth it when you can report to management that you have just saved your company 3% to 5% of annual labor cost through enhanced productivity and/or reduced expense.

(b) People create competitive advantage
Just as no two companies are alike, no two workforces are identical. And, different business strategies require different approaches to human capital. For example, a firm that needs employees who understand its products, services, systems, and procedures in order for its business to succeed may want to hire people and retain them over their careers. The more experience people have in such a company, the more valuable they may be to that company.

In a rapidly changing industry, however, an organization might want a significant and constant influx of new people because it seeks the latest expertise, which may require buying rather than building talent. Here, careers might not be as salient as short-term cash and equity. In industries such as aerospace, defense, and high technology, retention may not be as much a concern as attracting key professionals with the latest knowledge. For example, when the defense contract expires, your talent migrates to the next organization – that is, until you win your next big contract.

(c) Perception is not always reality
While conducting employee focus groups and surveys is common, the information obtained by these kinds of analyses may only scratch the surface. Employee sensing can provide valuable information about what employees say they want, but the data also can be linked to actual employee histories to determine whether these perceptions match behavioral reality. For example, armed with information regarding the real, underlying root causes for employee turnover, a company can undertake targeted initiatives, based on:

Return on investment (ROI) – Net impact versus cost;
Feasibility – How realistic would it be to implement (e.g., administration, management, and employee acceptance); and
Risk – How predictable and/or controllable are affected turnover drivers over time.

For example, a Fortune 500 commercial bank learned that, although exit interviews suggested that pay and workload were the primary drivers of turnover, the real factors that most influenced retention were promotion, job mobility, and retention of its better supervisors. The bank was able to use this information to develop a retention strategy focusing on careers and management stability. The results were quick and impressive. Similarly, a Global 500 manufacturing organization learned that, although its employees perceived little connection between pay and individual performance, the real relationship was consistent and strong. The company was able to use this information to improve communication about rewards and performance management, avoiding significant new – and unnecessary – reward investments.

Expert consultant Peter T. Chingos and 28 of his colleagues at Mercer Human Resource Consulting give you the tools and techniques you need to design and implement a highly effective compensation program that will sharpen your company's competitive edge for years to come.

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Paying for Performance: A Guide to Compensation Management, 2nd Edition

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