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Rewarding Employee Contributions, Not Job Titles: A Base Pay Strategy to Retain Peak Performers

By Barry MacLean, PayScale,   1/15/2007
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Retaining peak performers has always been a challenge, but within a few years this effort will be even more difficult. The reason: An exodus is about to occur, resulting from the retirement of more than 11 million skilled baby boomers. This translates into more work for the fewer remaining workers. Industries such as health care and information technology (IT) have already experienced this ever-widening gap between available positions and skilled employees to fill those roles.

As a result, workers will increasingly control the marketmaking it more important (and difficult) to retain skilled, high-level performers who are motivated and invested.

The Cold, Hard Truth

Successful retention strategies are usually related to factors in the workplace such as growth and development opportunities, positive relationships with managers, the nature of the work performed, and respect for the organization and its values.

While these play an important role in retaining employees, a primary factor for turnover is being overlooked: cold, hard cash. According to a 2005 workforce study by Spherion, only 49 percent of employers rate financial compensation as a very important driver of retention, but 69 percent of workers believe it is.

And while compensation is not the complete answer, money accentuates the positive or negative aspects of the other contributing factors. If employees feel well-paid, that irritating and micromanaging boss they have is much easier to put up with than if they perceive themselves as underpaid. Simply put, money makes matters better or worse.

Using variable pay to drive business performance makes a great deal of sense, with top performers rewarded based on what they contribute. But merit-based pay systems are a different matter when it comes to retaining employees, especially star performers. In these systems, a 3 percent or 4 percent raise for mid-level employees is equal to one extra latte per day.

High-potential employees in a competitive market can demand to be paid what they are worth, and get it, if not from their current employer then from one down the street. Employers have no choice but to examine seriously and decide how important it is for them to retain top performersand then pay them accordingly.

The Differentiator: Personal Value vs. Market Value

Traditionally, the market value of a particular job sets the rate for which an individual is compensated. What this doesnt take into account is the value of the specific and unique set of skills and competencies that an individual brings to that endeavor. The compensation system fails when a bland, homogenized model is implemented that treats peak performers and average performers virtually the same.

The market value of a particular job can fail to take into
account the unique set of skills and competencies
an individual brings to his or her position.

Employers win the loyalty and service of peak performers when a dynamic and effective compensation strategy is used. But successful compensation models work only if the right values are placed on the right things, so:

Focus on employees who are truly performing and producing.

Analyze the unique, individual worth of these employees and take into account a range of factors beyond a typical analysis of performance and the market value of their job.

Focus on the Individual

No longer is just doing your job the standard. In a knowledge-based business culture that prizes value-added contributions, employees are expected to collaborate on project teams, find ways to improve processes and transfer their knowledge to others. In many organizations the very notion of a job is pass.

Consider two professionals in the same job. The difference between them is not just in how they perform their job but also in what each contributes to the overall success of the company. One may be an indispensable future star and the other a competent performer. Yet traditional surveys will use job description, tenure and location to crunch their compensation together and offer a pretty meaningless set of average data on which to determine their base pay, at least if the company is serious about retaining the top performer.

The role of the VP of Human Resources is one example. This position in some companies is responsible for administering traditional personnel functions, whereas in other companies it is a key strategic business partner. A true chief human resources officer (CHRO) might have an MBA and most likely has experience working with financial decision models and managing through metrics. This strategically focused skill set drives overall business success, making the CHRO a potential candidate for succession.

Pay these two HR executives the same, and you will ensure that your CHRO and future leader will be a star at someone elses company.

Analyze Four Key Factors

Every element of the employees performance and potential must be examined. This includes the broader role they play in the organization and their personal value in the marketplace based on their skills, competencies and expertise. The following four areas can help to identify steps in the process:

1. Contribution. Look beyond the immediate performance. Factor in the long-term impact of their contribution plus the ripple effect they have on the performance of others. Does this person inspire and innovate, or are they happy with the status quo?

2. Value. Market value should be assessed from a basis of the employees competencies and skills and expertise above and beyond the basic role that they play in the company.

3. Role. Look beyond the job title. Examine the employees role to move the company forward in terms of involvement outside job position on task forces and committees, influence on others, and advocacy of vision and values.

4. Potential. High-potential employees need to be paid in keeping with their potential; otherwise they are a flight risk.

A Changed Marketplace

A philosophical mind shift must take place in order to embrace today's changed marketplace fully. Base pay must be viewed as a strategic investment, not just as a market-driven fixed cost. The market-based negotiation strategy is an increasingly outdated approach as it fails to retain peak performers.

Today, employees have the tools to determine what they are worth accurately. With the shrinking workforce and this expanded knowledge, the dynamics of the negotiation cycle have been dramatically changed. Employers must realize the importance of base pay issues and the message base pay communicates to peak performing employees about how they are valued.

Barry MacLean has 30-plus years of corporate and strategic HR consulting experience, focusing on technology-based talent management and compensation. He has worked with Sibson Consulting, Mercer HR Consulting and MacLean Associates, among others, and brings that experience to PayScale, where he is currently a contract consultant.

Related Reading

Avoiding 'Pain for Performance': How to Effectively Design and Implement a Pay for Performance System, SHRM Online Compensation Discipline, September 2009 

Building a Market-Based Pay Structure from Scratch, SHRM Online Compensation Discipline, December 2008

The Problems with Pay-for-Performance Plans—and What to Do About Them, SHRM Online Compensation Discipline, January 2007

How Kimberly-Clark Ties Pay to Performance, HR Magazine, November 2006 

Effectively Managing Base Pay: Strategies and Programs for Success, SHRM Online Compensation Discipline, September 2003 

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