Balancing Act

In the aftermath of the recession, most companies are struggling to answer the same question: How can we keep costs down while improving employee engagement and performance?

According to a recent Hay Group report The Changing Face of Reward, organizations in the top 25% when it comes to engagement have revenue growth 2.5 times higher than organizations in the bottom 25%.  And companies with highly engaged workers that actually enable people to perform with tools, information, investment, etc., demonstrate up to 4.5 times higher revenue growth.  In other words, how companies make trade offs between engagement, performance and costs impacts how they perform.

It’s a balancing act.   Of course, compensation planning is always a balancing act but the wire just got thinner.  What are some of the factors that must be weighed against each other to find an optimal strategy?

• Cost v. Value – This is an obvious one but what to do about it is less obvious.  The problem is that during the recession most of the costs that could be cut were already cut so cost containment is a dead end strategically if that’s all you’ve got.  The challenge going forward is not cost containment but value creation, which is harder, especially on a tight budget.  To create value, companies must invest in engaging and enabling their workforce and the challenge will be figuring out how to do so with maximum return.

• Short-Term v. Long-Term – It’s always important to justify investments with rigorous financial analysis but I thought the folks at The Hay Group put it well when they said, ‘…this emphasis on financial goals and metrics is at odds with what we know Fortune’s Most Admired Companies do.  While peer companies apply performance metrics to executives that are focused on operational excellence, profits or revenue, the most admired go further by adding measures around long-term thinking, teamwork, building human capital and customer loyalty.’

• Variable v. Base – Companies plan to rely more heavily on variable compensation than base pay increases for the foreseeable future in order to keep fixed costs down and have a flexible lever to shape business outcomes.  Although there's a lot to be said for 'thinking Pink', it's harder to justify paying people to show up than it used to be.  Mind you, that doesn't eliminate the risks that come with variable pay, including loss of creativity, increased likelihood of unethical behavior and myopic focus on areas of the business that offer a personal reward.  A balanced compensation strategy must address these risks.

• At Will Employment v. Loyalty – Most companies have agreed in principle that it isn’t economically viable to carry low performers.  In fact, the new trend is, ‘What have you done for me lately?’ when it comes to both employment and rewards and employees are under more pressure than ever to prove themselves on a daily basis.  The flip side of that perspective is that employers can’t expect much loyalty from employees in return.  The takeaway here is that taking that ‘at will’ thing too far can erode employee trust and morale, which are key components of engagement.  Striving to be a fair, compassionate employer makes sense ethically and financially.

• High v. Solid Performance – Research shows that top performers have more positive impact on the bottom line than average and low performers so many experts have concluded that high performers should get most of the rewards.  Fair enough.  And yet, it is also important to engage and enable consistently solid performers since they tend to be the largest demographic of the company, which means the more you can shift their performance upward the better your company will perform overall.   If you’re a compensation specialist, you probably have at least the bare outlines of a plan in place for identifying and rewarding top performers in 2010.  What's the plan for solid performers?

• Individual v. Team – One potential risk of rewarding individual performance is that team performance is discouraged, to the extent that John believes helping Jane be successful will mean less reward for him.  So companies that want to encourage teamwork need to find the right balance between rewarding teamwork and individual performance.

• What You Reward v. What You Don’t Reward – While formulating your compensation strategy it’s useful to note down what you are rewarding next to what you are NOT rewarding in order to make sure nothing critical got left out.  Nothing too fancy is required here, you can do it on a napkin if you need to – the point is to approach each problem from two sides instead of just one.   For example, let’s say your hotline staff has a KBO to increase resolution volume by 12%.   Might this goal create any undesired results?   It always pays to take a second look from a new angle to make sure you didn’t overlook anything important.

There are other items we could add to this list (cash v. non-cash rewards, centralization v. agility, global v. local, innovation v. efficiency, etc.) but you get the idea.

There’s no right answer.  There are only tensions and tradeoffs and the best we can do is weigh potential outcomes and decide where to draw the line. 

So, take a deep breath and find your balance.

Picture courtesy of Bob Elsdale Photography.

Laura Schroeder is a Compensation Strategist at Workday, headquartered in Pleasanton, CA.  She has more than twelve years of experience designing, developing, implementing and evangelizing global Human Capital Management (HCM) solutions and is currently pursuing a certificate in Strategic Human Resources Practices at Cornell University.  Her articles and interviews on HCM topics have been published in the US, Europe and Asia.  She lives in Munich, Germany and enjoys cooking, reading, writing and spending time with friends and family.

Comments

[Derek Irvine, Globoforce]

Ah, brilliant post. The what you reward vs. what you don't reward is a very critical point to understand. You must positively reinforce employees only for those actions that reflect the company values while achieving the strategic objectives. This approach ensures employees who, for example, increase productivity but do so by harming the environment will not be rewarded for their efforts. Values-based recognition is the key to ensuring employees display the right behaviors in achieving the company goals.

For more on how not to reinforce deviant behavior and research on the topic: http://globoforce.blogspot.com/2009/07/self-esteem-sabotage-and-psychic-income.html

[Shawn Miller]

Ah, thank you for the great article. I think its great, because you've articulated precisely what's been niggling at my growing discomfort with "pay for performance." In theory, PFP makes all the logical sense in the world. But its application is much more problematic!

The last bullet point, "What you reward v. what you DON'T reward" can also be viewed by employees as 'what they've told us v. what they haven't told us'
...that my solid performance is devalued,
...that we're 'not' in this all together,
...and that individual results trump corporate results, after all.

Every action has a reaction, and I fear a predictable (negative) reaction in engagement as the market continues to shift from the 'buyers' (employers) to a 'sellers' market.

[Laura Schroeder]

Derek and Shawn thank you for weighing in with these great insights!