Compensation Cafe

Big Data and Pay

We all have our favorite theories about what engages and motivates people at work but what if we could validate our assumptions with actual data? Compensation is such a large percentage of overall operating expenses I predict we’ll start seeing more deep analysis around its effectiveness at driving engagement, retention and performance.

In fact, it’s already happening, according to a recent WSJ article Big Data Upends the Way Workers Are Paid.  The problem with the big data approach is that it’s aggregated across multiple companies so its applicability to a specific company may be limited. On the upside, big data can offer a broad view of what has worked - and not worked - across thousands of organisations.

What is Big Data? It basically means lots of data. Complexity is implied as well.

Today companies use a variety of external information to decide on compensation, including market data, best practices, etc. Unfortunately, that kind of information only gets you so far because it fails to measure the impact of specific strategies within your own organisation.

For example, imagine your company is losing a critical mass of talent. What challenges would that create, besides losing experienced people and having to replace them with inexperienced people?

• Recruiting expenses might be above the benchmark for your industry;
• Morale might also be an issue, impacting customer service and productivity; 
• Continuity might be a problem for ongoing projects as tribal knowledge flees the organisation.

You get the idea: high turnover not good. The typical reaction is to ignore it or throw money at it.

But what if you could build a model of your own organization and track things like salary, career progression, turnover, absenteeism, variable compensation, etc., and use this information to build a predictive model of why people leave? The model would tell you how much impact individual levers such as compensation have on retention so you could make better decisions about how to address the retention problem.

For example, when confronted by a top performer who has been absent a lot recently and just exercised all their vested options, you could evaluate whether a salary increase is likely to retain them based on your model. If the model tells you that a promotion would be more effective than a raise or that the manager they work for has an unusually high attrition rate, these are useful data points to inform your decision.

Best of all you could more precisely manage how much of an increase to give and stop at the point where giving more loses effectiveness.

*The caveat here is that this will only work for organisations with a statistically significant sample population and sufficient historical data.

So, now you’re thinking, ‘Yeah, right, as if we have any extra money to give people!’ I’m going to go out on a limb here - actually, I live on this limb so I’ll just stay put - and suggest that the reason you don’t have budget for increased rewards may be that your data is insufficient to make a business case. You may know a top performer is paid below market but you don’t know if they’ll leave the company or whether it even matters if they leave the company.

In other words, you have what is known as a ‘hunch.’ Hunches can be useful for pointing you in the right direction - and giving CFOs a rare chuckle - but you still have homework to do.

Bottom line: You need more precise data to get more money from the people whose job it is not to give you more money.

There are many things besides compensation that motivate employees and few companies are good at understanding and managing them. However, I expect we’ll see a change in this area as management consultants figure out how to monetise big data.

In the meantime, hire a graduate student specialising in statistics to build a predictive rewards model.  If they do a good job, you can use it to fend off the management consultants who want to hire them away for more money.

Laura Schroeder is a global talent specialist at Workday, headquartered in Pleasanton, CA.  She has nearly fifteen years of experience envisioning, designing, developing, implementing and evangelizing global Human Capital Management (HCM) solutions and holds a certificate in Strategic Human Resources Practices from 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, kick boxing (well, kicking things) and spending time with friends and family. If you want to read more from Laura, check out her talent management blog Working Girl or follow her on Twitter @WorkGal.

Picture courtesy of Mediaplexblog.com.

How Watching Homeland Helped Me With Pay-for-Performance

Think you only have two options for handling your 3% merit budget this year? The recently popular, "throw most of the money at the high performers" strategy or the "what's the point meddling with this little money, just give everyone the same increase" strategy?

I just finished catching up on Season 1 of Homeland, so you'll excuse me if I am triggered by security breaches and obsessed about getting things right. It's just that I have these misgivings that have started to boil over in my brain, just like Carrie.

It goes like this.

A pay-for-performance philosophy is based on the tenet that an individual's salary represents their performance over time.

That's why our pay structures are typically built out of salary ranges that are designed to take newbies towards market rate as they master job responsibilities. And they are designed to take experienced employees over market rate if their performance over time turns them into seasoned, valuable contributors.

If our pay-for-performance philosophy holds, then an employee's position in range should tell her/his story over the length of time s/he held the title, Accounts Payable Supervisor, or whatever.

So here comes the security breach. Given how we've handled our merit increases over the last few years, what story does an employee's position in range actually tell in your company these days? It's worth a check. If your analysis shows that there are a lot of operatives in your company who aren't where they are supposed to be, don't you have some important evidence? Doesn't it beg to be kicked up a level and studied for what it really means?

One thing it says is that your compensation philosophy may not be what you claim it to be. As of 4Q 2012, you're faking it.

Or, it may mean that the merit budget strategy for 2012 deserves another look.

Don't you want to act thoughtfully this time, looking toward the future, rather than behaving erratically, with the reactionary behavior of the last few years? Do the analysis to see where you stand and then make some tough decisions.

Should you say that your salaries reflect pay-for-performance anymore? If yes, it's time to provide better-than- average increases to those who are too far down in their range, given their long-term performance. Or some creative alternative, like performance bonuses or performance-based supplemental benefit allocations.

If the answer seems to be no, now what? Shift to variable pay?

Since everything we do in compensation is communications, it's important to be clear about what is going on. Pay-for-performance is a code word, but for what? If you want it to be part of your vocabulary, you need to either update your definition or acknowledge how you have strayed, and figure out what you are going to do to fix it (and by which Episode!)

Margaret O'Hanlon is founder and Principal of re:Think Consulting. She joined Ann Bares and Dan Walter of the Compensation Cafe to speak the unspoken -- "Everything You Do (in Compensation) Is Communication" -- at the WorldatWork 2012 Conference. Margaret brings deep expertise in total rewards communications and change management to the dialog at the Café. Before founding re:Think Communications Consulting, she was a Principal in Total Rewards Communications and Change Management with Towers Watson. Margaret is Deputy Director of the International Association of Business Communicators (IABC) Pacific Plains Region. She earned her M.S. and Ed.S. in Instructional Technology at Indiana University, Bloomington. Creative writing is one of her outside passions, along with Masters Swimming.

Does Your Incentive Plan Work?

Once management incentive plans are developed and implemented they tend to take on a life of their own, and like a perpetual motion machine may keep on ticking, doing what they do, perhaps long past their intended design and usefulness.

Perhaps that's where the phrase, "we've always done it that way" originated.

So it's worth checking in every now and then.  Kicking the tires.  When is the last time that you reviewed the effectiveness of your management incentive plan?  To see whether the intent of the plan was still being delivered?  Is it still performing to design (risk - performance - reward) specifications, part of your pay-for-performance strategy, or is it simply an administrative reward processing machine?

What does it take to change behavior?

For example, is one of the goals of your incentive program to change behavior?  To encourage and reward performance that's above and beyond normal expectations?  That's why it's called incentive.   Or else why pay for what would have happened anyway? 

That would be what is called "delayed compensation", as in "it's been 12 months, where's my check"? Such a scenario is not pay-for-performance - but happens all too often, just the same.  With luck your plan focuses on a win-win strategy; that of first achieving company goals, which in turn generates a reward for the employee(s).

So you want to change behavior.  You want to light a fire under participants and get them motivated to achieve their quantifiable, measureable objectives.  So how much target incentive would it take to have an employee focus their attention for the entire performance year on achieving their objectives?

If you said any number lower than 10% I'd suggest you save your money and don't bother.  Because not enough money is in play to gain an employee's attention and hold it for an entire year.  Behavior modification will not take hold and root.  What you'll get instead is the same performance you would have gained without an incentive, only your compensation costs would have risen.

For employees clamoring to be made incentive-eligible, even a measly 5% target incentive is an attraction, especially for managers trying to do whatever it takes for their employees.  However it would be incumbent on the requesting manager to explain upward what the employer would gain for that increased cost of labor.  Because if you can't show the ROI for the cost increase, your proposal would face a steep uphill battle.

Take a chance, anyone?

There's another way to make the sale, of course, but it's a strategy rarely taken.   You could lower base salaries a bit for those newly eligible for an incentive program, and counter-balance that hit with the opportunity to earn a great more through the incentive scheme.  Most of the time employees would come out ahead by the end of the year (sometimes a great deal), but there is a risk.

And therein lies the rub.  Many affected employees would raise such a howl of outraged indignation that your ears would bleed.  When pay-at-risk is a reality it often doesn't go over well in certain quarters.  The demand instead would be for additive compensation, not the uncertainty of true variable pay.

Have a care to avoid that trap.

So as FY12 nears a close and plans are being finalized for FY13, have a look-see at your management incentive plans.   Do they really incent?  Do they provide rewards for achieving company objectives?  And while you're at it, check whether those targeted rewards are indeed a motivating tool, or are you planning to give away money for the same performance you could have gained for free?

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats.

Creative Commons image courtesy of Enokson's Photostream

Don't Pay for Mistakes

Every employer likes to think they pay people to Do The Right Thing.  It is NOT smart to pay according to the theoretical value of potential mistakes.  (Note that many job evaluation approaches are designed to do exactly this.)

Don’t pay for errors.  Don’t even consider paying for what someone possibly COULD do wrong.  Instead, pay for proper performance.  People in a position where mistakes have serious consequences are correctly compensated for the value of their positive (not negative) expected outcome results.  An airline pilot is not paid for failing to crash but is paid to safely and efficiently transport valuable human cargo.  The night guard is not paid for declining to open the doors to thieves but is rewarded for appropriately following your security protocols. 

The whole concept of paying for the potential value of errors is wrong-headed and confusing.  That logic would argue that operating room nurses should be paid almost as much as the surgeons they assist, because they could do as much (if not more) harm to the patient. 

The selection decision process includes considerations about the potential hypothetical chance for error.  Anticipated competence is established upon employment.   Employees are selected, assigned and paid due to assurances they can satisfy the higher demands of proper performance for their specialized roles.  Once someone has passed your entry screening protocols and completed any required additional training, you expect proper work performance thereafter. 

Next, their job should be designed to minimize or totally eliminate the negative effect of deficient performance.  Most organizations are clever enough to recognize their vulnerabilities.  They erect protective buffers to prevent problems and install reactive options as contingent responses to quench sparks before they erupt into fires.  Management control systems are installed to detect results outside acceptable parameters early enough that timely interventions can assure that deficiencies are corrected before failure levels are reached. 

Most individual contributors are not permitted to hold positions where they are granted the freedom and power to wreak unrestrained havoc upon the entire enterprise.  It is not wise to pay someone more because you failed to properly screen them, refused to place essential quality assurance controls on their work or declined to install feedback alarm systems.  That course of action enables recklessness and invites disaster. 

It is preferred to reward workers in line with the effect of their actual positive contributions rather than give weight to their possible potential hypothetical negative blunders.  Maybe this is why compensation professionals have such a hard time getting high pay for themselves.

 E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Image courtesy of checkonsafety.com

What About Profit Sharing and Employee Stock Ownership Plans?

This article carries forward the theme started with a question about what to do when a company can’t or doesn’t want to offer stock options. My first response, “Competitive Compensation Without Stock Options,” covered units, phantom awards and appreciation rights. The world of Long-term incentives (LTI) is vast. Some companies get comfortable with one “family” of LTI and use it to augment every total reward program they touch. It’s sort of like putting catsup on every meal. Catsup might be great, but it isn’t ALWAYS great (although my wife and I often disagree on this issue).

This article provides an overview of Profit Sharing and Employee Stock Ownership Programs (ESOPs). These programs are similar in many aspects, but totally different in critical areas. First, some equity compensation programs are used to share profits. Other equity compensation programs are used to share ownership. Second, outside the U.S. the acronym “ESOP” is often used to refer to Employee Stock Option Plans. Third, smaller companies often fund their bonus or other variable compensation programs using profits. To be clear, this blog won’t be covering any of that stuff.

Profit-sharing programs are most often designed as a retirement benefit, but can offer a wide variety of vesting schedules. These are funded programs that generally require trusts to hold contributions, investment decisions, formal plan documentation, designated fiduciaries and other structural components. These programs create a direct link between one definition of success (profits) and employee compensation. They may disengage employees from other success measurements, so they often used to augment, rather than replace other plans.

From a compensation philosophy, these types of profit sharing programs focus participants on 1) profits (duh) 2) long-term employment with the company. While these plans are a legitimate alternative to stock options they obviously serve a very different purpose. If you are trying to link compensation over the next 1-5 years to some type of corporate success profit sharing, these programs are unlikely to be your solution.

ESOPs provide employees with a piece of a large block of company shares. These are also designed as a long-term program with payout available at retirement or other vested leave date. Company shares are purchased or contributed by the company and held in a trust fund. They provide support of a real ownership culture and also offer potential tax benefits to the company. These programs are often established when the owners of a closely held company wants to “cash out” on some or all of their ownership without giving control to some outside organization or the public at large.

The downsides to ESOPs are not insignificant. The cost to set up an ESOP can be prohibitive for a small company when compared to the set up costs to other LTI/LTB programs. There is also the real risk that if the company performs very poorly an employee may lose their job and retirement funds at the same time.

The upsides to ESOPs are well documented.  ESOPs offer significant tax benefits for both employees and companies. The National Center for Employee Ownership (a great resource) also says that ESOP companies generally outperform their peers in many categories. Lastly, I have worked with and been around many ESOP companies over the years and they tend to have very involved and passionate staff members. While true engagement can often be hard to measure, sometimes you can just a get a “feel” for it and ESOP companies often have the feel.

Your long-term incentive programs needs to be custom fit along with the needs of your company. You also need to be willing to explore new solutions as your goals change. When a program that has worked for a decade stops working, it might not just need a new paint job, you might need to trade it in. And, if your company has unique limitations on the use of certain types of pay tools (cash, equity etc.), you may need to speak to more than one expert to get to the right solution. Don’t wait to start that exploration. Even if everything is working great today, it is great to have your toolbox stocked with future solutions. I will touch on a few other LTI alternatives in my next post and then return to my standard, irreverent, analogy-filled posts.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”,  “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay

Should We Eliminate Merit Increases?

Do you give your employees merit increases? If you do, have you thought about why you do it?

Some people think that awarding these kinds of annual raises no longer make sense.

One of these people is Dow Scott, Ph.D., an HR Professor at the Quinlan School of Business at Loyola University. In his article "Blending General Increases With a Pay-for-Performance Policy", Dr. Scott says that merit increases "have marginal motivational value" and contribute "little to the retention of talented employees."

What's wrong with merit increases in pay? Dr. Scott sees five problems:

• increases of 2 to 4 percent per year are too small to make much of a difference;
• managers who give these kinds of increases are "extremely reluctant" to distinguish between high performers and good performers;
• tenure is the typical driver of pay increases, leaving many older employees overpaid for their contribution;
• folding across-the-board increases into base pay every year permanently ratchets up pay levels, and increases in company performance may not keep pace;
• pay ranges are so wide that modest increases and annual adjustments make it nearly impossible for employees to progress from the bottom to the top of the range.

 What's the solution? Base pay adjustments should relate to the market. According to Dr. Scott:

Adjustments in base pay can still occur, but only to account for changes in the price the marketplace pays for a particular position -- not for increases in the cost-of-living or individual performance.

Scott believes that adjusting base pay in response to market conditions "sends the message to employees and their managers that their wages or salaries are pay for the responsibilities and capabilities required to do the job."

Short-term and long-term incentives should be used to reward performance. This has the dual advantage of (1) creating a line of sight between performance and reward, and (2) not permanently ratcheting up base salary.

How do you transition out of a merit increase program? Simple, according to Scott: convince managers and employees that it's not a very good way to reward performance. He states that good communication, combined with employee and manager involvement, leads to little push back from employees on moving away from these kinds of systems. 

When it comes to the argument for eliminating merit increases, I can see both sides. It goes without saying that when market conditions for a given job in a given labor market change, adjustments to base pay are needed. I agree that a 2 to 4 percent annual increase is unlikely to inspire dramatic improvements in performance and engagement. There's no doubt that merit increases permanently ratchet up base pay, and there's also no doubt that lower incentive pay this year relative to last year is a lot easier for employees to swallow than a cut in base pay. I'm 100% behind the idea of creating clear lines of sight between pay and performance. 

On the other hand, we all know that compensation budgets are tight, and there's no guarantee that a switch to incentive pay will generate more than a 2 to 4 percent increase in total pay anyway. I also have to question the simplicity of convincing everyone that merit increases (which may have been in effect for years) aren't a good way to reward performance. Pay evokes a visceral response, and even though our logical selves understand the argument, our emotional selves may have a hard time with it.

From an economic perspective, moving from annual merit increases to incentive pay eliminates some risk for employers because they aren't locked into ever-increasing costs of labor. But the risk doesn't just vanish - it gets shifted from the employer to the employee. The result is more uncertainty among the workforce about their likely earnings stream. Depending on which school of economic thought you belong to, this could be a significant impediment on the road to economic recovery.

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert quantitative analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics Inc., the host of The Proactive Employer radio show, and author of the upcoming book Compensating Your Employees Fairly: A Guide to Internal Pay Equity. Follow her on Twitter at proactivemployr.

Executive Compensation: What the Conversation Can Tell Us

In a terrific guest post late last month, Steve Gifford looked at the “cult-ure” of CEO pay. In particular, he dissected why the typical method for determining CEO pay – assessment based on CEO pay at “comparable” companies – is highly flawed.

With Steve’s post top-of-mind, I then read this Economist article arguing why CEOs are not overpaid, including this nugget:

“[Steven Kaplan’s (Chicago’s Booth School of Business)] argument is well-grounded and intricate. He distinguishes, for example, between ‘estimated’ and ‘realised’ pay. Estimated pay is the estimated value of the CEO’s pay, including stock options, when the board does the hiring. Realised pay is what the CEO actually makes when he exercises his options. There is a big difference. …

“[Kaplan] starts off by questioning the idea that CEO pay always goes up. Granted, it shot up between 1993 and 2000. But since then it has fallen. Average estimated pay for the bosses of S&P 500 companies has declined by 46% since 2000. Median CEO pay has declined since 2001, though only slightly. In 2010 CEOs were paid about as much in real terms as they were in 1998.”

This last statement got me curious on when CEO pay and compensation became part of our lexicon. I ran a quick Google Ngram (which tracks the frequency of words appearing in books during a set time period). As you can see illustrated below, I charted CEO pay (blue), executive pay (red), CEO compensation (green) and executive compensation (yellow). For the record, I originally charted this beginning in 1800 just to see what would happen, but none of the terms even made a blip on the screen until 1900 (which isn’t really surprising).

 

Again unsurprisingly, conversation around CEO pay and compensation (green and blue) shot up in the late 1980s, but I am a bit surprised it wasn’t part of the conversation really at all until then. Executive pay, however, made a bigger impact beginning as early as 1950. But executive compensation is the real story here. Beginning in 1934 we see a sharp rise in the conversation around executive compensation that only continued over the years.

I’m not a compensation pro, so I was curious why. A quick search told me that prior to 1934, corporate executives did not publicly report their salaries or compensation in the U.S., explaining the sharp rise in the conversation as well as the continued sustained path for that particular term above the other three.

Otherwise, the trends for pure word usage align fairly well with the rapid rise in executive pay as compared to average workers. As perceived unfairness increased, so did the conversation.

What’s my point? Simply this: People notice. People question. People discuss. Yes, most understand CEOs bear more of the burden of decision making and more of the risk, but people also notice company results and pay are often disconnected. (And new research shows CEOs aren’t even the most stressed people in the organization.)

If your goal is to motivate and engage all employees to give their best every day, be sure you keep your finger firmly on the pulse of employee sentiment and discussion on this topic, too.

Compensation pros – please weigh in!

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Incentives Before the Fact?

I don't know about you, but I just love Peter Cappelli.   He is one of the "thought" leaders in HR.  You might not always agree with his ideas, but you have to admit that he is always willing to shake up conventional wisdom and bring creative ideas to the table for consideration.

I read one of his articles the other day entitled “Rethinking Incentives and Discipline” in HRE.  I thought I would share some of his thoughts with you.

What if managers were given their bonuses (at target) at the beginning of the year when goals are developed and then a portion, or all of it taken away at the end of the year if some or all of the goals were not met?  If they were met, the target bonus would be kept.   If goals were exceeded, managers would receive additional money up to the maximum allowed.   The equivalent of “claw backs” for executive and sales compensation.

He bases this idea off a study conducted at the Chicago public school system by a couple of university economics professors.  The study included 150 K-8 teachers from Chicago Heights, a low-income community in Illinois. One group agreed to work under a traditional year-end bonus structure, where they could make between zero to $8,000 based on their students' standardized test scores. Another group was given $4,000 at the beginning of the school  year  and informed that if their students' turned in below-average results, they'd have to pay a portion of it back on a pro rata basis. On the flip side, above-average student performance could earn them additional bonus money, up to the full $8,000. 

The results?  There was no/little change in student performance if the teacher had the traditional type of bonus payment at the end of the year.  Students gained as much as a 10 percentile increase in their scores if their teacher received a bonus at the beginning of the school year.   Do you think these teachers were checked for whips before going into the classroom everyday?  There is no mention in the article about the psychological impact teachers and students at yearend.  I guess economists don't consider that newsworthy.

The results of this study can be explained by the psychological term “risk aversion”.   Risk aversion is a method of motivating behavior.   It has been studied for 30+ years in psychological and economic research.  Research indicates that psychologically, losses are twice as powerful a motivator as gains. People tend to strongly prefer avoiding losses to acquiring gains.

Now . . . what if we used this method in private industry for managers?  Think it would work?   Do you think it would end up causing stress and anxiety?  Who wants to subject themselves to the stress of seeing his/her bonus stripped away?   And what about employees?   Would managers put extra pressure on employees and micromanage them in an effort to insure better performance?

Is this a bad idea, or just a mean one?  I think it's both.

I have to disagree with Peter on this idea.  I think it has more potential negatives than positives.  It might lead to better performance on the part of managers---but the downside would almost certainly increase pressure on both managers and employees.    Also, I really don’t think top management would ever agree to awarding bonuses to managers before they “earned” them --- even if they could be “clawed back” later.  

So Peter, thumbs down.   But, as always, I hope you continue to throw out new ideas.   The majority of them are good in my opinion.    Even the ones we may disagree with make us think about new possibilities out there just waiting to be discovered.

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expat twice during her career.   Her true love is working with local national issues.  Jacque has the following certifications:  CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology and an MBA.    She belongs to SHRM, Human Capital Institute and World at Work.   Jacque has also been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications.  She lives in Dallas and has 3 four-legged children and one Chinese daughter (it’s a long story).  She’s had a life-long love of animals and the ocean.   So why is she living in Dallas?

Image courtesy:  fishbowl.com

Repairing Performance Management

Editor's Note:  I am pleased to feature today's post from guest contributor Howard Risher.

Last week I received one of those email messages telling me “performance appraisals can be painful”.  This organization claims to have surveyed X thousands of managers and employees and learned that only 6% of CEOs and 13% of managers “find [appraisals] useful.” 

How many times have we read something similar?

That message stood out because the same week I was working on a soon to be published article by Ed Lawler and two colleagues on best practices in performance management.  Ed has been one of the ‘gurus’ in pay and performance now for 40 years.  The article summarizes the findings from a survey of 100 large companies, focusing on the practices that contribute to effective performance management.

As editor of Compensation and Benefits Review, I invite the best thinkers to publish, but was particularly pleased to receive this manuscript from Ed and his two colleagues. I recommend the article as a must read.  I am not about to give away their conclusions, however; the article will be available in a couple of weeks.

Their analysis shows clearly that the effectiveness of an organization’s approach to performance management does not ride on the ‘system’ design or on the use of technology. This finding should not be surprising to anyone who has followed the research.

The survey results demonstrate that far more important than the system is the leadership by senior management – they need to make it a priority -- and the ownership and accountability of managers. Lawler’s conclusion is consistent with my experience: Line managers are the keys to success. HR has virtually no involvement in the day-to-day management of performance.

One of Ed’s recommended practices is: “Develop measures of the effectiveness of the system.” Their survey finds that few companies have developed these types of measures, but in those companies that have, the practice has “the highest correlation with the effectiveness of the system of any survey item.”  It’s also highly correlated with the perceived effectiveness of the HR function itself.

That came together with the strategy adopted by one of the country’s intelligence agencies. They have a highly successful pay for performance system. They conduct an annual audit of their experience based on employee surveys, targeted interviews, and focus groups. They also created small teams of high performing specialists – ‘Professional Advisory Boards’ is their name--  to identify performance criteria for the major occupations. The HR staff analyzes performance ratings and financial rewards. A summary of these findings and planned changes are provided to the workforce.

Each year they use the information collected to refine and improve their pay and performance practices. It is effectively a commitment to continuous improvement. No one knows more about the best way to plan and evaluate performance than experienced managers and job incumbents. With guidance, they are completely capable of identifying solidly defensible performance criteria.

It is completely logical to ask managers and employees each year to assess how well the system’s working. After all, if the ‘system’ is a tool for managers, they will know if it’s meeting their needs. They will also know its strengths and weaknesses.

Reporting that a performance management system is not “useful” is hardly surprisingly or helpful. This federal agency essentially takes those surveys one step further, asking – “OK, if our system is not as effective as it should be, how can we improve it?”

It should be obvious by this point – the Holy Grail of performance management is a myth. Conducting an annual audit and committing to employees that problems will be addressed will be considerably less disruptive and less costly than investing in an entirely new system.

Howard Risher is a private consultant who focuses on pay and performance. His career extends over 40 years and includes years managing consulting practices for two national firms. He recently became the editor of the journal Compensation and Benefits Review. He also has an MBA and Ph.D from the Wharton School of the University of Pennsylvania. Contact him at [email protected].

 

Creative Commons image: "Hard Hat with Hand Tools Inside" by toolstop

Employee Size Doesn’t Count

Someone asked recently if there was a list of employers by headcount.  I suspect the question arose for the usual reason:  the CEO was curious whether it might suggest some justification for an argument about pay.  The consensus answer from the members of the global total rewards association was negative; but the reasons why are more interesting than the simple answer. 

There is no one authoritative source that ranks organizations by employee count because (essentially) no one cares what others are doing.  Headcounts don’t tell you much.

Number of full-time employees is a terribly misleading size metric in this age of automation, technological innovation, subcontracting, outsourcing, contingent workers and temporary employees. The number of people on your payroll constantly changes and is frequently deliberately flexed for maximum responsiveness to current needs.  No study has ever shown any association of headcount to business success, although sheer size does imply a certain base mass and probable inertia.  Not that many nimble dinosaurs out there.

Employee population is less statistically predictive of compensation than operating budget or sales revenue.  One could argue that the number of people on your payroll does affect your organization style and has some impact on office services and HR functions like labor relations; but those dimensions don’t have much influence on executive compensation.  Firms can have the same revenues, similar expenses and identical profit margins with widely varying headcounts due to differences in work design and business methods.  Those executives who can generate the same operating results with a much smaller payroll may have a better argument for higher pay than those who require many subordinates for the same outcomes.  Likewise, when more people are doing a task, the value of each individual job-holder may drop. 

Number of employees is infrequently surveyed and indifferently reported because no one is willing to underwrite the costs of a really accurate count.  When you do an internet search under "employers ranked by employee population", you get popularity contest lists, incomplete lists of firms sorted by sales revenue  or global headcount estimates.  FTE counts are rarely a matter of external interest except to companies trying to sell something based on headcount (frequently outsourcing or subcontracting services). 

Another reason that headcounts are rarely externally compared is that large employers have already spent many years re-engineering their workplaces for maximum efficiencies.  Economic pressures have also justified downsizing and the replacement of people with systems and technology.  Chaotic supply & demand market situations stimulated the creation and implementation of nimble just-in-time manpower planning systems that can better cope with uncertainty, too.  All these responses were internally driven without reference to (or dependence on) what other employers were doing.  Enterprises that want to survive in this new turbulent world can’t afford to look to others to decide what is best for them.  That is particularly true when the most popular path taken turns out to be a mistake leading to a dead end.  Those who find a new and better path may reach the destination sooner than those who are forced to reverse direction, take a detour or finally find their way only to arrive last at the end of the line.

It may be interesting to know how many employees other have, but it doesn’t really affect you, except as a factoid of dubious relevance.

 E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Creative Commons image "Crowd" by James Cridland