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In an uncertain economy, many companies are facing hard choices when it comes to rewarding employees. Salary budgets are being cut, and incentive pools are drying up. According to a global survey of 1,028 HR and finance professionals conducted by Mercer, 73 percent of respondents are likely to reduce their projected salary increase budgets in 2009, and 12 percent consider it likely that their companies will freeze wages at 2008 levels. When it comes to incentives, 60 percent of respondents expect to reduce 2009 bonus payouts based on 2008 performance, and Mercer expects this figure to increase after year-end 2008 results and 2009 business forecasts are finalized.
Yet especially in difficult economic times, companies need to manage rewards carefully. “The biggest concern for companies is losing top talent,” says Tom McMullen, U.S. rewards practice leader for The Hay Group in Chicago. “Good performers can land a new job no matter what is going on in the broader economy.”
Get More Bang for the Compensation Buck
In this environment, employers need to make sure that they are spending their compensation dollars wisely. For many companies, this means focusing incentives and salary increases on key talent in the most important jobs. These are the employees a company can least afford to lose and who are likely to be in greatest demand in the marketplace. But focusing on rewarding top achievers gives rise to challenges such as:
To ensure appropriate rewards for key employees and high performers, companies must take the time to identify properly which employees fit into that category. “So many organizations can tell you about every segmentation of their customer bases,” says McMullen. “But ask them the same question about segmenting their employee population and they can’t answer.”
The need to reward and motivate high performers could impact incentive pools and salary budgets to the point where little is left for the remaining employees. “If you take that budget and target it to the highest-performing employees, some employees may get zero,” says Erin Packwood, leader of Mercer’s human capital practice for the southwest region in Houston. “However, this approach can make that budget go a little farther.”
Methods for managing employee performance must be effective.“Although more organizations are increasing the quality of their performance management programs, there is still work to be done,” says Packwood. Effective performance management helps to ensure that the company is rewarding the right people — and that employees understand pay and incentive decisions by linking them clearly to business performance.
Identify Top Talent
There are many ways that HR can help define employees who deserve exceptional rewards. Some companies spotlight those holding the “key jobs” in the organization, while others favor employees that they have determined to be high performers or high-potential individuals. These employees might not have reached the high-performer level but show the promise to do so.
Gen-Probe, a biotechnology company with about 1,000 employees based in San Diego, focuses its incentives and merit increases heavily on high-performing employees. For this company, identifying high performers is a relatively straightforward exercise: defining clear goals and metrics, and then communicating to employees exactly what they are expected to do.
Gen-Probe employees who exceed a certain level of performance are considered to be high performers and are eligible for greater rewards, such as higher merit increases. “We make it very clear at the beginning of the year what the company expects in a given time frame,” says Lisa Hellmann-Rhodes, the company’s senior director of organizational development and learning. Because of the company’s stretch goals, only about half of the group is made up of employees who attain high-performer status consistently.
No matter what parameters or criteria a company uses to select the employees eligible for special rewards, incentives or salary increases, it must apply them consistently. Like any other performance criterion, lack of clarity or confusion about what is required to achieve high-performer status is likely to lead only to frustration and anger among employees.
------------------------------------------------------------Lack of clarity or confusion about what is requiredto achieve high-performer status is likely to lead to frustration and anger among employees.------------------------------------------------------------
Look Beyond Pay
It is always a good idea to expand the traditional definition of rewards beyond the financial, especially when monetary rewards are getting scarce. After all, rewards can encompass anything of value an employer provides to its employees, including benefits, training, professional development, career advancement and long-term opportunities with the company. “Different workers have different values, so it is important to discover the best way to motivate them,” says Hellmann-Rhodes.
Along similar lines, no matter how companies manage their rewards programs, they should keep one thing in mind, adds McMullen. “It’s important to align reward opportunities with the intrinsic needs of the individual.”
In this regard, career development, in particular, should not be underestimated. Companies can garner a great deal of good will with their top performers by talking to them about what they want to be doing in their jobs and careers, and how that might fit with the company’s needs. However, whenever a manager or executive makes a promise regarding the careers of these individuals, it's essential that the company be able to deliver.
“When people know that they are considered among the top talent in the company, that can be an indication that the company will offer a broader range of future career opportunities and the related rewards,” says McMullen. “The company needs to position those long-term opportunities, whether that is a specific job or simply interesting project opportunities, as what top performers can aspire to. A big part of rewards is the quality of work itself.”
------------------------------------------------------------‘A big part of rewards is the quality of work itself.’------------------------------------------------------------
It’s easy to overlook the motivational and positive psychological benefits of nonfinancial rewards. It costs very little to invite a group of high performers to have lunch with the CEO to discuss the company’s future, but the motivational benefits and cache attached to that invitation can be considerable. Likewise, the psychological and motivational benefits of fast food giant McDonald’s paid sabbatical program, which allows managerial employees to take eight weeks of paid leave after 10 years of service, are likely to far outweigh the actual cost of the employee’s eight weeks of salary.
Joanne Sammer is a New Jersey-based business and financial writer. Her articles have appeared in a number of publications, including Business Finance, Consulting, Compliance Week and Treasury & Risk Management.
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