In this era of modest salary increases, employers are looking to differentiate rewards for their best-performing employees. Even bonus pools are not always funded at a level high enough to make up the difference in salary growth.
“You don’t want rewards to be spread like peanut butter with both average and high performers getting the same amounts,” says Linas Orentas, SPHR, senior director of compensation for Rosemont, Ill.-based US Foods Inc.
Compensation decisions are a zero-sum game: There is only so much money to go around. “A manager trying to get even 5 percent for the very best performer requires some tough decisions for the rest of the population,” says Laura Sejen, global rewards practice leader for Towers Watson in New York City. In many cases, even average performers might not get that average 3 percent increase.
Incentives are not as robust as they used to be either. “Since the recession, incentive pools on average have been underfunded at less than target levels,” Sejen says. That can make it harder for managers to achieve variation among different levels of performance.
Even so, organizations are trying to link rewards and performance as much as possible. According to Towers Watson’s 2014 Global Talent Management and Rewards Study, which surveyed 337 U.S. companies, the highest performers receive merit increases that are differentiated at 170 percent, while annual incentives are differentiated at 125 percent.
Identifying top performers is the most important step in this process, and employers may struggle to determine who is most deserving.
In some companies, top performers make up as little as 5 percent of the employee population while in others they constitute up to 30 percent.
Once top performers have been identified, employers must make sure to provide adequate rewards. US Foods has a goal of giving top performers rewards that are at least 2.5 times those offered to lower performers. The company develops guidelines for its salary review process, then measures how closely each business unit adheres to those guidelines. The review comprises three key measures:
• Actual awards compared to established guidelines.
• Actual high-performance premium compared to expected premium.
• Actual plan compared to budgeted plan.
When it comes to bonuses, US Foods allows its business units to differentiate awards under the annual incentive plan by “using individual performance factor multipliers that increase or decrease the size of the formula-driven bonus award for individuals based on their performance rating,” Orentas says. “Top performers earn bonuses that are up to 140 percent of the formula-driven bonus award.”
Inevitably, managers will often try to get a higher level of reward for certain high-performing employees. “Most companies are overwhelmed with requests for exceptions, and every exception on its own looks OK,” says Jim Kochanski, SPHR, a principal with Sibson Consulting in Raleigh, N.C. The danger is that too many exceptions will undermine the link between rewards and performance.
This is a delicate balance. “Management needs to have the ability to recognize and reward extraordinary effort and performance,” says Fran Wahr-man, SPHR, vice president of incentive compensation and governance manager with The Huntington National Bank in Columbus, Ohio. “But there’s still a compensation budget that must be maintained, and, more likely than not, that budget is tight.”
US Foods allows managers to advocate for awards that are outside the company’s compensation guidelines as long as the manager provides justification for the award. In most cases, managers can either leverage the company’s limited equity adjustment budget for these situations or work with HR to bring the final salary increase back within guidelines. “Managers need to have the flexibility to manage and plan rewards as they deem necessary,” Orentas says.
merit increase percentage*
incentive payout as % of target
|Did not meet expectations
|Partially met expectations
|Far exceeded expectations
All figures are the median.
*Based on an overall median merit increase budget of 3 percent.
Source: Towers Watson’s 2014 Global Talent Management and Rewards Study.
Considering Other Options
Some companies extend eligibility for long-term incentives to high-performing employees even if they are at an organizational level that otherwise would not allow their participation in the plan, Sejen says.
Another way employers funnel limited funds toward top performers is by “carving out” part of the salary increase budget for that purpose. For example, if the overall salary increase budget is 3 percent for the year, employers can allocate 2.5 percent for all employees and funnel the remaining 0.5 percent into a pool to fund greater salary increases for top performers.
Providing smaller but more-frequent salary increases can also motivate top performers. For example, a top performer might get a salary increase during the overall salary review process, then another smaller increase later in the year. This can be a good approach for rewarding top performers who are at the lower end of their pay band or salary range.
“Instead of waiting 12 months, employers can schedule additional salary reviews for these high performers within the next six or nine months,” says Tom McMullen, rewards practice leader with Hay Group in Chicago. “To balance it out, employers might make certain lower performers wait 18 months to two years for a salary review.”
A Small-Company Perspective
Rewarding top performers can be particularly challenging for smaller companies that need to keep fixed costs under control. After experimenting with nonmonetary rewards such as cruises and other trips, the leaders at Easy Rest Adjustable Sleep Systems—a company in Baltimore with 100 employees—realized that cash is king.
“We have tried offering rewards other than cash, and it simply doesn’t work,” Chief Operating Officer Jeffrey Mowrey says. The only noncash reward Mowrey has found to be welcome is extra paid vacation time.
The company’s main compensation system focuses on rewards based on weekly performance metrics for the roughly 75 percent of employees involved in sales and service. For special projects in other departments, top performers are awarded with a one-time cash bonus. Year-end bonuses, which fluctuate based on overall company performance, are given based on performance (80 percent) and tenure (20 percent).
To maximize the impact of rewards, find ways to make them stand out. For example, cut a separate check for a bonus rather than making it another line item on a paycheck, and be sure to communicate your gratitude when you present it.
The Huntington National Bank, which has about 12,400 employees, occasionally takes this approach. For example, a top performer might get a 3 percent raise during the annual review then another 2 percent or more six months later. “This sends a message of going above and beyond to recognize and reward consistent high performance,” Wahrman says.
For employees with salaries that are at or near the top of their salary range, employers can offer a one-time lump-sum bonus that is equal to the amount a normal salary increase would have provided. If the employee continues to perform well in that position, it may be time to talk about how to move him or her to a different job with a higher salary range.
Communicating About Pay
Working through compensation issues is much less effective without proper communication about how and why decisions are made. “Without communication, this can be a recipe for disaster,” McMullen says.
He suggests that managers engage in preparatory communications well before compensation discussions and performance reviews begin. Managers should be prepared to address employees’ questions during this process. “The focus [of HR] should be on ‘How can we help managers provide a good robust discussion?’ ” McMullen says. “Pay should never be a surprise at the performance discussion.”
Joanne Sammer is a New Jersey-based business and financial writer.