Managing Compensation to Win the War for Talent
By Mike Vilimek on Nov 26, 2013
By Jeff Haynes - Originally posted on Oracle Applications
If there’s one thing HR and Compensation departments have learned since 2008, it’s that the budgets for rewards programs are anything but set in stone. Many historically well-funded merit and bonus pools were slashed as corporate performance waned. A clear emerging trend coming from this down turn is that you can’t make mediocre compensation decisions with thin budgets. Wise and well-informed decisions that impact your highest performers and those with the hottest and most critical skill sets can go a long way towards competing and winning the war for talent.
In general, all the elements of talent management loom large as executives look to gain a competitive edge in innovation, new market opportunities, and gains in productivity and quality. In fact, a study by The Boston Consulting Group demonstrated the importance of sound talent management practices on enterprise value by comparing the growth of stocks in Fortune’s “100 Best Companies to Work For” versus the S&P 500. Firms that made Fortune’s list at least three times in the last 10 years outperformed the S&P by nearly 100 percentage points in 2011. With those kinds of returns, who doesn’t want to implement the types of best-practice talent management programs demonstrated by these firms?
One such practice that stands out is reward segmentation and differentiation. Segmentation is the purposeful compartmentalization of particular groups within your workforce. These could be based on categories, such as high performers, job families with critical skills, high potentials, different geographies, or different business units. Differentiation is the careful, disproportional distribution of rewards to these segments. In “The Next Wave in Integrated Talent Management,” Bersin and Associates demonstrated that companies with higher standard deviations in compensation have 15 to 20 percent greater performance when measured by revenue and profit growth.
Who Pays for Performance?
Today’s tight rewards budgets coupled with these eye-opening studies have moved “pay-for-performance” front and center. More than 80 percent of firms offer variable compensation programs and a third said they plan to increase pay-for-performance, according the 2013 Global Top Five Employer Rewards Priorities Survey by Deloitte. To give some historical perspective, in today’s labor market, 80 percent of employees are eligible and receive bonuses; this is more than a 30 percent increase over the last 15 years. Studies have shown that variable compensation is really the best place to differentiate pay; and, every major academic review of rewards researched in the past 30 years has confirmed that incentives (variable pay) increase performance (Ledford, Gerhart, and Fang World at Work Journal Q2 2013).
As appealing as it may seem, a pay-for-performance initiative should not be undertaken lightly. The following are some baseline criteria where pay for performance typically works best:
Quantifiable / Attainable Outcomes: The organization has a results-oriented culture where precise, measurable performance criteria are identified that create business success
Competitive: Bonus plans are common in industry / particular job levels
Pragmatic: Plans are simple and well understood
Communication / Leadership: The plans are not a substitute for management
Strategic HR: HR functions as an enabler of collaboration, expertise, and decision-making, and the pay-for-performance plan is a part of an integrated talent management strategy
Here’s Where Oracle’s Technology Comes In
The fifth criterion, the role of strategic HR, is evolving. Specifically, it is moving towards being a proponent of technology―as an enabler of the talent management strategy (The State of the HR Profession, 2011).Obviously we at Oracle are in the business of designing, developing, and selling great HCM applications―and technology will undoubtedly enable an organization to be more successful at these activities.
But, let's be clear―all the best software in the world won't solve poor management practices.
Often, we find that the selection and implementation of Oracle’s software actually drives HR to re-engineer its talent processes and to implement more sound and relevant management practices.
So, as you and your organization consider your next steps in integrated talent management, give reward segmentation and differentiation some thought. Is it a part of your talent strategy? How well are you doing it? Are you driving pay for performance? What’s holding you back? As Abraham Lincoln once said, “Give me six hours to cut down a tree and I will spend the first four sharpening the axe.” How sharp is your pay-for-performance axe?
Jeff Haynes is a 19 year veteran of HR / Compensation / Human Capital Management. He has been on both the corporate side of HR, and in consulting, and the recurring theme he hears is that organizations are looking for competitive advantage. He believes that today, more than ever, this can be found by focusing more on human capital – making wise investments to enable the highest performing and motivated workforce, and driving towards real business outcomes.
Currently, Jeff is a Practice Leader in Oracle's HCM Transformation Practice specializing in Talent Management and Compensation. He helps organizations transform their strategies, processes and technology to unlock the power of their people and drive measurable business impact.