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Rewarding stars in the age of flat salary growth

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Confronting flat salary-increase budgets, employers are looking for ways to make compensation compelling to their top talent. With some creativity, they are succeeding -- with a careful eye on overall compensation costs.

Not surprisingly, rewarding high performers with significant salary increases gives many businesses, particularly smaller ones, pause. So, rather than boosting fixed costs through salary hikes, more employers are relying on incentives and recognition to reward their workplace stars.

Increasing one-time pay

“As a prudent small-business owner, I hesitate when it comes to raising guaranteed salaries,” said Sean Radvansky, owner of Insight Pest in Raleigh, N.C. “Rather than permanently rewarding present-day results, we let our technicians prove their worth each month.” These monthly incentives are based on several measures, including callbacks, customer surveys, production, sales and manager evaluations.

Radvansky is not alone. Other employers look for nonsalary options to identify and reward their stars.

Providence, R.I.-based Contempo Card Co. relies heavily on incentives for its 120 employees. Funding is contingent on the company's revenues and profitability, and the size of individual rewards is based on each worker's performance.

“Star performers receive a larger share of the overall pool,” said Michael Markarian, Contempo Card’s vice president of business development. “This provides employees with the opportunity to be rewarded for their individual performance while also ensuring that the company achieves a certain level of profitability.”

Another company eliminates annual salary increases altogether. “In lieu of increasing salary, we provide a performance-based incentive for every full-time employee,” said Zachary Rose, CEO of Green Education Services, an environmental health and safety training company. “We receive at least 50% of our total sales from phone conversations, and every employee takes phone orders.”

Individual workers receive a small commission for each phone order. A $50 American Express gift card is awarded to those with the highest sales and the highest average sale value per transaction.

Stretching salary budgets through differentiation

Avoiding salary increases or offering very minimal upticks is not a viable strategy for every organization. And let’s be candid: A significant rise in salary is an important way to keep high performers happy. The challenge for employers is making flat salary-increase budgets go further.

For the most part, these budgets haven’t returned to their prerecession levels and don’t appear likely to in the near future. The recent influx of 2013 salary surveys reveals that the 3% average salary increase remains remarkably consistent across all employee groups. And for the vast majority of companies, that 3% is exactly what employees get.

Aon Hewitt’s research on pay practices at nearly 1,200 organizations found that “75% of employers are just giving 3% across the entire performance population, which is not resulting in much differentiation at all,” said Ken Abosch, Aon Hewitt’s North American compensation practice leader in Lincolnshire, Ill.

However, a smaller group of employers are trying to do more for their star talent. “There are organizations that are trying to provide 5% or 6% or even up to 8% in salary increases to top performers,” noted Abosch. “The rationale is simple. Research tells us that a star performer can be responsible for twice as much output as an average performer and probably 10 times as much output as a below-average performer.”

If HR executives need to sell senior leaders on a compensation approach that favors high performers, this data point is a good place to start.

This rationale is a key reason why the remaining 25% of the employers Abosch studied tend to shift a greater portion of available salary-increase budgets to higher performers, he said. So if employees who perform just average receive a 3% salary boost, then the company can deliver more of the budget’s dollars to the highest performers.

In this case, a poor performer might receive a salary increase of 1% or less, while star performers might earn about 4.5% to 4.7%.

Yet, Abosch added, “I would even make the case that even a salary increase of 4.7% is not enough to really provide a strong message to high performers in an environment where we have a 3% average budget.”

Of course, an employer can do this salary shifting to a greater degree. For example, using that same 3% salary-increase budget, a business could average increases of 2.5% for the overall workforce in order to free up a higher portion of dollars to reward its stars.

“There are companies that are providing their outstanding performers with an increase of 6% or more,” said Tom McMullen, reward practice group leader at Hay Group in Chicago. “To do that, these employers are obviously giving a higher percentage of their employees no or very low salary increases.”

McMullen notes that performance-oriented organizations follow the key mantra of multiple and differentiated rewards. Thus, companies can add individual performance modifiers to any available short- and long-term incentives.

Identifying stars

For any of these approaches to work, employers need to be sure they have identified their high performers using consistent criteria. For example, McMullen suggests that organizations develop a key talent grid with the expectation that 15 to 20% of the workforce will be considered high performers. This focus allows companies to invest more time and attention on those individuals.

However, for this approach to be successful, companies must also strengthen the underlying infrastructure that supports the identification, management and compensation of star performers. In other words, if an employer is going to shift more money toward the star-performer group, it needs to make sure that those in the group have earned and continue to earn that designation. This means doing a better job of tracking who falls into the high- and low-performer categories using clear standards of performance.

In addition, employers must make sure they have effective goal-setting processes for employees. The executives, managers and supervisors working with these high performers must also have the skills and tools necessary to manage employee performance throughout the year and not just when it comes to reviews and compensation decisions.

Once the core group of high performers have been carefully selected, employers can evaluate what, if any, adjustments they need to make to current compensation levels.

“If there is a disconnect between current compensation for this key talent group and where compensation should be, organizations will often use off-cycle base salary increases to help high performers get caught up,” said McMullen. Organizations can also use additional rewards, like equity, to make up some of the difference.

Joanne Sammer is a New Jersey-based business and financial writer.

© 2013, Society for Human Resource Management.

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