Why Link Pay to Performance

If you expect to attract and retain the best people, you must have market competitive pay. Additionally, you have to be willing to accept some level of employee turnover. The key is to design your pay so that you have targeted turnover; i.e. you induce turnover of low performing personnel while re-enforcing a culture of high performance, enabling you to retain top performers. This is why every company should consider linking pay to performance.

The problem for many companies is the minimal spread between high and low performers. Most companies design their pay around a merit matrix that looks like this:

Performance Level	Highest	Above	Below	Lowest
Exceptional	3.5%	3.5%	3.0%	3.0%
Exceeds Expectations	3.0%	3.0%	3.0%	3.0%
Effective	2.5%	2.5%	2.5%	2.0%
Development Needed	2.5%	2.5%	2.0%	2.0%
Unacceptable/Poor	2.5%	2.0%	2.0%	2.0%

In the above example, the spread between the best and worst performers is a mere 1.5%. In today’s world where companies are fighting to attract and retain top talent, you must be much more aggressive with your merit matrix so that it looks more like this:

Performance Level	Highest	Above	Below	Lowest
Exceptional	6.5%	5.5%	5.0%	4.0%
Exceeds Expectations	6.0%	5.0%	4.0%	3.0%
Effective	5.0%	4.0%	3.0%	2.0%
Development Needed	2.0%	1.0%	0.0%	0.0%
Unacceptable/Poor	0.0%	0.0%	0.0%	0.0%

In this example, people who don’t perform get no increase. This sends a strong signal to everyone that performance matters and for those who do perform, you will get a serious merit increase. This is one of the most powerful statements any company can make when it comes to retaining the best people. You should also think about the limited money you have to spread around. You want to allocate your limited resources to those people who deliver results. A merit matrix that has distinct differences between low and high performance will do more to communicate and create a culture of high performance than any speech or memo you will issue. 

“Variable pay budgets and spending have nearly doubled in the last 20 years, subsequently emerging as the pay-for-performance vehicle of choice now and for the foreseeable future. In a more robust job market, competition for talent exists in every sector. As a result, we are seeing industries that have traditionally shied away from providing bonuses, such as agriculture, higher-education and the federal government, realizing they must establish variable pay programs to compete for and retain the best talent.” - Ken Abosch, Compensation Leader for Aon Hewitt.

Trying to retain the best people is becoming increasingly difficult. According to a 2015 survey conducted by WorldatWork, over 80% of the people surveyed indicated they plan to leave their job. Contrast this to five years ago when the percentage was 60%. High performers are not going to stick around for the usual 3% raise while others get 1%. 

A final point concerns the traditional performance review. If you link pay to performance, you need to rely more on 360 degree feedback that has some anonymity. This provides an objective, open and honest review process that serves as your basis for administering your merit matrix. Additionally, your review process has to be on-going and not just once a year. It should be a cumulative reflection on how well someone has helped the company meet department and company goals. And the review process should be both quantitative and qualitative. For example, the Marketing Manager was able to help the company meet its sales targets (quantitative), but he also mentored and grew the capability of our marketing team (qualitative). If you can have a robust back-end review process coupled with a serious merit matrix (as described in this article) and combine this with a competitive benefits package, then you have established the foundation that should enable a high performing workforce.

"It is very difficult, but not impossible, to put a price tag on losing key people and their smarts. As if to emphasize the intangible yet dire nature of these costs, some executives were unable to provide a dollar figure, but simply responded 'incalculable' or 'priceless.' So even if you can't quantify the costs of knowledge loss, you might agree that the cost is often a lot, enough that you would like some options to avoid or minimize these costs. Despite the acknowledged threat, a surprising number of organizations are doing nothing or little about it." - Critical Knowledge Tools by Dorothy Leonard, Walter Swap and Gavin Barton

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Recognizing Intellectual Capital

The traditional accounting model with its financial statements is increasingly inadequate in helping us understand what drives value in our business. These value drivers are highly intangible and the accounting model is not setup to measure and report these critical assets. Part of the problem is simple – it’s hard to measure intangible drivers of value. They can include things like:

• Your ability to retain and have loyal customers
• The fact that your workforce is highly motivated and requires minimal supervision
• Having strong leadership that creates the right culture for performance
• Obtaining brand recognition that makes it harder for others to compete against your company
• Turning ideas into real product improvements for continued market leadership
• Leveraging your know-how against the assets of others in a shared economy

A Better Way to Grow

The consensus amongst most is that bigger is better. With increased pressure on our natural capital (soil, water, oceans, etc.) and an ever increasing gap between rich and poor, it’s time for all businesses to re-think what growth is really about. Take for example inequality - the United States has the fourth-highest income inequality among the world’s developed countries; only Chile, Mexico and Turkey rank higher with trailing countries represented by Russia, Ukraine and Lebanon.

In their book The Big Enough Company, authors Adelaide Lancaster and Amy Abrams make the argument that owners should be true to themselves and grow a company to a size where they can still enjoy running the company. You should not grow just for growth’s sake. A “big enough” company delivers benefits to a broad audience and continues to have a positive impact as the owners originally envisioned.   

Is Knowledge Really Power?

We all recognize (at least I hope most of us) that knowledge is instrumental to value-creation and that knowledge as an asset is far more important than traditional assets such as equipment, real estate or buildings. And to a great extent, every organization must become a knowledge organization and every employee must become a knowledge professional.

Three Frameworks for Higher Productivity

Increasingly we live in a world where we have to get a lot done and since no-one can change time, the key is to get more out of the time we have available. The good news is that several frameworks can rapidly increase your productivity. This article will discuss three: 1) Eisenhower Box, 2) Lewin’s Equation, and 3) the Zeigarnik Effect.   

Certain people seem to get a lot done in an effortless way. One such person was Dwight Eisenhower, 34th President of the United States, serving two terms from 1953 to 1961. Eisenhower followed a simple principle based on what he once said:  “What is important is seldom urgent and what is urgent is seldom important.”

Measuring Human Resource Capital

One of the most under measured parts of a business is the human resource capital and it represents one of the biggest challenges facing business; namely finding the best and brightest people. It is these human resources or people who ultimately create value for the organization. People generate value through their application of skills, talents, and abilities. The key is to invest in people so that human resources are productive, knowledgeable, effective, and efficient. This is what separates the average company from the exceptional. Getting a return on this investment or ROI is extremely important.

How to Capture Useful Feedback

Capturing feedback is important to the success of every business. Feedback represents a conversation with your employees and your customers. These conversations keep you within a zone of reality and best of all, these conversations create relationships. And in the world of business, relationships matter.

Organizing the Competitive Intelligence Effort

The development of strategies to compete is essential for the survival of every organization. Competition is increasing from everywhere, ranging from small startups to global companies leveraging resources in the shared economy. Understanding this external global environment is now part of how you must strategize. Competitive Intelligence (CI) is the process by which you collect and analyze information to understand the external environment. The product of Competitive Intelligence is knowledge that facilitates decision making, both strategic and operational. Therefore, CI is both a process and a product.

How to Use the Minimum Viable Product (MVP)

Over the last few years, successful entrepreneurs have pointed to the Minimum Viable Product or MVP as a roadmap for creating long-term success. MVP is about creating a product or service with just enough value to make it attractive to a small group of customers. In some cases, the product or service is released on a test basis. This allows you to move incrementally without committing huge resources. A strong development team will be needed to capture feedback and turn out new releases. If you are releasing something very unique, you should validate the offering with a private or internal group well in advance of going to a larger test market.

Appreciating 'Appreciative Inquiry' (Part 2 of 2)

Simple things often work best – easy to design and implement. When it comes to strategic planning and getting the organization to move, Appreciative Inquiry can be the preferred approach because of its simplicity. In an effort to get Appreciative Inquiry working, we can follow the 4 D Model: Discover > Dream > Design > Deliver.