Can a Company Buy Performance?
No, it can’t. But many organizations try nonetheless.
A few years ago, our firm was engaged by a business leader who thought he could buy results by paying people at the 90th percentile of market pay. His theory was that by paying a higher salary than most of his competitors, he would attract the best people–and because he hired superior talent he would in turn achieve superior performance. Didn’t happen. He was frustrated and couldn’t understand it. Why didn’t it work?
What successful companies have figured out is that pay is a strategic tool that is not one dimensional. It has many facets that must work together much like asset classes do in an investment portfolio to achieve a “total return.” In fact, for most organizations compensation is one of the most significant “investments” they will make year to year–and should be treated and measured as such. As a result, the issue becomes much less about “how much” someone should be paid and more about “how” he or she is paid.
A rewards “portfolio” has to be organized in a way that creates alignment between a company’s vision, its business model and strategy, the roles and expectations associated with the those elements and how value will be shared once those expectations are fulfilled. Only compensation that is properly distributed between a range of “asset classes” can achieve that. A one or two dimensional approach won’t get you there any more than one or two stocks can be counted on to generate the total return you’re seeking in your investment portfolio.
When the line of sight just described takes place, employees more clearly focus on what’s important to the organization. That focus leads to higher and more consistent execution in key performance areas. And consistent execution produces results. That is how performance is properly nourished.
Conversely, paying someone a higher salary than the competition doesn’t communicate anything to that employee about what, for example, needs to be done to grow the business. If my company has plans to double revenue in the next three years, and I am paying a key person $10,000 more a year in salary than most of my competitors, what connection is there in his mind between his remuneration and my growth target? There isn’t any. What I need is for that employee to “own” the revenue goal–to have a sense of stewardship about it. I can talk all I want about how important that goal is to the business, but unless that employee and I have defined a financial partnership for achieving that outcome, it’s not likely he will fully adopt an ownership mentality towards it. We’re not aligned.
On the other hand, if I institute a pay philosophy that incorporates a value-sharing approach, I might think about paying that employee at the 45th or 50th percentile of market pay but with significant (perhaps even unlimited) upside potential. I will likely incorporate a blend of short and long-term value-sharing programs that allow the employee to participate in the growth he helps create. The larger the growth, the more value I’m willing to share.
This kind of pay strategy isn’t “buying” performance. Instead, it’s defining a financial partnership with key producers that is self-financing. Value is paid out of value that is created. If it is not created at the targeted level, then less or no value is shared. This approach appeals to real producers because they feel more in control of the financial outcome associated with their performance. And the reward is aligned with with the vision, business plan, strategy, role and expectation components mentioned earlier.
So, instead of trying to “buy” performance, companies should be trying to create alignment (line of sight) by effectively defining how value is created in the organization and how and with whom it will be shared.
To learn more about this subject, view our webinar entitled: “How Does Compensation Impact Performance?”