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Rewarding stars in the age of flat salary growth

BY HBSDEALER Staff

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.

Have HR-related questions and concerns? Get access to essential forms, policies and guides, plus a live call center, at ToolkitHR.com, powered by HCN and the Society for Human Resource Management (SHRM).

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Industry pitches in for Haiyan victims

BY HBSDEALER Staff

Many companies have been organizing drives and fundraisers for victims of Typhoon Haiyan since it touched down in the Philippines, and the home improvement and building materials industry is finding ways to make its own mark on the recovery effort.

Lumber Liquidators is providing tents and aid to affected families via the nonprofit ShelterBox USA. The organization delivers compact kits and emergency supplies to disaster survivors, which include tents, blankets, tools, water purification equipment, stoves, children’s activity kits and more.

Sears Canada has launched a donation campaign to the Red Cross Typhoon Haiyan Fund, which it recently extended through Nov. 22. Donations are being accepted at Sears retail stores across Canada, as well as by phone. Donations may be matched by the government of Canada, and the retailer will also make a corporate donation based on donations from customers and associates.

The Ace Foundation has also partnered with the American Red Cross to collect donations for the typhoon survivors.

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Executive chairman of A. O. Smith named National EY Entrepreneur of the Year

BY HBSDEALER Staff

Paul W. Jones, executive chairman of A. O. Smith, has been named the National EY Entrepreneur of the Year 2013 Distribution and Manufacturing Award winner.

The EY Entrepreneur of the Year Award encourages entrepreneurial activity and recognizes leaders and visionaries who demonstrate innovation, financial success and personal commitment as they create and build world-class businesses.

Jones was recognized for bringing the manufacturing company to the next level of innovative strategy, business approach and new service offerings. He was honored at the Entrepreneur of the Year Awards gala, the culminating event of the EY Strategic Growth Forum in Palm Springs, Calif. The Forum is the nation’s premier gathering of high-growth, market-leading companies. Awards were given in 10 additional categories.

The EY Entrepreneur of the Year Award winners were selected by an independent panel of judges from more than 250 regional award recipients.

"Jones’ bold decision-making definitely impressed our judges,’" said Bryan Pearce, EY Americas Director, Entrepreneur of the Year. "Jones helped the company grow internationally both in China and India, which are now both highly successful ventures."

"When I joined the company, we needed to rationalize the acquisitions we made in order to put the company into a more efficient operation status," Jones said. "Once our costs lowered in the marketplace, we were able to focus on bringing innovation back to the equation."

Jones joined A. O. Smith in January 2004 as president and chief operating officer, and became chairman and CEO in January 2006. He was elected to the board of directors in December 2004. Jones assumed the newly created position of executive chairman on Jan. 1, 2013.  

In addition to Jones, the EY Entrepreneur of the Year Distribution and Manufacturing finalists in the US were: Gary M. Schuster, president and CEO, OMCO, based in Wickliffe, Ohio; Dr. Larry Sanders, president and CEO, Specialty Fertilizer Products, LLC, based in Leawood, Kans.; and Andra Rush, founder, president and CEO, The Rush Group, based in Detroit.

Hamid Moghadam of Prologis was named the National EY Entrepreneur Of The Year 2013 Overall Award winner.

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