17th November 2015
When a marketing team at any company meets to decide how to sell its product, the overriding philosophy is always the same. How do I reach the most people, with money to spend, and with the least amount of effort? For most companies that means targeting the middle class. Despite some erosion over the past few years, the middle class still has the majority of the spending clout in the US as in most advanced countries. However, whereas targeting the middle is the best outward philosophy for companies, it is not necessarily the best inward one. Especially when it comes to compensation planning.
Most people who have worked in finance and human resources can tell you that the planning for a new year always starts off with talk of averages. What will the average raise be, what are the average performance scores, and what will the averages be this coming year? What everyone should be talking about is who are our top performers, how do we keep them going, and how do we get more.
Towers Watson just completed its annual study on bonus awards across large and midsized employers. The breakdown of performers was pretty steady with prior years:
8% far exceeded expectations
25% exceeded expectations
56% met expectations
8% partially met expectations
3% failed to meet expectations
However, many of these companies will still begin their year with an average salary increase that provides a few points above for the exceptional performers and even a few below for the underachievers. This can be very demotivating when you consider that according to SHRM (Society of Human Resource Managers), the average raise in 2015 was 3%. Compound this with another study by the University of Northern Iowa which concluded that a merit raise must be about 7-9% to make an employee feel pleased and motivated. So, how uplifting is it to give that 33% who exceeded expectations a 4% raise, while someone who is just doing what it takes to get by receives 3%.
Compensation planning has to be among the most significant investments an organization makes. If you want top performers to stay, they have got to be your priority. Start by giving them raises proportionate to their productivity, 7% plus. Then disburse what’s left to the rest. This way the top performers continue to be motivated, and if the plan is transparent, the average performers might start picking up their game.
In the end it might not feel democratic to give the majority of raises and bonuses to a smaller set of people. But if you want your business to grow, then that group of high performers will have to become a larger one. Solid compensation planning is what will make that happen.