| REWARDING PERFORMANCE New advice on pay for performance challenges In today’ s rapidly changing economic environment, corporate America is learning that the concept of "paying for performance" can be far more complicated than first imagined. A new book from Mercer Human Resource Consulting offers some timely advice for those of you grappling with a compensation strategy that forges a link between pay and performance. Best practice in paying for performance While this Mercer book rejects the notion of one-size-fits-all solutions to compensation challenges, it observes that there are certain guiding principles that nearly all high-performing companies follow, either explicitly or implicitly, in designing and implementing pay programmes. The seven guiding principles are as follows: - Vision: Before any organisation can hope to develop a successful pay-for-performance programme, it should have a clear sense of purpose , says Mercer. There should be a high-level understanding within the organisation of where it would like to be next month, next year, and beyond. Without such a vision, a compensation programme is likely to drift aimlessly.
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- Alignment: Proper alignment of pay programmes is critical because it helps ensure that the behaviours the organisation is rewarding are the same behaviours that will help achieve the desired results. Alignment also requires proper calibration to ensure that the levels of pay delivered are in line with the levels of performance achieved, says Mercer.
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- Holistic approach: A central thesis of the Mercer book is that pay cannot be managed in isolation from other elements of human capital management. An effective reward programme looks holistically at pay, benefits, and career opportunities and the relationships between these various reward components.
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- CEO commitment: Even a properly aligned, holistic reward programme will disappoint if it lacks commitment from the highest levels of the organisation, warns Mercer. It is vital that CEOs take the lead in identifying and communicating performance criteria so there is clear understanding of how the organisation measures success and how individuals can contribute to that success. What’ s more, the CEO must be willing to drive change throughout the organisation.
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- Accountability: For Mercer, personal accountability is a hallmark of effective pay-for-performance programmes. Traditionally, accountability has meant "the numbers tell the story", but today, many organisations are adding non-financial measures to their reward programmes. This often takes the form of a balanced scorecard in which performance is evaluated in areas such as financial results, people management, customer satisfaction, and intellectual capital development.
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- Balance: According to Mercer, one of the most challenging aspects of any pay-for-performance programme is striking the right balance among various compensation elements and performance measures — for example, short-term versus long-term results, absolute versus relative performance, cash versus equity compensation. An over-reliance on any one element or measure can produce unintended consequences, so it’ s critical for each company to achieve its optimum balance.
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- Rewarding top performers: While its tempting to argue that no employee should receive a substantial reward if some baseline level of organisational performance is not achieved, this approach can be short-sighted, argues Mercer. Failure to deliver rewards to top performers in difficult times can result in retention problems that further exacerbate a company’ s problems. After all, these are the people who will drive future performance improvements. High-performing companies, it seems, widely recognise the need to reward top performers, regardless of overall business conditions.
| What you will find in this Mercer book | | The 389-page book, authored by noted consultant Peter T. Chingos and 27 of his Mercer colleagues, provides current thinking and practical advice for designing compensation programmes in a pay-for-performance environment. Through self-contained chapters, the book provides a broad overview of the many elements of an effective pay-for-performance system. Topics addressed include: - overall reward strategy
- executive compensation and benefits
- annual incentives and long-term incentives
- broad-based and global equity plans
- sales compensation
- performance management
- special guidance for not-for-profit organisations.
| | No one size-fits-all solutions Underlying each chapter in the book is Mercer’ s collective experience regarding "best practices" with high-performing companies. But as Peter T. Chingos points out, the book is not intended to provide "one-size-fits-all" solutions to compensation issues. "There is no single best or right way to design and implement your company’ s reward programme, he says. A good programme balances each organisations specific business issues, human capital concerns, and shareholder expectations. It should be uniquely created to sharpen your competitive edge." | A final word "The notion of human capital as an investment to be cultivated and not merely an expense to be minimised - represents one of the most fundamental shifts in business thinking in recent years. This idea is the foundation of our book. We believe that, as economic conditions continue to shift, effective human capital management may become the most important driver of long-term financial success and shareholder value creation." - Peter T. Chingos, Mercer Human Resource Consulting. Want to know more? Title: Paying for Performance: A guide to compensation management, Mercer Human Resource Consulting. Availability: To order a copy visit www.mercerHR.com/PayingforPerformance. Mercer Human Resource Consulting is a global firm that helps organisations create business value through their people . With more than 13,000 employees in some 40 countries and territories serving clients worldwide, the company is part of Mercer Consulting Group, a wholly owned subsidiary of Marsh & McLennan Companies, Inc., For more details visit Mercer online at www.mercerhr.com. Posted 11 June 2002 |
