Don't distribute pay like peanut butter

20 February 2009 8:56am

One of the most common mistakes businesses make - particularly in a downturn - is to distribute remuneration evenly across their workforce, according to researcher Erik Berggren.

During uncertain economic times it's crucial that organisations reward good performance, he says.

Berggren, who is the senior director of global research at performance management software provider SuccessFactors, told a breakfast yesterday: "Peanut butter is good, but not as a metaphor for distributing compensation."

His research shows that evenly distributed compensation is the worst model in terms of a company's financial performance, while pay that increases in a straight line with performance is still not ideal.

The best model, he says, is an exponential one that gives the most important people the most pay. "Of course all people are equal but they don't contribute equally to your financial results. They don't - it's a fact. Actually there's a factor of five to 20 'x' between the best and the weakest."

However, he found, 81 per cent of workers say they would consider leaving an organisation if they weren't rewarded for putting in extra effort, but 58 per cent say low and high performers are rewarded equally in their company.

Don't confuse retention and engagement

Sharing the findings of research into the "winning" and "losing" companies from the last downturn, Berggren urged employers: "Don't ever mix up retention and engagement. We see now, people are clinging onto their jobs, but do they care, are they committed? Do they want to win?"

He says employers must "cut with precision" when reducing their headcount.

If you just trim down your organisation by 10 per cent of your people, he says, you're left with "90 per cent of what you already had. You've made no change; you're just stuck with 90 per cent of what you didn't like in the first place.

"It's smarter to know where the critical roles are, and know who's performing and who's not.

"If you need to get rid of body weight, you get rid of body fat, not your lean muscle."

Berggren's research found that low performers are the most likely to stick around, so employers shouldn't hope that natural attrition will take care of downsizing for them.

"What rats leave the ship first when it starts sinking? The ones that can swim."

Who stays in the organisation is as important as who leaves, he says. "If you fire a bunch of good people... the people that will leave you are actually those that very easily get a job somewhere else. And they leave with knowhow, with skills, with relationships with your customers."

Transparency increases trust

On the topic of communication, Berggren says, "transparency drives trust and employee engagement".

Employers must change their communication strategies "from secret to open; from double-speak to clear; from hiding to two-way; and from inconsistent to metrics-based. What does it mean? It means less bullshit, less politics.

"It means if you're firing people, if you're investing in some areas, you better know what you're doing. It cannot be based on subjectivity from managers that just kind of guess... Those companies that manage and build a high trust environment are completely outperforming their competitors that don't."

In the last downturn, organisations with high trust levels among employees outperformed those with low trust by 168 per cent, he says.

To say one thing and do another "is not just bad moral practice, it's really bad for your finances. You're screwing your shareholders if you're doing that, and it makes it hard to recruit and attract the best people, because they don't trust you. You deflate your brand".

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