Notice Anything Differentiated?

Ever since corporate America discovered, sometime around the late 1990s, that employee rewards programs could actually generate measurable results, efforts to increase incentive program ROI have been on the rise. In The Manager’s Guide to Rewards (AMACOM, 2007), authors Doug Jensen, Tom McMullen, and Mel Stark of the Hay Group suggest that companies can dramatically improve their programs’ ROI by establishing a system of rewards that genuinely differentiate among various team members’ contributions to the organization’s key goals. They offer five tips for helping managers make this happen:

1. Remember that managers are your front line recognition troops
   Many managers will spend a great deal of time figuring out the best way to rate and evaluate their employees’ performance. But effective performance management typically boils down to three elements: clarity of goals, frequency of dialogue, and differentiated performance and rewards. Give them rating scales and managers will use them, but the most capable managers, left to their own devices, will often come up with their own meaningful performance differentiators that produce bottom-line results.
2. Don’t fudge it on the budget
   All the incentive program-based communication, goal clarification, performance differentiation, and the rest of it won’t mean much if the funding isn’t there to offer rewards commensurate with the extra results produced by top performers. A program consisting primarily of promotion increases and base salary merit increases will likely not be enough. That’s why savvy organizations will allocate a portion of their compensation budget to ensure that truly outstanding achievement is recognized properly – and generously.
3. Rate differently, reward differently
   To the company, performance differentiation means greater results leading to the achievement of organizational goals. To employees, however, performance differentiation is a means to a different end: greater compensation. Some companies cling to plans based on a distribution curve of performance ratings, but these inevitably break down when top performers realize that they’re only receiving marginally more rewards, whether merit pay, incentive pay, or other options, than average performers.

   If you change this practice, and reward top performers more, isn’t that a zero sum game where the extra that those at the top receive means less for everyone else? Yes, and the authors acknowledge that this can be a tough sell for the whole team. But managers who get ahead of the process, engaging in regular dialogue with employees throughout the year and clarifying precisely what differentiation means and how it will be rewarded, can actually improve the morale and "climate" of the office.

4. Let them know why differentiation matters
   A basic tenet of any incentive program is that employees need to understand exactly what they’re being asked to do to earn rewards. But perhaps equally important, employees should also understand how their extra effort in achieving or exceeding the established goals would benefit the company and help the organization succeed. Additional motivation often stems from team members’ sense that they’re connected to a larger picture and they understand how their actions contribute.
5. Communicate early and often
   With the possible exception of lunch theft from the break room refrigerator, in an office of coworkers there’s no more sensitive subject than compensation. Any changes to compensation plans will increase tension. And while most organizations have an identifying philosophy behind the key elements of incentive programs, few do the genuine work of communicating that philosophy to program participants. This is why, when asked, most employees can’t explain what a compensation program is designed to achieve.

   The important take away, say the authors, is that merit increases and incentive payments (or the lack thereof) alone do not take the place of the performance management process. Effective communication must accompany all the management directives so that employees are given the best chance of meeting the goals that have been established for them. But no amount of communication, they add, can make up for an ill-conceived or poorly designed incentive program.