Meritocracy: Pay-for-performance strategies yield big benefits
Meritocracy is a subject that's close to the heart of Tom Lynch, Ceridian vice president of Compensation and Benefits. "Meritocracy," he says, "describes a strong, straightforward compensation philosophy. It describes a system that gives opportunities and advantages to employees on the basis of their performance -- meaning that meritocracy is all about measurable accomplishment. When an organization embraces meritocracy, they're making a commitment to reward their employees for performance, significantly differentiating between top performers and those who are average or below average."
Lynch goes on to say, "This approach has powerful implications for companies of all sizes. By changing the compensation structure to pay for actual performance, organizations are easily able to recognize and reward their very best employees. This invigorates and motivates your entire workforce, because it strengthens retention of your best people and provides inspiration for others to improve." What's at stake?"There is a lot at stake for employers across the nation," Lynch says, "because compensation strategies have a very real impact on success." One Mercer study showed that little more than half of American workers understand how their pay is determined -- and only 28 percent said they were personally motivated by that knowledge. (Source: "Communication Pays Off" by Lin Grensing-Pophal, HR Magazine, May 2003.) "When workers don't clearly see how the quality of their work affects their pay, there can be startling effects," states Lynch. "For instance, job satisfaction is demonstrably lower when pay issues aren't clearly understood or clearly tied to performance." Of the employees in the Mercer study who said they understand how pay is determined, 74 percent were satisfied with their jobs. Of those who did not understand how pay is determined, only 42 percent were satisfied with their jobs. And, of those who said they were paid 'fairly,' 85 percent were satisfied. That compares to only 47 percent of employees reporting satisfaction with their jobs when they felt they were not paid fairly. Meritocracy gains in popularity
"Compensation philosophies evolve over time," Lynch says, "and meritocracy is being embraced by increasing numbers of organizations as a way to meet some very real challenges. In today's competitive environment, pay-for-performance is more than just a catch phrase; it's a way for organizations to link goals, performance and rewards to impact the bottom line. "It wasn't that long ago that compensation strategies focused on the masses. Everyone in the company received three percent, like spreading peanut butter evenly across a slice of bread. But facing the prospects of a shrinking workforce, global competition and an increased need for knowledgeable workers, organizations are taking action to move their compensation plans toward something more meaningful: a meritocracy approach that presents fresh ways to improve business results and keep the enterprise vital." Structure and manage a pay-for-performance program
"In order for a pay-for-performance approach to succeed fully," Lynch says, "the
CEO and the staff must all believe in it. It's easy to believe in a strategy that could impact total return to shareholders, but change is hard sometimes. People are reluctant to leave the 'known' behind, even when the change will be positive" In creating meritocracy solutions at Ceridian, Lynch has learned that there's theory -- and then there's execution. "Because this strategy literally pays for performance, the result is that on the base salary side of the equation, your top people may receive as much as two times more reward than employees who are 'keepers,' but not top achievers. A company that commits to a pay-for-performance model will likely set apart their top 10-25 percent of employees for special rewards, too, in addition to base salary differences." "Implementation," Lynch says, "is equally important. First, communicate the philosophy. Define the terms, explain the rationale and be prepared to help everyone understand the importance to the company's bottom line. Then put a good performance management system in place -- one that has the kind of tools that can build a culture of top performers. This might include base salary programs and automated tools that provide guidelines for differentiation to be used by managers. Consider creating a performance scale with four or five delineated points, then providing your managers with tools that help them recommend salary increase percentages. "This is compensation theory that's come alive within the organization. It's a fresh perspective for companies that are serious about achieving workforce alignment, driving productivity and retaining the people who create the most value." Helping managers with solid coaching
When he advises leaders about meritocracy programs, Lynch puts a strong focus on the importance of manager support. "Other than the commitment to this philosophy by senior management," he says, "the most important influencers in this whole equation are the first line managers. Their engagement in the process will make or break the success of the initiative. That's why we always make sure to provide training for managers that's both annual and ongoing. We explain the plan components and how they support senior management's commitment to meritocracy -- we want to make sure managers understand not just what to do, but why they're doing it. The time we spend with managers makes all the difference." Communicating with employees
Another important part of the transition to a pay-for-performance approach is employee communication. "After managers are trained," Lynch says, "they know which messages their employees will respond to. Clear communication isn't difficult, but it's important. "We make sure to give managers a packet of materials that is structured to help train the workforce. It's all about setting expectations, and we assist managers with the process." Pay for performance yields big benefits
Tom Lynch believes that pay-for-performance compensation models can be valuable in many ways. "There are powerful cultural aspects that aren't immediately apparent," he says. "Everyone in the organization sees that, if you aspire to get better, you too can be rewarded for top performance!"
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