Early in my career, I managed a service delivery team at a large company. My team was a mix of recent hires and some long serving employees with a well established reputation for their competence and hard work. Although their job descriptions were quite similar, the long serving employees were paid significantly better than the recent hires. This was the company’s way of showing appreciation for their proven talent and loyalty.
So I was surprised when I started discovering a startling imbalance: Most of my team’s work producing value to our customers was being performed by a few of the more recent (and lower paid) hires. Knowing that the long serving employees had actually worked hard to establish their reputation, I wondered: Why were they now performing worse than their newer colleagues?
After conversations with my team members and colleagues who had worked with the company longer, I discovered that the culprit was the way the company rewarded performance: The mechanism designed to reward talent and loyalty was doing nothing to reward actual performance. By failing to reward employees’ direct contributions to the company’s success, it was causing disengagement among long-time employees and resentment among some of the newer ones.
The talent premium
In a Harvard Business Review article from October 2014, Roger Martin, a former dean of University of Toronto’s Rotman School of Management, described how the increased impact of talent on companies’ bottom lines has lead to a significant increase in the premium that companies (and the economy as a whole) pay for talent.
This has been a welcome result of what Mr. Martin calls the rise of the “talent” economy. He points out that, until 50 years ago, the key drivers behind a company’s success would have been access to capital and the control of natural resources. Access to talent only played a secondary role, in an economy where the vast majority of jobs were routine-intensive.
Unfortunately, most reward mechanisms that companies employ to attract and retain talent today are still little more than tweaked versions of old compensation models designed to reward low-value routine labour in the past. They haven’t evolved enough to adequately reflect the increased direct impact that talent has on a company’s bottom line. As a result, those mechanisms usually fail to encourage (and reward) the outcomes that companies are looking for.
In a short commentary published in January’s edition of the Harvard Business Review in response to Mr. Martin’s article, I questioned whether higher premiums for perceived talent in recent decades have brought a better economic and business performance. I argued that, while our economy does indeed reward talent, it often rewards the wrong type. In the process, we tend to miss opportunities to reward direct, tangible, measurable contributions to business and economic growth.
Input-driven approach to rewards
Talent may very well be one of the most crucial factors driving business success. But unless it actually brings an organization closer to achieving its goals, it is not worth a reward. Hence the key issue that I see with paying for talent is this: It fails to provide a direct incentive to put one’s talent to work towards a desired organizational goal. Instead of aligning rewards to outcomes that talented people can produce, it pays them for just being talented.
This misalignment goes well beyond the “pay for talent” mentality. It has its roots in the old economy where work was repetitive and employees’ impact on an organization’s success less direct and more limited. It is deeply engrained in the way most people think about work compensation.
Companies generally pay their employees an hourly wage and rarely provide a clear link between work outcomes and compensation. If the boss believes that someone is more talented, they get paid more. When bonuses are paid, they are usually capped at a small portion of the compensation, and the criteria used to calculate them (if one exists) is rarely understood by the employees.
Another common scheme that puts input ahead of results is seniority-based compensation: It rewards long-serving employees better than recent hires for the time they have spent with the company, regardless of their actual contribution to the bottom line.
Paying for talent promotes the wrong behaviour.
The problem with all this is: Rewarding people for their input sends the message that outcomes are not as important. In response, instead of focusing on providing tangible results, employees may, for example, go to great lengths to demonstrate that they work long hours, make a large number of phone calls, produce many documents and send many emails, etc. They may be eager to generate ideas and comments in meetings, but show little interest in turning them into actions.
These are the symptoms I was seeing in the small service delivery team that I managed. The company’s compensation policy left no room to align rewards to the actual performance of individual employees. Each year’s budget was determined by the prior year’s spend and did not allow for meaningful performance bonuses. Given that it was virtually impossible to claw back past salary increases due to poor performance, the only option left was to reward the “talent” of more recently hired top performers by giving them a slightly better pay raise, at the expense of reducing pay increases for long term employees.
The newer top-performing employees felt that they were being short-changed. The long-time employees saw no reason to do better: They knew that their compensation was no longer tied to their performance because there was no room left for it to grow. They also felt reasonably secure on their jobs because they knew that letting them go would have been expensive.
I was left with an uneasy feeling that, by giving extra pay increases to today’s top performers, I may be shaping the mindset of tomorrow’s mediocre long-term employees. Some will eventually get rewarded by moving to more senior (and better paying) roles, but most will not and will eventually reach the top of their pay scale.
Paying for results rewards productive talent too
Given that talent plays a key role in driving performance, rewarding results means also rewarding talent. In contrast, rewarding talent does not reward performance. For this reason, paying a top performing employee a larger, clearly defined, uncapped bonus for delivering tangible, measurable results rewards them better for their talent than giving them a somewhat larger pay increase. It is more transparent and less likely to be taken for granted than a permanent pay increase. By being tied directly to achieving the organization’s end results, it drives employee engagement.
Of course, rewarding results comes with its own pitfalls and challenges. The bonus must be large enough to make a difference to the employee (Giving a $200 gift cards is a nice gesture but can only get you so far). The deliverables must be defined clearly in advance, must be understood by the employee, and the employee must have control over them. This could sometimes require quite a bit of work and involves some risks (For example, instead of defining output requirements, companies sometimes simply replace one type of input with another). Measuring performance against result targets may also require putting new monitoring mechanisms in place. However, it is the only genuine way to reward people for not only having the right talent, but for using it to achieve the organization’s shared goals too.
Written by Strac Ivanov, MBA, PMP
Strac Ivanov is president of Vicinity Jobs Inc, a Canadian economic development and business intelligence technology company with presence in Toronto and Vancouver. Vicinity Jobs operates a network of specialized search engines and a hiring demand analytics service, and was among North America`s first companies to launch an Internet search engine for jobs. Strac holds a Master`s degree in Business Administration from Vienna University of Economics and Business. He lives in Vancouver, BC with his wife, daughter, and son. You can follow him on Twitter, at @stracivanov