Top Five Reasons Why Pay Differentiation Matters

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Key guidelines for business owners on employee compensation

In the late 90’s I was asked by senior IBM leadership to plan a new way of delivering pay increases to employees.

Our direction/ goal was to pay our best employees like the best employees in our industry. In charge of all US Compensation with well over 300,00 employees, and 20,000 managers, my team knew we needed to retrain managers and reconfigure an entirely new pay delivery system.  Adding to that dilemma IBM managers were more accustomed to delivering similar size increases within the budget allotted to them, and in many cases without regard to skill, performance, retention, or scope of their job responsibility. In other words, we were “spreading the peanut butter” on pay increases.

Daunting task, yes. Management skepticism yes. Systems tested but unproven, yes. Training materials not perfect, yes!

In view of all this, we took the hill, a little bloodied during initial rollout of the program, but managers were now given more control based on their view of their employee’s performance and value to the company. They no longer could hide behind the “system” of what a computer-generated program would recommend; now they were accountable. And at the end of the day our best performers were paid on average versus weaker contributors on a ratio of 4:1 in size of increases.

And managers began to appreciate their new role and now valued this new way of paying.

Let’s add up the five wins on pay differentiation and why it mattered:

1. First and foremost, base pay increases were now becoming a retention tool for our top performers- large increases, many double digits, were given to our top contributors. Our middle of the road contributors were given approximately the average size increases of the budget allotment and the weaker contributors were given smaller increases than average and in some cases were skipped altogether. The impact was dramatic and helped fuel and funded the size of increases to our top people. And even if these top employees were enticed to leave for another company, often they decided to stay knowing they were appreciated and valued. Way before engagement became the word for commitment and motivation in a company, this program was the incentive for staying at IBM.  And yes, as far as the top people being paid like the top employees in our industry, these employees were paid like the best and in many cases ahead of the marketplace.

2. Secondly, if done with the management team working together in their respected functions, the increases were calibrated to ensure soft graders versus harder graders were properly normalized. The result was fairness in pay- not to be confused with equality in pay but a better way to ensure the right decisions were being made.

3. Thirdly, employees not receiving increases or receiving smaller increases were generally not a threat to leave. The reason most cited by managers was that the top contributors were a key resource for helping them in getting work done. If they saw a key person leaving that would be an issue, however, when the top people are staying, as generally they were, it sent a positive message throughout the organization. And it should be noted when we first ran this program it was during the Dot.com frenzy of the late 90’s. Our voluntary attrition rate was still below 5%.

4. Fourth, we found in subsequent years when financial constraints due to the economy and our business status reduced the size of the budget for increases, we now had a methodology to pay at least the top 20% of our population by differentiating the top contributor population. No matter the size of a salary budget, big or small, by differentiating increases made incredible sense.

5. Finally, our managers loved this program, especially when we got all the bugs worked out. HR did receive “cred” on how we made change, positive change happen for them and the Company. To pull this off much needed training was delivered on how to score employees using an index of factors such as annual performance, skill, retention risk, and job scope. When automatically averaging the score for each factor into an index, and showing the pay range for each employee, managers now had a powerful new tool to help guide their decision making. Our training also helped managers deliver messages to employees whether they were a top receiving employee down to employees who was skipped.

And what mattered most to our managers was giving them the tools to make the decisions and control their budget based on their view of their employee contributions- not some backroom devised computations. In other words, we trusted managers and as a result they also felt valued.

How’s that for win- win!

Related content: 

Motivation: 7 Rewards for Employees When There Is No More Money

Here Are 3 Things to Show Your Employees You Value Them

Is Adding a New Employee Worth the Expense?

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