New Pay Programs Boost Retention

May 1, 1999
Everywhere you look these days,there’s another book or article discussing employee retention. It seemswe’re all looking for the silver-bullet solution to retaining valuable staffin this highly competitive labor market. And it’s no wonder - according to theU.S. Bureau of Labor Statistics (BLS) as of March, unemployment is at 4.2percent, a trend toward the lowest level in over 25 years. 

    While experts debatethe effectiveness of retention strategies ranging from “nurturing growthenvironments” to stock-option plans, HR professionals must find practicalsolutions to keep talent not only retained, but committed and motivated toachieve necessary business results. Doing so means accepting the fact that bothenvironment and money impact employee decisions about where they work and howwell they perform their jobs.

    Aon Consulting’s1998 America@Work survey of 1,800 U.S. employees measures critical factors thatemployees weigh when making employment decisions. Results of the survey supportboth sides of the retention equation. On the intrinsic or environmental side,opportunities for learning and growth top the list of reasons why employees staywith their employers. On the extrinsic or more tangible side, meaningful rewardsand recognition of performance are highly correlated with employee commitment.In fact, salary and benefits are viewed as two of the most important factorsaffecting employment decisions.

    So if you thinkmoney is a secondary issue in employee retention, think again. Of thosesurveyed, all things being equal, 25 percent would leave their current jobs foran increase of 10 percent or less, and more than 55 percent would leave for lessthan or equal to 20 percent. Pretty staggering data, isn’t it? It’s evenmore disconcerting when you consider not only base-pay increases, but theendless barrage of signing bonuses, stock options, employment contracts andspecial deals companies use to lure away the best and brightest in today’smarket. It certainly supports the need to give serious consideration tocompensation design and practices. After all, your primary goal is to make toptalent think twice before walking out the door.


New pay programs send a powerfulmessage.
   Traditionally, compensation systemshave been designed to attract, retain, motivate and reward employees by beingexternally competitive and internally equitable. Unquestionably, these are nobleintentions. However, the actual plan design that’s in place at manyorganizations was originally conceived in the 1950s, when the world of worklooked very different than it does today. It was a time when fairness wasdefined as “sameness,” when employment was for a lifetime, and whenfollowing procedure was far more critical to success than innovation and gainingcompetitive advantage.

    Today, compensation systems mustsupport the mission and culture of the organization, and communicate toemployees what is important, why they are important, and what their role is inensuring the ongoing viability of the organization. Compensation systems areincredibly powerful communication tools to apply to a workforce looking foranswers to the fundamental questions, “Why am I here?” “What am Icontributing?” and “How (well) am I being recognized for mycontributions?” Basically, if employees feel good about the answers to thosequestions, they stay; if they don’t, they go.

    But how do you keep key talent fromjumping ship? The most important step is to recognize that carefully designedpay practices can have a significant impact on making your company a place wherehigh-performing employees want to work. And just in case senior management wantsto make sure there’s a good business reason to change “the way we’vealways done it,” tell them this: In a study of major Fortune 100 companies,organizations using strategically designed pay systems performed better thantheir traditional-pay counterparts based on financial objectives such asearnings per share, return on assets, profit per employee and cash flow (The NewPay: Linking Employee and Organizational Performance, by Jay R. Schuster andPatricia K. Zingheim, Jossey-Bass, 1996).

    If you want compensation to be aneffective part of your retention strategy, you must move beyond the reactionary“just throw money” method of using pay to keep people. You know the drill:Critical employee gets juicy offer from competitor; crazed manager insists youfind way to counter; somehow you do, so the employee stays (for a while!) - andthen it all happens again.

    For pay to be a preventative measurerather than a reflex, reward systems must be designed to align employeeperformance with business performance. Employees need to understand what thecompany expects of them, why the company expects it, and the potential rewardsthey can earn when performance expectations are met. Taking this approach to paydesign provides an ownership context for employees - they know they’reimportant to the ongoing success of the company and, if they do their part,they’ll share in the success they helped create. For high-performingemployees, these are pretty good reasons to stay.


New pay programs call for patience andcommitment.
   Designing the right pay program foryour organization can be the key to high performance and big bottom-linereturns. But before you jump into a full redesign, consider this: Introducing anew pay program is really about culture change. Culture change is aboutreframing and redefining corporate values, and communicating these new valuesover and over again, with the ultimate goal of changing the behavior of theentire organization.

    How long does this take? On average,about two years from implementation. Though you might start to see results inthe first year, the momentum kicks in when employees begin to see the return onnew behavior motivated by the program itself. Much of the success and cycle onreturn will depend on how much time and effort was invested upfront to make theprogram a success.

    New pay programs aren’t a quick fix,and the initiative requires total commitment from the key stakeholders.Unfortunately, corporate patience runs short, and companies tend to pull theplug on new programs or start tinkering with the design if they don’t see areturn in the first six months - a deadly mistake when it comes to employeemotivation, one that undermines the entire mission of the redesign. So, if youwant the redesign to work, invest time into getting a good design in place,implement it and leave it alone. It’s not unlike investing in the stock market- you have to look at the long-range returns and trust the process.

   Ifyou’re wondering what the process should look like and where to begin,today’s most effective plans are designed in stages that typically include thefollowing steps:

  1. Identify critical business priorities and the talent required to achieve results. (In some companies, it’s specific groups of employees, and in others, strategic compensation efforts are focused on the entire workforce.)
  2. Assess competitive-market pay practices to use as a benchmark to identify what you can and can’t do to compete in the marketplace.
  3. Conduct focus groups to understand employee perspectives, and encourage partnership in designing reward plans.
  4. Select a reward plan design that will be most effective in meeting your overall objectives.
  5. Develop the specific reward plan (with employee participation) that will most effectively motivate employees to achieve desired business results, and acknowledge their contributions.

    If you’re concerned that your companymay be dealing with too many priorities to develop and commit to a formalretention strategy - compensation-based or otherwise - you’re not alone.Additional data from the previously cited Watson Wyatt survey indicates thatonly 35 percent of the 397 U.S. employers surveyed have a formal retentionstrategy. Instead, retention strategies appear to be evolving in stages, withcompensation playing an important role.

    Two compensation-based approachesappear to be emerging in the workplace: 1) Overall, companies are seeing thevalue of designing pay systems to support business goals, thereby engagingemployees in the business and rewarding them based on their contributions tosuccess, and 2) Companies are developing compensation-based retention strategiestargeted at specific employee groups critical to achieving specific businessresults.

    One company that has made a commitmentto the new pay approach is Chicago-based OEI Business Products. In a time whenBLS cites average tenure for wage workers at 3.6 years, and managers andprofessionals only slightly higher at 4.8 years, OEI enjoys an average tenure of8.5 years. Amy Schuett, director of HR at OEI, attributes their success to acompany culture that is relationship driven and committed to promotion andgrowth from within. In addition, the company uses a variety of performance-basedcompensation programs that tie employee rewards to company success.

    Managers and professional staff at OEIearn annual bonuses based on a formula that rewards their contributions to ROA(return on assets) and achievement of specific business goals. The salesforceparticipates in an incentive plan that pays out based on achievement of specificvolume and profit objectives, and reflects competitive industry performance.Several of OEI’s manufacturing operations base incentive awards on achievementof specific productivity and efficiency improvements. While not its directintent, OEI has created a retention culture that provides rewards based onemployee contributions to business results, which is supported by management’scommitment to internal promotion and growth opportunities.

    While OEI has taken a companywideapproach to strategic pay design, our research indicates many companies taketheir first steps towards strategic pay in a somewhat piecemeal fashion - forinstance, when they have specific business needs to address and critical groupsof employees to retain.

    For example, Mel Warriner, principal ofEugene, Oregon-based consulting firm The Company Tribe, tells us his new ventureclient, Car Wash Partners, developed an innovative approach to attracting andretaining on-call employees to handle fluctuating staffing levels. The companypartnered with local colleges offering part-time employment to students - withan added retention benefit. Students who worked specified hours of on-call shiftwork over the course of a year were not only paid for their hours worked, butalso received a $2,000 scholarship.


Measuring the results of new payprograms.
   So how do you measure results? If theobject of the new plan was to attract and retain employees, look at time-to-filland turnover ratios, and build the compensation question into exit interviews.If the object was to increase sales productivity, look at trends in data ofrevenue growth, sales-call activity, new account openings and so on. Go back tothe objectives, and that’s where you’ll find results - and remember thatchange takes time.

    For example, SAS Inc., a Cary, NorthCarolina-based software development firm that ranked third on Fortune’s listof “100 Best Companies to Work For” (January 1999) looks to retention ratiosas a key indicator of program results.

    David Russo, director of humanresources at SAS, believes the company enjoys a turnover rate of less than 4percent because of employees know they are an integral part of the team thatdrives the company’s success. Russo reported SAS provides a myriad ofinnovative employee benefit programs, and is committed to providing acompetitive total compensation package. Russo believes offering a competitivebase salary is the cornerstone of good compensation practice and critical toattracting and retaining talent. In addition, SAS uses performance-based bonusesto recognize individual contributions across all levels of the organization.


Tying it all together.
   Research done by Sharon Jordan Evans,co-author with Beverly Kaye of the upcoming book Love ’Em or Lose ’Em -Getting Good People to Stay (Berrett-Koehler, 1999) reiterates the importance ofstrategic pay. She confirms that the top reasons people stay with companies aregrowth and learning opportunities, and because they feel recognized and rewardedfor their contributions. She believes employees who are fully engaged in thebusiness aren’t thinking about other jobs. “What we all want is a job thatmakes us want to get up in the morning where we’re happy, productive andappreciated for what we do,” states Jordan Evans.

    So what’s the bottom line? The era oflifetime employment is over. As HR professionals, the smartest thing we can dois to create a retention culture that engages high-performing employees in doingmeaningful work for as long as the relationship is mutually rewarding. Recognizethat both money and environment have an impact on where people choose to work.Take an integrated approach to designing reward, recognition and developmentpractices that will help your company become an employer of choice.

Workforce, May 1999, Vol 78,No 5, pp. 36-40  SubscribeNow!