Pay – performance v talent

12 March 2018

This article was featured in the April 2018 issue of the magazine.

Ruth Thomas, senior consultant at Curo Compensation, sets out the arguments for moving to a pay-for-talent approach

How fit for purpose are the traditional models of performance related pay (PRP) that we have been using for the last thirty years and what is the alternative? What should you be considering to ensure you reward those employees who provide the most value in terms of performance, contribution, potential, critical role and key talent and ultimately ensure drive a return on investment (ROI) on your compensation spend? Traditional models of PRP link pay progression to an assessment of individual performance; usually measured annually. Then a resulting performance rating is used to drive forced distribution (bell curves) and merit matrices to distribute pay budgets. 

However, recently the effectiveness of annual performance reviews has been challenged together with the accuracy of performance ratings. This leads us to question if we are at risk of paying the wrong people through PRP?

Another criticism levelled at current PRP approaches is that they are failing to drive business performance. Take a look at most programmes in practice and weak pay differentiation, poor employee engagement and low ROI on compensation spend are defining features. This may be because when choosing to distribute pay budgets through a normal distribution curve most companies find they actually end up spending the majority of their budget in the bulge of their curve where the average performers sit. Ultimately this fails to drive ROI on compensation spend and often leaves inadequate budget to differentiate reward for high performers. So, is it time to review pay practices in the same way that leading organisations are questioning the value of their existing performance management approaches?

If you don’t use performance rating to drive pay decisions what do you do? Some leading organisations are moving to a pay-for-talent approach that broadens the definition of employee value. So, assessing talent in terms of future potential, attrition risk and the critical nature of an employee’s skills and using these in conjunction with output from continuous assessment processes to distribute pay budgets. By calibrating these metrics as well as market data to drive pay recommendations you end up with deeper insights into employee value relative to compensation spend. 

 

...organisations are questioning the value of their existing performance management approaches...

 

Another key issue with traditional PRP approaches is they tend to be backward looking only, assessing an employee’s value to the organisation based on the last twelve months’ contribution. This does not account for the future value of your talent which in today’s fast-moving business world is critical. It’s a subtle shift but, in this way, fixed pay becomes more of a talent insurance paid to mitigate the risk of talent leaving and the associated recruitment and training costs needed to replace them. 

Of course, this approach does add complexity; and binary merit matrices that take into account performance rating and market position to provide recommended pay now need to become multi-dimensional. The right compensation management software can help here and some vendors are even looking into how artificial intelligence can help mine employee data to drive meaningful compensation decisions to support managers. 

It’s worth noting that a pay for talent approach is not a one-size-fits-all solution. Not all organisations are ready to implement a full-scale pay for talent approach as it requires integration of a number of talent management processes, including: skills assessment, identification of critical employees and succession planning. 

You will need to consider what works within the culture of your organisation — both today and as you prepare for the next generation of workers. But pay-for-talent enables organisations to use compensation as a key lever across all talent management processes to drive the achievement of key business goals, to deliver that critical ROI and, crucially, it’s definitely more future proof.