Standard business theory suggests that star employees receive bigger financial rewards than average or below-average performers.

Common practice suggests that’s just not the case – mainly because managers aren’t willing to make tough decisions, or do the “heavy lifting” required around pay issues.

The topic is a key discussion point in a white paper recently released by the Hay Group Limited, a worldwide human resource management firm.

Larry MacDougal, Business Edge
David Payne and Craig Illott of Hay Group Ltd. say in some cases, rewarding top workers can be a poke in the eye to others.

Among many compelling statistics and case studies presented is a 2001 survey of 75 U.S. companies.

The survey analyses the difference in merit pay that star performers and low performers receive; it finds top performers receive only 1.9 per cent more.

In a separate Hay Group survey of 335 companies worldwide, only 35 per cent of employees said they believed that if their work improved, they’d be better rewarded.

“Companies have struggled with this for years,” says Calgary-based David Payne, regional director for the Hay Group’s prairie region. “It’s what I would call a chronic management issue.”

Payne, whose firm specializes in helping employers improve employee effectiveness, says the report has “resonated” with many of his clients who are requesting extra copies and distributing them throughout their management teams.

Organizations say they want to give their best employees bigger pay increases, explains the report. But often that decision means other employees will receive less money, or even no additional pay. So when budgets are examined, pay raises tend to be spread “like peanut butter.”

Companies don’t make tough choices for a few reasons.

The issue that commonly surfaces is that managers avoid conflict in annual performance reviews and don’t have ongoing conversations with employees throughout the year. Employees therefore assume their work is just fine, even if it is sub-standard, says the report.

“At year-end, rather than confront poor performers with the bad news, many managers choose the path of least resistance, speeding through performance reviews and spreading merit pay out almost evenly.”

This egalitarian approach is entrenched in many company cultures and, as Payne says, it isn’t a simple issue. In general terms, 75 to 80 per cent of employees meet objectives in most organizations. About 10 per cent exceed expectations while the balance of the group under-performs, he says.

Craig Ilott, a senior consultant in the Hay Group’s Calgary office, calls the report timely.

“It calls a spade a spade,” says Ilott. “We can talk all we want. But when it comes down to where we want to apply pay to people, it’s not happening.”

The report cites companies such as John Hancock Financial Services Inc. that took an aggressive stand on pay policy, offering merit increases of 20 per cent or more to star performers – and nothing to lesser performers. The result helped the company double its stock price two years after going public.

Ilott says that while cases such as Hancock may be on the extreme end of the scale, firms are now examining the issue seriously.

Senior executives are delving deeper into assessing what they want to accomplish – and asking tough questions.

Consider that you have an employee who has been with the company for 25 years.

That person is a solid worker, but he is now talking about retirement and has been starting to slack off in performance.

At the same time the manager is kept awake at night fearing one of his top performers might be lured away by a competitor.

“You have these two people,” says Ilott. “Do you want to pay them the same amount? Is that what we mean by rewarding people for performance . . . when at the same time you are saying you want to be market competitive?”

Ilott and Payne stress that all companies are different. Their cultures, goals and financial health dictate how rewards are allotted.

In many cases, giving a star performer a one-per-cent hike over and above other employees is an irritant, more like a poke in the eye with a stick. In situations where one per cent is all a company can afford, it might be better off finding other rewards such as training incentives.

In addition to focusing on differentiating rewards, the report highlights two other elements it believes are essential to building better performance.

It shows how organizations must be clear in setting and communicating goals (messages are consistently muddled, says the report).

And once goals are clearly identified, it discusses the processes needed to carry out the objectives. All three elements are linked, and the overriding message is that companies must communicate all three elements with clarity. With regard to pay issues, Payne and Ilott agree money is a thorny problem if not handled properly.

They say – and most employee surveys agree – that if pay levels reflect market conditions, most people don’t complain.

When the issue of incentive pay arises, a clear policy, and sticking to the plan, eliminates confusion and bitterness.

If incentive money is spread out differently, and top performers receive significantly more than low achievers, then at least you are irritating the right group of people, says Ilott.

“It sends a message.” Differentiating rewards can be a shock to a corporate culture not familiar with the process.

But most employees know the score.

“Even if the boss doesn’t understand who’s not performing, the employees sure do,” says Payne. “And they actually want to be treated somewhat differentially.”

The Hay Group report concludes that sub-par performance caused by poor management execution is fixable.

What it takes is clear dialogue – and some heavy lifting.