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12 | 2014
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Group etersen, Hay y L andon P b d ile p m o C
From rewarding talent to identifying top talent, this discussion ran the gamut.
THE
WorldatWork Total Rewards 2014 Conference & Exhibition brought together industry leaders from some of the biggest brands as well as leading HR expert practitioners to discuss the latest in total rewards strategies. Approaches to differentiating and rewarding performance were a key focus of the conference discussions, and were the focus of a panel discussion headed by some of the largest consumer and retail brands. Participants included: ❙❙ Maryam Morse, national retail practice leader, Hay Group (moderator) ❙❙ Thomas McMullen, North America reward leader, Hay Group
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❙❙ Lisa Emerson, vice president of global total compensation, McDonald’s Corp. ❙❙ Scott Smith, vice president of compensation, The Home Depot Inc. ❙❙ Sanjay Patel, vice president of compensation and HR operations, Kraft Foods Group The following is a summary of the ensuing discussion with these four total rewards leaders. MARYAM What does rewarding for performance mean in your organization today? LISA About 10 years ago, we went from a five-tier performance assessment system, where a majority of
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It’s not about alignm it’s not about desigent, It’s about performa n. nce. – Lisa Emer son, McDonald’s Cor p.
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our organization was rated in the top two tiers, to a three-tier 20-70-10 distribution guideline. We also redesigned our annual incentive program so that it became multiplicative, where you multiply the target award by the business performance and then modify it via individual performance. Rewarding for performance has increasingly become part of our ongoing dialogue at McDonald’s, and we’ve improved our reward programs to the point where, even during a few years of below-target award payouts, the consistent theme we’ve been hearing is, “It’s not about alignment, it’s not about design. It’s about performance.” SCOTT We have a 70/30 split on our annual incentive plan, where 70 percent of the payout is determined via line of sight financial performance and 30 percent is based on individual performance. Over the past several years, we’ve migrated away from a formulaic-based approach largely based on an individual’s personal performance rating to a system where we now give all of our leaders separate funding pools — one for STI [short-term incentives] and one for LTI [long-term incentives] — and they have a lot of discretion in terms of how they allocate those awards to their teams. This means we no longer hear, “I’d like to give you more, but HR won’t let me,” because the accountability is on the leader to make those decisions and then justify those decisions with their people. SANJAY At Kraft, we have a philosophy of managing performance aggressively. Like McDonald’s, we moved from a five-tier
to a three-tier performance rating with a 20-70-10 distribution guideline. We’ve also gone through incredible strides to highly differentiate that 20 percent of top performers. Many studies out there will tell you to focus on those high performers, even if it’s a relatively small group. At Kraft, that top 20 percent group gets the best pay and the best access to training. Those who are consistently in the top 20 percent generally have more opportunities to get better access to experiential opportunities and advance more quickly in the organization. We are also starting to focus a lot more on providing the right analytics to our managers on their assessment of their top 20 percent and how effective they are in providing opportunities for those employees. MARYAM What is your organization focused on now regarding differentiating and rewarding performance? What’s working and not working? LISA One of our focus areas has been to help our managers understand that each element of reward has a different role and purpose. Managers’ natural tendency is to apply an annual performance rating across the board when they’re allocating all elements of compensation. We felt that wasn’t really the intent of each one of those programs. We’re also considering separating the timing of our stock grant from our annual salary and bonus cycle. While it may be a bit inefficient, we feel that tying our stock grant to our succession and our talent management processes will change our managers’ mindsets to get them thinking about how rewards can better reinforce retention or top talent. SCOTT The discussion we’re having now is evaluating whether we should be focusing more of our reward investments on strategic imperatives and strategic functions. So we might take money from one part of the organization and allocate it to another because that part of the organization is more strategically important and impactful. SANJAY In some cases, we found that our lowest performers were getting between 80 percent and 85 percent of their target pay and our highest performers were getting around 115 percent. We really wanted to change our programs to stretch that out more to accentuate the pay-for-performance
orientation of our programs. Now, due primarily to how we distribute incentive compensation dollars, our poorest performers are at about 70 percent of total target compensation and our highest are at about 130 percent. We also used to have a merit salary increase matrix and now we empower managers to really differentiate merit pay with relatively few rules. We also introduced recognition awards and off-cycle compensation treatment to further differentiate pay for our top performers. The combination of these changes demonstrates our commitment to differentiating compensation in our organization. TOM In follow-up to Sanjay’s point, we’re seeing a common theme of organizations increasing the variance of pay, particularly after the economy tanked in 2008-09. We’re seeing organizations in general taking a more rigorous approach to managing their performance distributions. We’ve also seen a number of organizations shifting the value of their total remuneration package from fixed programs to variable programs and slowing down growth in base salaries and moving value from benefits programs that employees either don’t understand or don’t appreciate and moving that toward the variable pay side. Lastly, we’ve also seen more organizations placing more weight on individual performance ratings as modifiers on their STI and the LTI programs. MARYAM If you have 20 percent of your employee population who are the stronger, key performers, how do you keep that other 80 percent engaged? SANJAY It’s not always the same 20 percent of people. You know that the top 20 percent is going to get the highest compensation. The belief is that, due to the compensation differentiation, those employees not in that group will strive to make it into that group for the next year. We also try to differentiate incentive awards by giving quite a big range within that large middle group. We also use recognition awards throughout the year. We’re careful to share with our businesses that if they are essentially awarding the same group of 20 percent for a second year in a row, that they will need to justify it. SCOTT We also focus on getting our leaders to think about differentiating within the large 70 percent group of employees.
A significant portion of their pay is driven on their financial outcomes. There is still going to be natural differentiation within that group based on how their individual unit performed financially and operationally that year. And then the discretionary components complement that. MARYAM What do you do in your organizations to identify that top 10 percent or 20 percent of talent? SCOTT We’re thinking about talent and performance management more holistically and we’ve got a talent-planning process that’s extremely robust. Every function presents talent to the senior executive team of the company, and we make sure that there is cross-functional agreement on the top people. LISA It becomes difficult when you’re trying to identify that top 20 percent. And what we found is you have to get the message across that performance is both absolute and relative. You may have had a very good year — that’s the absolute part — but it is also important to understand how your year compared with your peers — that’s the relative part. The calibration roundtable helps to get to this point because you are able to hear the accomplishments of those who don’t necessarily work directly for you and compare it with what your employees delivered. TOM In key talent assessment processes, employee performance is often the most important criterion, but for many organizations it’s not the only one. We also see employee potential and placement within critical jobs as the three dominant criteria that organizations use to define their key talent. MARYAM Do you have a separate pay structure for high performers, or if not, do you use a different target market? For example, 75th percentile for high performers vs. median for the rest of the population. LISA We do not have a separate salary structure. But we have a group of employees who have been identified as having potential to make their way up to enterprise-level positions, meaning the top positions in the organization. And we tell the leaders that, for this group of people, which is a very small group, you should
IT’S NOT ALWAYS THE SAME 20 PERCENT OF PEOPLE WHO ARE THE STRONGER, KEY PERFORMERS.
december 2014 workspan | 59
probably look more toward targeting a higher percentile for base salary — around the 60 th to 75th percentile. SANJAY Similar to Lisa, we don’t have separate structures, but we do have certain groups that we informally say it’s OK to target something higher, like a 65th to 75th percentile. But we are still living within the same compensation structures when we do that. SCOTT The best way to grow your base salary with us is to progress to positions that have higher responsibility. TOM We did a study a couple of years ago on key talent reward programs and that was one of the questions that we asked. Very few organizations reported that they had separate formal structures in place for the key talent group. Reward management for this group often consists of off-cycle base salary treatment, restricted stock grants and more rapid promotion in leadership roles. MARYAM How transparent are you in communicating to managers the size of the funding pools and how they are allocated? LISA For us, it’s full transparency.
We say our salary increase budget is X, we multiply that by everybody’s salary, that’s your pool. For our annual bonus, everyone has a target award. We add up all the target awards for everyone in your organization, and we add a little extra in there for differentiation, and that’s your pool. So we’re very, very transparent about how our pools are developed. SCOTT We do the same thing. It reinforces transparency and how much money we have and how it is allocated. Every manager knows what the merit budget is. And every manager knows how their STI and LTI pools are calculated. I see no way around that. TOM The more transparent the payout determination process can be among the management group, the healthier the process tends to be. It can also be a contentious process, but typically the outcomes are better in the long term.
60 | workspan december 2014
MARYAM Has anyone changed their performance-management program in the past few years, and if so, what’s been the impact on reward programs? SCOTT We’ve tried to divorce all the focus being placed on the rewards piece because it was getting in the way of a meaningful performance discussion with a number of our managers. TOM One developing trend I’m seeing in more organizations is the elimination of formal performance ratings. One of the most dominant reasons for this is that they felt that the compensation tail has been wagging the performance dog. Or in other words, people are getting way too hung up on the performance label — for example “Why am I a 3 and not a 4? — and the compensation related to the rating as opposed to engaging employees in a more meaningful conversation about performance and how to improve their performance. We are seeing more organizations now saying, “Performance management is really about establishing a dialogue between manager and employee. We will still differentiate performance, but we’re not going to formulaically link it to compensation the way that we’ve done in the past.” These organizations will provide managers with some tools and some principles on how to differentiate, but they’re going to stop short of developing performance tiers tied to compensation increases. Landon Petersen is a consultant with Hay Group’s retail team in Chicago. He can be reached at
[email protected].
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