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6: Reward Culture Change

Recruiting great people is a step toward creating a high-performing culture, but you also have to persuade them to stick around. High turnover rates are a sign that companies are failing to do this. Research (Maritz) demonstrates that firms that keep their employees motivated and satisfied tend to keep their employees for longer. People stay with organizations that value them, and that share their values.

The employee compensation package is critical - good people don't leave because someone offers them a little bit more, but they do leave is someone offers them a lot more. Ultimately, people work for income, and if you're not competitive in the market, you will not retain your people.

And compensation involves more than salary and bonuses - many younger employees are generally healthy and only need coverage for catastrophic events, but more experienced employees are older and have families, and take greater concern with their complete benefits package. Especially in the present day, healthcare is an issue that's strongly on the minds of employees.

Aside of meeting the needs of employees, compensation must be matched to values. When values-based behaviors are rewarded, they are practiced. Where it's merely tenure, people have the sense (and rightly so) that all they need to do is turn up and avoid making any serious mistakes.

Said another way, people do what they are given incentive to do - if raises and promotions are given to those who demonstrate the values, they continue to do so. If they are connected to other things, people do those other things. If rewards are not tied to anything specific, employees guess: and where they are not adequately rewarded, they will guess that whatever they are doing is wrong and they need to make a change.

While you do not need to recognize and reward every single instance of values-based behavior, the periodic review of employee performance should make the connection clear and give rewards to those who demonstrate the values you wish to install - and only those behaviors. This may require a complete overhaul of your current rewards practices and the method of evaluating employees.

Getting it right is important - and more important is to stop getting it wrong. Rewards that don't reinforce behaviors are at best a waste, and at worst they may undermine your attempt to instill and support values.

Peer Reviews Make A Difference

A fundamental problem with performance reviews is that they are highly subjective: even when there are documented standards of performance, an employee's review is based on one person's opinion of how well their daily activities conform to those standards.

As such, multi-rater reviews enable boarder input - even if one person rates an employee too high or too low, the confluence of multiple opinions tends to balance out to a fair review, and the author attests that companies that use this practice experience fewer employee complaints about the fairness of the review process.

To implement peer reviews, employees and supervisors should work together to pick a panel of three to five people who are their "customers" in the organization - those who observer the employee's behavior and who are impacted by their performance, excluding those with whom the employee interacts socially.

(EN: This seems very important, and may be misconceived by calling this a "peer" review - as peers who are people who do the same job, which is a problem. Peers in that sense are in competition with one another for rewards and are have incentive to be critical of their rivals; because a person with shining reviews may be promoted, they are likely to chat up a colleague they feel would be partial to them in a supervisory role; and peer reviewers tend to focus on rituals rather than results - i.e., whether a person works the same way as they do, disregarding whether what they are doing is actually effective.)

Peer reviews can be anonymous in organizations where trust among coworkers is lacking, though anonymity is not absolutely necessary. The reviewers provide reports to a supervisor, who will incorporate the results into a performance review that includes outstanding behavior, positive or negative.

(EN: A second problem occurs when the supervisor picks and chooses what comments to use in the final assessment - they tend to use what they agree with. It might be better for the report to be compiled by someone who is not the employee's direct supervisor to maintain the integrity of the process.)

Developmental coaching becomes a lot easier for supervisors because the reviews are written by people who are impacted by their work product, and who will give specific advice for what the employee should do in order to improve their output. Your coaching and expectations of employees becomes more objectively based on their work output - not a vague directive to "do better" or a suggestion they should do something to improve themselves in a way that is not related to their function.

As an aside: organizations who use rating curves and grade levels should seriously reconsider. A rating curve is an attempt to normalize scores to conform to a bell curve, which is unnatural: poor employees are given the sense they are doing better than they are, good employees get the sense they are doing worse (or are not being appreciated) - it is possible to have an entire department of high- or low-performers and they should be rated fairly. A grade-level adjustment tells a more experienced person that they are doing a worse job because more is expected of them due to their tenure, which is not accurate, not objective, and not fair.

In most instances, employees already have a sense of how well they are doing at their jobs because of direct feedback they receive from their peers and customers within the organization - people have blind spots, but few are completely deluded as to the level of their performance, so what they hear in the review should not come as a shock.

It's important t apply the same standards for evaluating management as is used to evaluate employees - to do otherwise is to implement double-standard, which is never a good thing. Also, when evaluating managers, remember that their chief customers are the people whom they manage, i.e., their subordinates. In fact, when you switch to peer evaluations, you should start at the top level and work your way down within the organization: managers have a sense of what it's like to the subject of a review, and can better understand what employees expect and need when they are doing evaluations.

Base Rewards On Values

It's generally understood that organizations invest money in what matters, so there is no better way to communicate the significance of your values and the earnestness you have for promoting them than to connect them to the employee rewards.

Consider your current performance review and compensation process:

Your values blueprint should serve as a foundation for your rewards and compensation programs. Those values that are most closely tied to success and competitive advantage should be given the greatest weight in evaluating and compensating employees and managers alike. If you have not already done this, chances are there are gaps between the values you wish to install and the values for which you reward your people. Eliminate them.

One common example is that companies state they wish to be innovative, but they punish employees for taking risks. In effect, this discourages innovation and encourages employees to play it safe, because they recognize that if they take a risk, even a well-planned one, they will be punished if it does not work out as hoped. Psychologically, most people are more strongly motivated to avoid failure that seek success - and even success-seekers learn to avoid risk if they are punished if the outcome (which is impacted by many factors beyond their control) is not positive.

Compensation should be the decision of the entire management team, not just the HR department. The desire to be fair to everyone results in a system that rewards no-one, and encourages mediocrity.

Another important factor is considering the input not only of managers, but also of employees. Survey you're a-players to determine what they like and dislike about the current compensation and benefits plan. In a large organization, include people from every department, location, job level, and shift to get a broad perspective. The survey should focus on adequacy and fairness of compensation and identifying non-monetary benefits that are desirable but are not currently offered.

One of her clients is used as an example: more than 50% of employees disagreed that compensation was fair for the work done and 70% disagreed that bonus plans reward the right behaviors. The most common comment was that groups were encouraged, by compensation, to compete with one another in a way that was counterproductive to achieving goals for the organization.

The author suggests following up the survey with focus groups to gain more insight on the survey responses. (EN: This is backwards - use focus groups to identify issues to probe quantitatively with a survey, though they can also be reconvened after the survey to gather more qualitative detail.) Some questions to use:

For each answer, explore the reasons. There's also the advice to keep the discussion open, rather than tossing on the wet blanket of cost to the organization. Whether something is affordable is a separate discussion to whether it is desired.

Other useful sources of information can be found in exit interviews, turnover reporting, general employee surveys, and questions that frequently come up in "town hall" type meetings. You can also do a competitive analysis, though this is for benchmarking and comparison only, and your goal should never be to be as miserly as your competition, especially competitors who have high turnover.

Publish the results to the entire body of employees: transparency like this will foster trust and confidence that you are serious about making changes, and give employees a chance to mull it over, talk about it with their families (who are also impacted), and provide further feedback.

Pay, Promote, And Terminate Based On Performance

Raises, promotions, and terminations are powerful statements of the things the company desires of its employees. A significant raise (beyond the normal cost-of-living adjustments) is strong reinforcement to the employee who receives it; a promotion is far more visible to others in the organization; and a termination sends a shock through those who remain. In a high-performance organization, they must all be closely and clearly linked to values.

While employers generally prefer their employees to be tight-lipped about compensation, word does get around through the grapevine. While the general sense among employers is that "fair" means equal rewards, the general sense among employees is that "fair" means just: high performers expect to be compensated more than poor performers, and are demotivated when they are not.

(EN: My sense is that low performers agree with the principle of equity, because it's a better deal for them - so when pay and performance are not closely aligned, not only does it drive off the employees whose performance deserves more, it retains those whose performance deserves less.)

Organizations must have the willingness, and managers must have the authority, to award significant increases to the A-players, less-than-average raises to B-players, and even zero raises to C-players, regardless of their seniority. Seniority is a smothering factor - while employees may receive a fixed percentage as a raise, the more senior employees have higher salaries because it has built over the years, and the net amount of their increases will be higher.

It's also suggested that equity and profit-sharing plans should be more widely dispersed: front-line employees have noticed managers and executives who receive significant windfalls when their stock options mature, but few companies grant options to employees. It's noted that if employees are asked, most of the low-level employees show little interest in stock options and would prefer more pay - but in companies where low-level employees have benefitted, others take greater interest. An anecdote: a low-level employee was able to buy a home for the first time because of his stock option reward became a credible and eager advocate for the program.

In terms of promotions, a common mistake companies make is promoting low-level employees for their technical skills only - but while technical expertise makes an employee person highly competent as an individual performer, it does not make them effective as a manager. In fact, a person with the perception that he is an expert is far more likely to treat his people like pawns.

Instead, promotion to management positions should be based on a person's managerial aptitude rather than technical competence: chiefly, people should be promoted to management because they live the values and can serve as a role-model to encourage others to do the same.

Promotions should not be automatic based on tenure, especially when a person is promoted (or laterally transferred) into a position where their duties will be significantly different. In such instances, a candidate for promotion should be treated like a candidate for employment - meaning they should undergo a behavioral interviewing process and asked the same questions as if they were a new hire into the position.

Consulting in the hospital industry, the author found that weak leaders had been promoted due to tenure or technical expertise. She gives the example of a skilled surgeon who was a horrible chief of staff and treated other employees terribly. The hospital was reluctant to remove him from the position because they felt he was personally responsible for millions of dollars in annual revenue - but "very shortly" after his removal, they found that more doctors scheduled surgeries at the hospital and highly skilled staff that had transferred out of the department began to seek transfers back - and the revenues, safety ratings, and quality ratings all improved.

Non-monetary recognition can also be a powerful incentive: even something as simple as a handwritten thank-you note to an employee reinforces good behavior and bolsters morale. Some managers are reluctant to do this because an employee thus recognized may get the perception that they are owed financial reward as well because they are a high performer and the truth is they will expect it, and have every right to expect it, and in any company that is serious about compensating based on performance, they will get it.

The compensation offered to a new hire is slightly different: their offer is based on the market value of commodity labor, slightly adjusted if they seem to be an outstanding candidate, because you are likely competing with other firms to obtain them as a supplier.

However, once they have become an employee, the compensation strategy needs to shift away from market value because they no longer an unknown factor, such that compensation is tied to their actual performance for better or for worse. Companies that seek to pay their existing employees a competitive wage are treating good employees as if they were job seekers whose skills and potential are unknown, rather than in consideration of the skills and potential they actually have.

Compensation plans should not follow industry standards, any more than the values of a firm - they should be unique to the company, structured to compensate and encourage the values that the firm wishes to instill. The compensation plan can even vary among departments of a firm - employees in different roles should be managed differently, and compensation is a tool that can be used in different ways for different jobs.

The author advocates a 50-50 system, in which compensation is based equally on performance (results) and values (behaviors) of each employee. In reviewing the compensation plans of various firms, many fall far short of that mark. At one client, it was found that values were only 5% of the factors considered in its compensation plan, treated as an afterthought.

To sell the notion of values-based compensation, the author has found that asking about the importance of values is enlightening. Simply stated, companies compensate what they care about - and if they do not compensate based on values, it sends a clear message they do not care about values.

There's also a brief note that a company should not throw the switch without preparing the employees, because it is a sensitive issue. They are aware of the criteria by which they are assessed, and are highly sensitive to matters related to compensation. Even those who feel the compensation system is unfair may be reluctant to accept change because they have learned to work the system - it's the devil they know. Most companies take a full year to make the transition, so employees are aware well in advance (not a few months before evaluations) that the change is coming.

A Creative Approach To Benefits

A key consideration: "Benefits are there to benefit your employees." That is, the plans are formulated to cover those things that the employer predicts that employees will need, but should not be used to deny employees who have unusual needs from getting the help they need.

One example the author gives is a hotel chain whose benefits excluded in vitro fertilization - but waived that rule when an employee made a convincing case that it was the only way she would be able to have children. In another instance, there was an employee who suffered extensive injuries that exceeded the maximum coverage of company health insurance, but the decision was made to waive the maximum.

Companies that are willing to bend the rules n order to give an employee the help they need find that they win huge loyalty - not just from the employee who received the benefit, but from anyone who know of their situation whether inside or outside the organization. It's well worth the cost, and a demonstration of commitment.

Many companies would not even consider doing such things - they see the employee benefits plan as a way to limit costs, not to provide what is needed, and there's a concern that they will be plagued by employee demands for exceptions to the limitations. That fear is irrational, and companies that bend the rules do not find themselves in that situation - but if they did, they should instead question whether the benefits they provide are adequate to the needs of their people.

Said another way: if many people seek exceptions, the rules are bad. As such, benefits plans should be considered for the benefits they provide, and tailored to provide for the actual needs of employees, and flexible enough to cover situations where needs exceed expectations.

Going back to the loyalty and corporate image impact, it will be known just as widely, among employees and outside of the organization, when an employee suffers a tragedy and the company refused to bend: the negative impact of an employee who suffered the loss of a child whose employer refused to extend benefits to cover treatment that would have prevented the loss is huge and long-lasting.

A more common problem is that employee benefits are underutilized, which creates a contentious situation. The firm may feel that the benefit isn't valued and seek to discontinue the program; the employees may feel that the firm was keeping the program a secret to save money. In truth, most employers do provide information about benefits, but they are very lackadaisical in doing so.

It's strongly advised that employees should receive a total rewards statement at least once a year that demonstrates to employees the value of the benefits available to them - and indicates which ones they are using as well as the ones they are not.

The author specifically mentions work-at-home programs, which many companies find to be highly successful, but the common perception among employees is that work-at-home is a trap: if they take advantage of the program, they will be undervalued by management, and they expect that management will treat them as if they are gold-bricking. (EN: In my experience, this is not at all an unjustified perception - there is loose talk among fellow employees and even managers about the poor productivity of at-home workers, even when there is objective evidence that the work is being done. I don't know for a fact, but have the strong perception that it impacts their raises and promotions - but I have observed that remote workers are terminated much more frequently than in-office workers.)

Another nontraditional benefit is awarding employees additional vacation days to use at their discretion, as opposed to separate banks of sick time and vacation time. In a practical sense, this gives employees an incentive to use their PTO wisely: sick time is not abused because it detracts from vacation time. (EN: A drawback is that people come into the office when they're sick, which is particularly problematic for infectious diseases, but if PTO is liberal, it should not be an issue for most workers.) It's also noted that PTO should be bankable - the days off should not expire at the end of the year because this also encourages abuse to consume user-or-lose time.

The author mentions other nontraditional benefits and rewards that companies use - such as airlines that grant flight coupons to employees, hotels that provide free stays at properties in vacation destinations, and the like. Firms can be very creating in offering non-cash benefits to employees who provide exceptional service.

(EN: An HR professor made a sensible comment about rewards versus compensation. A one-time reward is given for a specific instance of exceptional employee behavior - but an employee who performs exceptionally on an ongoing basis deserves ongoing compensation, in the form of a raise and/or promotion. I sense the author may be blurring this line.)

While values differ by firms and industries, "We value or people" is likely an item that can be shared by all firms in all industries - your compensation and benefits programs are the ways in which this value is directly demonstrated.

The Cost Of Rewarding Behavior

Another major challenge in shifting to a values-based compensation system is the sensitivity firms have of their financial resources. Simply stated, they don't like to spend money and are fearful that any change will come at a higher cost. But on the other hand, businesses invest funds readily when they see the potential to earn a return that surpasses the cost. Tying pay to performance has significant potential to do so, such that the additional money spent on compensating good employees translates into productivity improvements that decrease costs and increase revenue.

(EN: My sense is the real problem is in making a convincing and specific case, and I don't see how that can be done. There are strong correlations, but it requires a lot of faith because you can't track the benefits to specific dollar amounts on specific ledger accounts and many of the figures are speculative.)

Specific areas of consideration are listed:

In terms of productivity, a single A-player can do as much work, and do it better, than two C-players. As you improve the quality of your workforce, you will need fewer people to handle the same amount of work and will need fewer troubleshooters to clean up messes, because they will not occur as often.

Reduced turnover cost, alone, may cover the cost of a lot of changes to compensation programs. If you can reduce turnover and extend tenure, a portion of the cost of recruiting to refill a position can be rolled back into compensation.

Some changes can be made if they end up with a zero-sum or a low cost. In many organization. Budget is approved at a high level and little discussion results if there are no major variances, so you can likely implement a number of low-cost or no-cost adjustments, or swap an ineffective program for a more effective one without much friction. You know how your financial approval process operates and are likely skilled in working the system.

For major changes, it will likely require a lot of campaigning to get support at a high enough level, across the entire organization, to make the case for more significant budget changes. It's a hard sell to get major allocations without demonstrating major benefits - but in terms of organizational performance, aligning compensation to values is a change that has enormous positive potential.

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