The Compensation Mistake You Don’t Know You’re Making

Most business owners would likely admit that their top performers deserve higher compensation than those performing at lower levels. In fact, research suggests that for jobs of at least moderate complexity, the difference in productive value between performers at the 85th and 15th percentiles is about 40 percent as a return on salary.

Still, it is fairly common to find that the range of merit and bonus pay in companies is more limited than would be expected given the difference in work contributions between superior (“eagle”) and mediocre (“turkey”) performers. Pay variance within jobs tends to be small, and more often reflects years of service than measurable contributions.

Feed Eagles, Starve Turkeys

If employee performance is so critical to business success, why don’t we see more companies “feeding their eagles and starving their turkeys” when it comes to pay? The reasons are twofold: Companies use inadequate methods to gauge performance, and managers are reluctant to offer variations in pay to employees in similar roles.

While managers can usually identify their eagles and turkeys, they often lack a system of measurement for charting different levels of performance. The standard five-point rating scale is too crude an instrument for performance calibration, since the rating categories are somewhat ambiguous and subject to interpretation. Consequently, the distribution of ratings in companies often becomes compressed (i.e.—mostly “threes” and “fours”) and the entire “flock” gets similar wage increases.

Why Measuring in Dollars Makes Cents

A more precise method of evaluation would be to express performance differences in dollar-valued terms. Despite the fact that the work outputs of many employees are not tangible or directly tied to the bottom line, their performance still has monetary implications. A dollar-valued measurement scale illustrates the real financial impact of employee performance on the company. Managers are asked to translate employee performance levels into estimated dollar amounts—relative to salary—across principle job activities. This in turn allows for the allocation of rewards commensurate with the dollar-valued performance of each employee, and as a share of the return on the company’s ‘investment’ (above a minimum hurdle) in their salary.

What’s the Matter? Chicken?

Why then are managers reluctant to differentiate for high performance when rewarding employee performance? Notwithstanding the hardheaded rhetoric commonly heard in companies, managers are apt to “turn chicken” when it comes to delivering different reward treatment to their eagles and turkeys. One explanation is that managers simply wish to avoid any unpleasant confrontations associated with rendering extreme evaluations. By awarding higher-than-deserved payouts to the turkeys, they preempt negative employee reactions, and by awarding lower-than-deserved payouts to the eagles, they need not justify (to their own managers) the exceptional reward treatment.

Another explanation is that managers seek to preserve group cohesiveness, even at the risk of undermining the pay-for-performance link. Among all groups of employees there will be a hierarchy with attendant status distinctions, based on relative performance. However, the high status accorded the eagles is dependent upon the turkeys’ willingness to remain at the bottom of the performance “pecking order” (i.e.—not leave the group). To maintain this group dynamic, a manager may subconsciously foster, and the eagles tacitly support, the transfer of a reward portion (“bribes”) to the turkeys to offset the indignity of low status. Thus, the payouts for turkeys may be somewhat higher, and for eagles somewhat lower, than their productive value would warrant so as to reinforce the group status quo.

Explore Your Options

What, if anything, can you do to align your employees’ pay with their work contributions? One alternative is to use group incentive or team-based pay plans to compensate employees for their collective, rather than individual, performance levels. However, unless there is sufficient task interdependence or opportunity for collaborative work activity, these plans are unlikely to align reward treatment. Moreover, such plans raise the possibility of the “free rider” problem in which the turkeys share the rewards generated disproportionately from the work contributions of the eagles.

Exploring the pros and cons of “feeding the eagles and starving the turkeys” within your organization is your best bet for providing fair compensation to your employees while upholding your commitment to the pursuit of success. Employee performance has monetary implications, and properly rewarding your top workers will motivate them to remain productive and loyal to your company.