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• Valued contributor is paid less than others in competing organiza-
tions.
• No bonus or incentive opportunity is available.
• Bonus or incentive offered is less than 10 percent of base pay.
• Nonperformers are receiving the same pay increases or bonuses as
valued contributors.
• New recruits are making signi¬cantly more than more experienced,
valued employees in similar positions.

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• Valued contributor has not received informal recognition in the form
of sincere expression of appreciation for contributions in the last 90
days.
• Employee is a ˜˜B™™ player”a solid contributor who may feel over-
looked or taken for granted.
• New hires seem to be ignored and disconnected.
• A valued employee has recently been passed over for promotion.
• Valued employee works for manager who does not express apprecia-
tion or recognition.
• Valued employee works for abusive manager.
• Valued employees do not have the right tools or resources to do the
job right.
• Valued employees work in cramped, noisy, messy, dirty, hot, cold,
noxious, or unsafe physical environment.
• Employee survey indicates recognition and pay practices are top con-
cerns.



Pay: The Most Emotional Issue of All
There is no more emotionally-charged issue for employees than what they
are paid for their contributions. What we make doesn™t just pay the bills”it
measures our worth in the most material way. We cannot help de¬ning
ourselves by the levels of our income, yet we go to great lengths to keep
the information private.
In reviewing the comments of ex-employees about pay, the root of
their dissatisfaction runs deeper than the sums they were paid. They are
bothered by the inequity of knowing that they make less than others who
are no more quali¬ed, or even less quali¬ed, than they are. They feel the
injustice of getting the same pay raises as those who have contributed far
less to the organization than they have. They interpret HR™s unrespon-
siveness to requests for payroll changes as a sign that they are unimportant.
They have no chance to receive a bonus, while others do. It all adds up to
feeling ˜˜less than.™™
This is why pay and recognition are combined in this chapter”they
are both tools for acknowledging the worth of those who work for us. We
will look at best practices in both pay and recognition, as they must be
considered as ˜˜twins joined at the hip™™ in sending the right messages to

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employees about what we value. But it is helpful to remind ourselves of
some key distinctions between the two:

• Recognition cannot replace pay; it can only add to it.
• Recognition is usually retroactive, acknowledging a contribution
after the fact, while variable pay can be a powerful incentive for
motivating future goal achievement.
• Recognition can happen at any time, reinforcing desired behavior
more effectively when it quickly follows the accomplishment of a
team or an individual.
• Recognition can be customized or personalized to ¬t the person re-
ceiving it, making it more meaningful.
• Recognition in the form of material possessions carries the additional
motivational power of reminding the individual of the company™s
appreciation.
• Any employee can recognize another employee, while only manage-
ment can pay.
• Recognition can take the form of celebration, bringing some needed
fun and excitement into the workplace.
• Innovative recognition practices may bring positive publicity to the
company.
• Contests”a common recognition practice”can give every em-
ployee an equal chance for a payoff.

Both pay and recognition are powerful tools for reinforcing organiza-
tional values or changes in personal behavior and work culture. Together,
they are more effective than either can be separately.


Pay Practices That Engage and Retain
Companies spend millions of dollars per year on compensation consultants
to make sure they are designing or redesigning their pay plans to ¬t their
business cultures and objectives. So, it would be misleading to suggest that
there are best practices that work equally well for organizations of all sizes
and situations. However, there are de¬nite trends in the way companies
are choosing to pay their workers that appear to be more motivating and
appropriate for the times and for newer generations of workers.
Companies have gradually replaced old pay practices with newer pay

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practices that meet new worker expectations. In the 1960s, 1970s, and even
into the 1980s, most companies rewarded tenure over performance and
created an entitlement mentality in much of the workforce. Workers
˜˜owned™™ their jobs and most companies were stable and paternalistic.
Companies absorbed pay and bene¬t costs regardless of their ability to pay.
With the late 1980s and 1990s came downsizings and the ¬‚attening of
organizations and with these, the loss of worker trust and loyalty. Workers
were no longer entitled to their jobs, but had to learn new skills to stay
employable. People found more ¬‚exible ways of working”from home,
part-time, and temporary. Pay and bene¬t costs were cut along with jobs.
There was a severe loss of workforce commitment that lingers today.
When talent became scarce compared to job growth in the late 1990s,
companies actually started believing the words they had always mouthed”
people really are a source of competitive advantage. Talented people had
other options than working for companies that did not value them highly.
Companies woke up to the fact that they needed to invest in their work-
forces and form win-win partnerships. This meant more open communi-
cation, more coaching, training, stock options, signing bonuses, creative
perks, and generous bene¬ts.
During the economic downturn of 2001, many employers began cut-
ting back on perks, bene¬ts, and signing bonuses. Employees started ˜˜tree-
hugging™™ their jobs, in spite of the fact that they were asked to do more
with less. At this writing, most experts believe the war for talent will return
as the economy continues to grow while boomers retire in large numbers.
If this happens, companies will realize anew that people work for more
than just pay and bene¬ts”they work for what we now call ˜˜total re-
wards,™™ the most meaningful of which are not related to pay.
Here then are some of the best pay practices that many preeminent
employers have begun to embrace to better engage and retain their talent:

Engagement Practice 35:
Offer Competitive Base Pay Linked to Value Creation
The ongoing need to provide increased value to customers, combined with
the need to control base pay increases, have led many companies to link
base pay more to value creation and less to rank or years of service. This
new emphasis has resulted in some companies paying lower-ranked em-
ployees more than their managers, based on the judgment that their contri-
butions brought more to the bottom line. At The Container Store, for
example, consistently ranked among Fortune™s ˜˜100 Best Places to Work in

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America,™™ it is not unusual for a sales associate to make more than a store
manager.
Another key is to communicate clearly to all employees how ˜˜value™™
is determined when making decisions regarding base pay. For example, in
many companies, overall sustained value is based on three criteria:

1. Skills and competencies needed
2. Labor market supply and demand
3. Ongoing value to the organization1

Yet, employees in most companies could not explain, if asked, how
value is determined, because it has never been adequately explained to
them. Besides communicating clearly how base pay decisions are made,
managers need to also be held accountable for making hard decisions about
which employees are creating more value for the business and are keeping
their skills aligned with company needs. There will always be a degree of
subjectivity in such decisions, and many managers will try to please every-
one by spreading pay increases evenly (as with peanut butter) to all, often
with disastrous results.
How salary decisions are made will depend on the goals of each organi-
zation. Some companies actually give base pay increases for lateral moves
within the organization, thus reinforcing the company™s emphasis on em-
ployee development and preparation for future assignments.
Here are some other notable trends in base pay:

• Paying for Skills and Competencies. This has been a growing trend,
resulting in more emphasis on paying the person rather than the job.
However, many companies have found that paying for results with
lump sums and variable pay is the higher priority.
• Less Emphasis on Internal Equity Based on Point Factors and Job Evalua-
tions. The more competitive the labor market, the more companies
have de-emphasized internal pay equity in favor of staying competi-
tive with other companies in the same industry. This can create prob-
lems of salary compression, as when new employees are recruited at
starting salaries greater than those of experienced employees. Smart
employers need to be disciplined enough not to get into bidding
wars, remembering that pay is only one piece of the total rewards
approach.
Some companies cannot afford to pay above-market base salaries, but
can still compete effectively for talent by giving employees more

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mentoring, no-cost recognition, additional vacation days, or what-
ever nonpay reward might be important to them. When employers
reach the point where they feel they must pay a premium to capture
new recruits, they will simply have to ¬nd creative ways to reward
more experienced workers.
• Less Reliance on Salary Benchmarking. More workplaces are becoming
less structured and more ¬‚uid in the way the work gets done. This
means some jobs are blended with other jobs, and some people are
given broader roles, combining tasks that were formerly done by
several others. This means that when companies look to make mar-
ket-based judgments about employees™ value, they need to keep in
mind that, when looking at salary surveys and benchmarking with
other companies, they may not be ˜˜comparing apples to apples.™™
• More Broad-Banding. Many employers have drastically cut the number
of salary grades and created broad salary bands that re¬‚ect the fact
that organizations may be ¬‚atter and less hierarchical than in years
past. The growing popularity of broad-banding re¬‚ects the fact that
it contributes to the attraction and retention of talent in several ways:
It focuses employees on growing within a broad pay range, facilitates
lateral career moves, emphasizes the person over the job, reinforces
the use of dual career paths, and supports changes in work design.2
Increasingly, employers of choice understand that base pay, as a re-
ward for individual ongoing value, is only one piece of a total re-
wards approach. Employers of choice have gravitated toward the mix
of variable pay to reward current value and nonpay rewards to com-
plete the total rewards package.


Engagement Practice 36: Reward Results with Variable
Pay Aligned with Business Goals
Because of the increased focus on productivity during the recent economic
downturn, more companies turned to new pay practices that require em-
ployees to put more of their pay at risk in exchange for greater rewards if
they help the company meet its business objectives. While many employees
will be uncomfortable with assuming the increased risk, many others, in-
cluding top performers, respond favorably to the opportunity for more
˜˜ownership™™ if it means being paid in proportion to their contributions.



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Employee Ownership Reduces Employee Turnover
USA 800 Inc., a contact call center and ful¬llment center with 400
employees across the United States, had experienced turnover rates as
high as 70 percent, resulting in loss of signi¬cant training investment
and in disruption of customer service. The owners decided to make
the transition to 100 percent employee ownership. Since then, the
company™s revenues have increased by almost 30 percent and the em-
ployee turnover rate dropped to 23 percent. Company owners see
another positive by-product of giving employees a stake in the com-
pany: 80 percent of the company™s managers have been promoted
from within.3




Three Types of Variable Pay
There are three types of variable pay that many companies use in combina-
tion: Short-term variable pay, long-term cash variable pay, and long-term
equity variable pay.
Short-term variable pay, such as goal-sharing, win-sharing, gain-sharing,
pro¬t-sharing, team variable pay, individual variable pay, and combination
plans, usually focuses on the achievement of business results within a one-
year time frame. As a way of gaining more autonomy in directly rewarding
employees for outstanding achievements, many managers now lobby for
˜˜spot award™™ money in their budgets.
Long-term cash variable pay is designed to reward business results over a
sustained period of time, generally two or more years. Sustained perform-
ance requires a long-term focus, not just the short-term view adopted by
so many companies in response to expectations of the investment commu-
nity. The longer-term perspective can also help keep key talent for longer
periods.
Long-term equity variable pay means stock options. By providing stock
options to all position levels in the organization, companies spread the feel-
ing of shared ownership, reinforce teamwork, and promote longer-term
retention.
The major attraction of variable pay is that it has the potential to ful¬ll
employees™ expectations of being paid for performance while allowing
businesses to make additional payouts only if they achieve business goals.

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