Should You Fire a Laggard to Give Your Stars More Than A 5% Increase?
July 18, 2007
First up, let me disclose - I'm not a big forced ranking "up or out" guy. What works for GE has painfully failed at other places, most notably Ford. I would prefer to institutionalize coaching tools and systematically try to raise the performance of all employees.
Of course, the painful reality for most companies is that we deal with limited resources. With 3% to 4%
budgeted across the board for merit increases, our choices are limited. Either give merit increases with little variability for low vs. high performers, or take the tough medicine - giving no or very limited increases for your lowest performers so you can pump up the available funds for the stars.
Last week I riffed on projected 2008 merit increase budgets, then asked Ann Barnes of Compensation Force to pitch in with some data about how the same companies polled on their merit budget expectations might distribute the funds to low and high performers. The highlights from one of Ann's links:
--The typical salary increase for low performers (employees who only partially met expectations) is 1.5%
--The typical salary increase for high performers (employees who far exceeded expectations) is 5.0%
As Ann concluded, these findings do expose a general unwillingness - or inability - to truly differentiate pay at most organizations.
So now for the tough love logic check. Let's say you had 100 employees, earning an average of $50,000. Knowing that your top 10 employees out of this group (highest rated at an overall "Exceeds" rating) were heavy contributors, you would do your best to give them 5% or a $2,500 annualized increase. If given the power, would you trim one position you couldn't backfill (savings of $50,000) to redistribute that income to your top 10 performers, giving them an overall increase of $7,500 or 15%?
Yes? Heck Yeah? Then why aren't you doing that? Simple answer - we don't really know who the best performers are or can't prove it. That's why we are constrained by the merit budget and can't bear to give less than a 2% increase to a low performer. We can't prove it and even if we could, most of us don't want to deal with the conflict of telling someone they aren't getting an increase.
Denial - not just a river in Egypt. Time to work on your Performance Management system.
You nailed it.
>We can't prove it and even if we could, most of us don't want to deal with the conflict of telling someone they aren't getting an increase.
Posted by: Laurie Ruettimann | July 18, 2007 at 09:42 AM
I work at a company that places enormous value in measurable results (measured in dollars, without exception). "Cost centers" such as IT, HR, Accounting/Finance get stuffed into the standard 3%, since there's no way to differentiate by generating revenue. Useful, innovative initiatives in other departments face the same challenge if they're not directly causing revenue generation. Absolutely kills the incentive to excel.
In contrast, sales and marketing have the potential to earn significant merit raises and bonuses if they can generate considerable revenue.
The battle seems 1/2 won here, but the result is worse than giving everyone 3%. Essential departments are demoralized, while salespeople and marketers come to expect a 7% raise, and are disappointed if they don't receive one. I'd kill for good performance metrics here that weren't tied directly to revenue.
Posted by: bruce | July 18, 2007 at 10:40 AM
Silly me. I always thought the reason you fired laggards was that they dragged down productivity and couldn't or wouldn't change. You fired them faster if they groused, complained and generally poisoned the work environment.
As I re-read the above, it sounded facetious to me. I don't intend it to be. I think managing performance at ground level is important and that all good productivity and morale springs from that. It's an issue where we need to be operational, not tactical or strategic.
Posted by: Wally Bock | July 19, 2007 at 08:33 AM
Assuming the right move is eliminating the one position in order to provide higher incentives for high producers, now a headcount of one has been eliminated. What is ahead next year when the headcount of one is no longer available and there is no "incentive pot" to pull money from for the high producers?
Posted by: Lane McPherson | July 20, 2007 at 03:33 PM
Lane -
Good point regarding the money being gone the next year. What about using the same example, but instead of spliting all the comp across your highest performers, why not give half this year, and half next year while keeping your merit budget the same? That would still equate into a 10% increase this year, with a similar raise being funded in year two....
Wally - I agree with what I think you overall MO is - manage performance on a daily basis for better results. That being said, the inability of organizations to institutionize pay for performance made me ask this question. Since the inability to confront the poorest performers seems so chronic, I wanted to propose this scenario as a "Plan B"...
Bruce - I hear you regarding what your company does. I would be a proponent of increase at-risk comp for your revenue driven performers. That way, if they sell more, they get more, but only if they keep selling. For the non-revenue folks, the more you can do to help the company ID who the stars are, the better the case for pay for performance...
Posted by: Kris | July 22, 2007 at 09:12 PM
Well, the problem for pay for performance - and don't get me started on forced ranking, which has not worked at GE as well as everyone thinks - is that it is impossible to determine performance in many office jobs. Most people are so constrained by the process and are trapped by it that it is difficult to determine who is really weak unless you have some easy indicators - wasting time or attendance issues or just blatently obvious skill deficiencies. But these considerations usually are being taken care of through a performance management process. Just working hard doesn't do it either, because we all know the firefighter costs money just as the laggard does.
I really like variable comp systems built on operation performance - like op income targets - with baseline targets that when exceeded can be doled out a little more generously to the stronger performers. Obviously sales systems are different, although straight revenue generation targets are death to margins, and can cost your business money.
Posted by: JEM | August 23, 2007 at 10:52 AM