This document discusses several compensation practices and their potential impacts. It notes that forced performance distributions can demotivate solid performers and encourage dysfunctional behaviors by managers. It also discusses how backloading compensation to reward tenure can benefit both employees and employers by incentivizing knowledge accumulation. The document recommends piloting any new programs and carefully considering both intended and unintended impacts of compensation changes through monitoring and research.

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Integrated performance ,training and
rewards management
(Humantalents Management perspective)
Jayadeva de Silva
It has been observed that rewards don't always have the impact on performance and retention
that companies expect. This paper discusses why it is that so what can organizations do about it?
Destructive Compensation practices
Compensation professionals have long sought to create accountability through the design and
implementation of effective rewards programs. Conventional wisdom suggests that the best talent
will be attracted, retained and motivated to perform by ensuring that high-performing employees
are distinguished from their peers. But, too often, the potential negative side effects of such
rewards programs are glossed over - the potential for destructive competition, the narrowing of
focus to the detriment of innovation and, in some cases, wasted payout that incentivize nothing
because employees already engage in the right behaviors.
Need to monitor impact of changes
It's critical to model out the potential impact of changes in programs. Monitoring actual program
impact also is essential but frequently overlooked. When it comes to rewards particularly, we too
often "trust our gut." When thinking about design, decades of research in two relevant disciplines
- psychology and economics - can shed light on important caveats and program success
strategies that can be better utilized to achieve organizational objectives.
Forced distribution of performance rankings
The first myth has to do with forced distribution of performance ratings. Shouldn't that help
organizations retain and motivate the "best of the best" and force out low performers?
Forced distribution can offer those benefits to the organization. But they come at a potentially
steep cost. Forced distribution can wind up demotivating solid performers whose ratings are fit to
the curve, leading to unwanted turnover.
Forced distribution might also drive some managers to dysfunctional behavior: retaining under-
performers to protect their "stars" and spreading high performance ratings across top performers
over different ratings cycles. Of course, such behaviors undermine the objectives of the program.
A significant percentage of employees participating in survey research indicate that forced ratings
are one of the HR practices that they would most like to eliminate. They see it as unfair and
believe that it actually discourages innovation, teamwork and risk-taking. We've also
conducted analyses of what drives employee turnover in organizations and found, in some cases,
that higher performers are more likely than other employees to quit following the implementation
of a forced distribution system. Is there anything companies can do differently so that forced
distributions will actually promote high performance?
Companies can make forced distribution more effective by training managers to implement it.
This allows employees to get valuable developmental feedback and ensures that effective
collaboration is not undermined. Companies should also clearly identify criteria for differentiation
and be sure to account for long-term contributions.
Pay for tenure and knowledge management
Should companies pay for tenure? Increasingly, that is not a promise that companies are
comfortable making. We're definitely not saying that such promises should be made - productive
employees should be those who are rewarded. But, in many organizations, an employee's firm-

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specific knowledge - knowledge that is gathered over time, such as understanding of the
company's products, protocols, internal networks and technologies - is highly productive. And it's
only productive in that context; as soon as the employee leaves the organization, the value of his
or her accumulated knowledge falls to zero. Because of that, it makes sense for organizations to
seek long-term employment commitments.
Backloaded Compensation
A long-standing economic model shows that one way to create such a "bond" is to back-load
compensation. In doing so, the employee and employer can share the upfront costs of accruing
firm-specific knowledge as well as the later benefits. Back-loaded compensation calls for paying
employees less than their market value, but more than they contribute, early in their careers.
Later, when their productivity grows to exceed their outside market value, the organization will
pay more than the market rate but less than the value actually generated by the employment
arrangement. By paying employees for tenure in this way, the organization captures more value
than it pays out and the employee captures more income than he or she could attain in the
outside labor market.
There is empirical evidence supporting the value of tenure to the organization. In a statistical
analysis conducted for a large financial institution, researchers matched employee data on tenure,
turnover and staffing patterns to information on branch performance over multiple periods and
found that each year of average tenure for the workforce was worth millions. That was because of
the greater success achieved by financial services representatives who were informed about the
bank's products and who were well-linked to the right bank personnel to support customer needs.
Careers and millenials
It may be true that employees - particularly younger employees - care more about current
payouts than long-term careers? Many companies believe that is the case for Millennials, but the
prospect of significant future pay, driven by career progression, can be an important motivator,
especially among younger employees who have a longer time horizon over which to realize such
gains. If career rewards help select employees with long-term focus, so much the better when
tenure is a key driver of productivity.
Career motivators won't work well unless the company relies on internal candidates to fill jobs,
aligns reward growth opportunities with critical markers of career progress, and communicates
the "career reward" trajectory to engage employees.
Do financial incentives like bonuses improve performance?
We're not saying that incentives don't work. But when organizations look to them as a quick-fix
performance solution, outcomes often fall well short of expectations.
Research on the impact of different types of HR program changes has found that financial
incentives are the least certain to deliver productivity boost - and they can reduce productivity if
not done right. While incentives may encourage poorer performers to leave the organization and
reduce the likelihood that employees will shirk their responsibilities, there is evidence that they
can undermine motivation. Incentives can signal a lack of trust, create confusion and stress, and
appear to undermine employee autonomy - all of which may diminish the intrinsic, ethical and
altruistic motivations employees already have for helping the organization meet its objectives.
For these reasons, we recommend that companies consider whether employees already exhibit
desired behaviors before implementing financial incentives. Companies also need to assess
whether creativity, innovation, long-term focus and collaboration are critical. If they are, incentives
may not be a good approach.
Impact of base pay on performance?

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Conventional wisdom says that base pay itself does not have the power to motivate employees.
But research conducted over decades has demonstrated that employers who offer base pay
above market rates reap a payoff in the form of greater employee productivity. That's because
non-performers risk separation and the threat of a lower-paying job or a potential spell of
unemployment can serve as an effective inducement. Those potential outcomes can also induce
employees to produce even when they're not closely supervised.
In fact, it has been found that, all else equal, exempt employees working under "stretched"
supervisors are better paid on base. Supervision is one of various humantalents management
practices that should be considered jointly with compensation policies to ensure the biggest joint
return on each of those investments.
The best way to avoid inadvertently undermining your objectives when designing rewards
and talent programs?
It's critical to test whether programs deliver the desired results in the specific organizational
context. Prior to implementing any changes, pilot new programs in small units. If there isn't time
to run such tests, monitor your programs using modern statistical techniques that can help you
gauge their impact and consider how they work together to generate optimal results.
While the complexities of overlapping HR policies make it difficult to avoid mistakes,
the imperative for HR and compensation leaders is to raise the bar and carefully think through
whether policy changes can generate a gain, considering both the intent as well as the potential
negative side effects.