“Differentiation is absolutely key, and the more, the better,” says Ilene Gochman, organization effectiveness practice director at Watson Wyatt and leader of the study. More companies are taking that approach. According to a survey by Mercer Human Resource Consulting, in the past year alone 36 percent of respondents increased short-term incentive differentiation based on individual performance.
So how can you reward the star quarterback without depressing the competent linemen who make his plays possible? Here’s a hint: it’s not necessarily more money. Instead, a combination of honest communication, clear metrics, and reasonable career mobility will keep your employees playing like a team.
Pumping Up the Middle
The first critical step in segmenting talent is managing the message. “You want to define the middle as a good place to be, because that’s where most of your workforce is,” says Dan Boccabella, general manager at Gainesville, Florida-based MindSolve Technologies Inc., an employee-performance-management software vendor. He advocates avoiding overly precise numerical grades and words that convey a stigma, like “average” or “meets expectations” in performance reviews.
Libby Sartain, chief people officer at Yahoo, would even avoid the common “high-potential” label. “When you segment someone as a ‘high-po,’ it seems as if you think the other 95 percent of your workforce are ‘low-po’s’ or something, and that’s what causes the friction,” says Sartain, who helped Yahoo craft its first-ever pay-for-performance bonus system three years ago.
In its performance-review system, Yahoo’s middle (and most commonly used) category is “performs well.” “They’re the workhorses; they get the job done and we want to keep them,” says Sartain. At Yahoo, even people in the middle range get salaries and bonuses above the market averages, with further incentives in stock options. “The people we don’t want to retain are in the ‘does not meet expectations’ group,” she says.
Nortel Networks learned the lesson of message management the hard way after it instituted a “Top Talent” retention program in 1999. It was “a very black-and-white system,” says HR head Cozyn, one that used precise numerical rankings to divide employees into “critical” and “noncritical” groups. Several employee-discrimination lawsuits regarding similar practices at other companies, notably General Motors, “forced a lot of companies, including us, to review the nomenclature and process for identifying these top performers,” says Cozyn. That lesson, coupled with an industry downturn and massive layoffs, made it all the more imperative for Nortel to reach out to its entire employee base.
Since then, the company has broadened performance categories to top, high, core, and low contributors, and eliminated the forced distribution system that allowed only a certain number of employees to be deemed “top.” Although the bulk of employees — 65 percent — still fall in the middle, or “core contributor,” category, Cozyn says the system is working well. The attrition rate for his top contributors is half the rate for the core contributors and one-eighth the rate for low contributors — exactly the ratios he targets. “If you’re labeled top, we’ll treat you special,” he says. “If you’re core, we’ll give you every opportunity to grow.”