VideoExecutives who need a lesson in the delicate balance between leadership and teamwork should consider a key off-field move made by NFL quarterback Tom Brady.
This past spring, the star player, who has won three of the past four Super Bowls for the New England Patriots, agreed to defer nearly half of his signing bonus. By doing so, he has reduced the impact of the payment on the team's compensation budget, which is subject to the National Football League's salary cap. That means his teammates can be better compensated, which, Brady hopes, gives the team a better shot at getting to the Super Bowl again in 2006. "Anybody who chooses to play on the Patriots realizes that [the team] goal supersedes what any player goal might be," Brady was quoted as saying.
Granted, Brady stands to gain more than $30 million in the next two years, making him one of the highest-paid players in the league. But his rationale for sharing the wealth reflects an understanding of why it's important to reward the group that one CFO calls "the mighty middle."
"It's true that you have to identify top performers," says Patrick Moore, executive director of finance for BellSouth, "but we focus so much on the top that the mighty middle is often overlooked." He fears that if this group continues to be neglected, he will see his current attrition rate of up to 2 percent skyrocket when the economy picks up.
Few companies actively decide to ignore their middle performers. Yet because of time and budget constraints, many focus solely on the top-performing and high-potential employees. "With A-players, you're very interested in what motivates them — is it money, recognition, titles?" says Jose Zeilstra, vice president in JPMorgan Chase & Co.'s auditing department. "You want to keep your B-players and keep them happy, but you don't go the extra mile to figure out the motivation piece, which is unfortunate."
The consequences of such benign neglect can include excessive turnover, reputational damage, or even poor performance. "You need to know who your top people are, but you also have to watch out for the message you're sending, because a disenfranchised middle can be just as damaging to your business as the loss of all of your top talent," says Martin Cozyn, vice president of human resources for Ontario, Canada-based Nortel Networks Inc., which has revised its performance-rating system twice in the past five years to be more "middle-friendly."
To be sure, no one is advising that companies pay all employees even close to equally. General Electric famously advocated a policy of disproportionately rewarding the top 20 percent of its performers, and companies as diverse as Microsoft and JPMorgan adhered to similar principles in incentive compensation. According to a recent Watson Wyatt Worldwide study, firms with sharply differentiated bonus payouts have far better stock performance than those with less differentiation. Those in the top quartile, with an average 47 percent return (including dividends) to shareholders over three years, paid their best performers 4.7 times more in bonuses than they paid lower performers. Companies in the bottom quartile paid their stars only twice as much in bonuses.
"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.
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