Just Rewards

When Xcel Energy wanted to reward its rank-and-file for taking the initiative, it created Xpress Ideas, a rewards scheme that pays bonuses on the spot for useful suggestions. The program has been a hit among the company's 11,000 workers; last year they offered 6,133 ideas, most of which were implemented. After one worker pointed out that the Minneapolis-based utility was making unreimbursed repairs to streetlights owned by other parties, for example, the company began to label its transformers, saving about $2,250.

But those good ideas come at a price. While the company wrote employee reward checks to the tune of $427,400 last year, Xcel management felt it couldn't gauge the payback for the program. "Intuitively, people say they know this increases performance and makes us a better company," says Michael Connelly, Xcel's vice president of human resources. "Still, the hard metrics aren't there."

Like the nonexecutive-pay systems at many companies, Xcel's aims to reward work that measurably improves corporate performance, attracts new talent, or motivates top performers. Ironically, because the Xpress Ideas program for rewarding good ideas doesn't fit neatly into that strategy, it may itself not be a good idea. And, in response, Xcel is considering shifting some of that money into its short-term incentive program, which rewards top employees with annual bonuses based on a combination of individual, business-unit, and corporate performance.

As it attempts to adjust the mix of compensation components, Xcel finds itself part of a growing trend. Across the country, companies are reacting to a shrinking labor pool and a strong economic recovery by improving their ability to recruit and retain superior employees. Often, that comes down to cash — and delivering that cash in ways that assure top performers that their contributions are recognized.

There is definitely grumbling in the ranks. A recent Watson Wyatt Worldwide employee survey found that 71 percent of high achievers list concerns about pay as one of the top three reasons for leaving a job, more than twice the number citing a failure to get promoted or a poor work-life balance. In CFO's own survey of senior finance executives, only 7 percent of respondents believe their companies' current pay policies greatly improve the ability to attract and retain high achievers, while 39 percent see a modest advantage and 32 percent detect no advantage at all (see "Mass Appeal").

Designing different levels of rewards, however, is far from easy. "The processes must be seen as credible to all employees, or there can be resentment," says Laura Sejen, Watson Wyatt's global practice director for strategic rewards. "I'm curious to see what kind of responses Corporate America will come up with for rewarding its top employees. It's almost like tectonic plates shifting — something's gotta give."

Putting the Merit in Merits
One likely starting place is the "merit pool" — the percentage of payroll earmarked for performance-based raises — which critics have long contended represents a missed opportunity for rewarding top employees. Rather than allocating money according to well-defined and carefully enforced achievement rankings, many companies simply apportion merit raises evenly (or close to it) across the entire eligible population. The reason? "Managers aren't interested in doing things that are going to have a negative impact on people's morale," so they rate employees higher than they should, says David Sirota, founder of Sirota Consulting and co-author of The Enthusiastic Employee (Wharton School Publishing, 2005). The national average for merit-increase budgets is less than 4 percent of payroll, making the actual amounts at stake relatively small. "Still, the reaction of top people is to ask why, after all their excellent work, they get, say, only 2 percentage points more [than the average]," he adds.

If designed properly, however, "merit pay recognizes employees' sustainable and growing skill set and their ability to contribute," says Myrna Hellerman, senior vice president of Sibson Consulting. Combined with an annual bonus, merits become part of a powerful dual performance–based incentive system.

At Xcel, management has decided that the way to unleash that power is to have some divisions cap managers' merit increases at 2 percent, creating a larger pool from which to reward top employees. While Xcel's merit pool is 3.5 percent of payroll, the cap allows certain employees to earn more than the average — sometimes substantially more.

"We step back and look at the whole organization's needs, and we address the merit issue holistically with that money," says CFO Ben Fowke. "That does two things: it puts more merit cash in the hands of productive employees, and it starts to send a signal about how you can be rewarded if you're a performer." Xcel hopes to bring the same thinking to its incentive bonuses, increasing the gap between high achievers and those who do an average job. The utility gives heavy weight in those bonus payouts to individual performance and business-unit achievement predicated on reliability, safety, cost-cutting, and other targets.

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