Many HR practitioners act more like social workers than they do business people, focusing their time and attention on lacklustre workers rather than high flyers. However, as Dr John Sullivan writes, HR can make a valuable contribution to the bottom line in determining and communicating the value of hiring and retaining top performers
Many HR practitioners act more like social workers than they do business people, focusing their time and attention on lacklustre workers rather than high flyers. However, as Dr John Sullivan writes, HR can make a valuable contribution to the bottom line in determining and communicating the value of hiring and retaining top performers
Many individuals in HR act more like social workers than they do business people. To prove my point, think about how much time generalists spend dealing with bottom performing employees versus the very best employees. Surveys of top performers and HR professionals alike routinely indicate that HR professionals spend little to no time with top performers identifying barriers to their productivity or what factors motivate and retain them.
This over-focus on bottom performers seems strange to most business professionals because they approach performance differentials much differently. For example, when a product manager has an over-performing and underperforming product they, without hesitation, put their resources into the top-performing product. The same is true with customers. Senior executives routinely spend huge amounts of time with their top customers while they spend very little of their valuable time with low impact customers.
Unfortunately this bias doesn’t just end with time management; most compensation and reward programs are also biased against top performers. For example, compensation professionals often develop programs where the net result is that compensation is spread out relatively equally among all team members, so that there is little differential between the pay of the very top and the bottom performers.
The problem with the equal treatment approach is that if you treat or pay everyone identically, the first ones to get frustrated and to eventually leave are the top performers. When everyone gets paid essentially the same (with no performance pay differential), the net result is that bottom performers are actually overpaid, average performers are paid accurately, and top performers are underpaid. This is management to the most common denominator, not management to increase performance.
The 80/20 rule
I have never met a manager that wasn’t familiar with the 80/20 rule, which states that you get 80 per cent of your profit from 20 per cent of your products. Many managers also agree that 80 per cent of the profitable activities within their department come from 20 per cent of the employees. Many senior executives have gone on record indicating their understanding of the value of top performers. Both Jack Welsh, former CEO of General Electric, and Jerry Yang, current chairman of Yahoo! have stated that they have seen a performance differential between average and top performers as high as 10:1.
Several research studies have demonstrated the actual impact statistically. One research study from the Recruiting Roundtable, a research organisation of the Corporate Executive Board, demonstrated that ‘superstars’ produce up to 12 times more than the average employee. Author Lindsey Buckingham in First break all the rules also cites actual examples where the performance differential is as high as 12:1. Unfortunately few in HR seem to be aware of either the 80/20 rule or the existence of a performance differential in their organisation. The net result of their unawareness or ignorance is that workforce productivity and profits suffer.
Top performers are cheap
The combination of low pay differentials and high performance differentials produce circumstances in which top performers generate significantly better ROIs than average performers. Once you realise this, it is only logical that HR professionals should increase their focus on recruiting, developing and retaining top performers while simultaneously spending less time and resources on bottom performers.
If you are cynical about the existence of a performance differential in your organisation there is a methodology that you can use to demonstrate that top performers are a bargain. You can start the process by first determining how much more expensive top performers are compared to average ones. Typically your compensation department can tell you what the typical difference in pay (salary and bonus) is between an average performer and a top performer in the same job. Once you begin that conversation, you generally get an interesting response, which often goes something like this:
1. Top performers generally do get paid more than average performers but the extra compensation for top performers rarely exceeds 40 per cent more than what an average worker would get. It’s more common for the differential to range between 7 and 22 per cent.
2. In many government agencies, the differential is zero – because there is no performance bonus program. The pay difference can, on occasion, actually be a negative number. In other words, top performers can actually get paid less than average performers in some situations, most notably those where tenure plays a role in compensation. For example, it is common in a unionised environment for a top performer get paid less than an average performer if the top performer has less tenure than the average performer. Most unions address this issue by negotiating performance standards that apply to all employees. Such agreements stipulate that all employees will produce n units in a specified period of time, no more, no less. These type of agreements limit the productivity of an organisation, but that is another story altogether.
3. Since benefits are not based on performance, there is no additional benefit costs for your top performing employees and bottom performing employees may actually use more benefits through their increased absenteeism.
4. Top performers require no more management time or training (they may actually require less) than average performers, so their costs to the organisation are equal to or lower than bottom performers.
5. Top performers require no unique or additional equipment.
6. The cost of recruiting a top performer is, in most cases, no higher than recruiting and hiring an average performer.
Basically what it means is that when you calculate the total costs to a company (include all of the above-listed factors) of keeping a top performer, the actual net cost varies between zero and 25 per cent of the cost to keep an average performer.
If top performers cost 25 per cent more, do they produce at least 25 per cent more? In other words, what is the differential in performance between top performers and average performers and does that performance differential produce value in excess of the 25 per cent extra cost associated with having top performers in your workforce?
The revelation here is that the performance of top performers almost always exceeds the performance of average workers by significantly more than 25 per cent. In fact, organisations that have estimated the performance differential have found that it is often 300 per cent higher and it is not unusual to find that the performance differential between average and top performers is 10 times (that’s 1,000 per cent) and superstars 12 times.
Now it doesn’t take a rocket scientist to realise that if you pay an asset (whether it is an employee or any investment) 25 per cent more, but it produces 1200 per cent more in output or revenue, you have outstanding investment. If you are not convinced of the performance differential based on the research studies and the experience of leading CEOs, you can use the following process determine the actual differential for specific jobs within your organisation.
Determining the dollar value of high performers
If you want to calculate the performance differential, follow these steps:
1. Start with some assumptions.
• Easy to measure jobs can be a mirror for other jobs. If you only do key jobs, you can save time and money.
• Not all jobs are equal and the differential in performance does vary with some jobs and organisations. As a result, ask senior managers do select the high impact jobs and start with them.
• Sophisticated calculations are time-consuming and expensive so you must realise that credible estimates may be as close as you can get.
• Get the CFO involved early in the process. The process must have ‘believability’ within the financial department.
2. Select key jobs that are easy to measure and then identify the performance differential.
• Identify jobs where performance is easily counted (sales, independent production, programmers, accountants, customer service reps, recruiters and so on).
• First look at monthly production or output reports to identify the highest output produced by any single individual (the top performer).
• Next divide the total output of the department by the number of employees in order to identify the ‘average’ employee’s output. An alternative is to use the department’s (or the company’s) overall revenue per employee calculation (total revenue divided by the number of employees) as an indication of the average performers contribution.
• Finally calculate the ‘percentage performance differential’. Start by comparing the outputs of the average performer to that of the top performer. Take the average performer as a baseline and then calculate the percentage difference between the lower and the higher number. Expect a performance differential between the 50 per cent and 1,000 per cent.
3. Next, determine the actual dollar value of the performance differential between the top and average performer.
• Multiply the average revenue per employee by the top performer ‘percentage performance differential’ (from item number two above).
• If you also looked at bottom performers (in addition to average performers) multiply the average revenue per employee by the bottom performer differential (the difference between the performance of a bottom performer and the average performer) in order to get the bottom performer differential (note: this will always be a negative percentage).
• If you also want to add employee costs to the calculation because top performers can cost more than the average worker in some cases, add this last calculation. Divide all employee cost (all employee pay and benefits divided by the number of employees) into the total revenue number (you can use total output as an alternative). This gives you the average revenue generated per dollar spent on the average employee. Next, calculate the average amount that you pay to top performers (Include total pay, bonuses and benefit costs). Divide that number into the value of their output (which is the revenue per employee multiplied by the top performer differential percentage) and you get the average revenue generated per dollar spent on the top performer. Comparing the two numbers tells you how much more a top performer produces per dollar spent on them.
4. Test the preliminary results.
• Ask a financial analyst to assess your work in order to find any errors. Refine and work with the CFO until you get believability and agreement.
5. Educate.
• Use the differential to educate managers, raise hiring standards and to increase your focus on the treatment, retention and pay of top performers.
Top performers are under-appreciated in the business world
The pay differential versus performance differential is extremely high in most business positions but the same extreme pay to performance differential does not occur in all economic endeavours. In some industries top performer pay is closely aligned with top performer output or results. For example, in professional sports, top performers (in the same position) are quite often paid not 25 per cent more but as much as 10 times more than average performers. For example, Michael Jordan in his heyday at the Bulls was reported to be paid $35 million per season. That amount of pay was well in excess of 10 times more than the average player in his position received. (Incidentally, his corresponding performance (scoring) was barely 10 times higher than the average guard in his position). Similarly, close pay increase to performance increase ratios can be found in entertainment and in particular in the payment of movie stars.
So why is the preceding sports and entertainment example relevant? Because if top performing employees ever found out that they were dramatically underpaid they would begin to think and act more like sports and entertainment stars. And should this secret get out, I am sure that top performers would rapidly get over their initial outrage and they would soon begin to demand higher pay differentials.
But until they do ... the lesson to be learned is that top performers are a bargain! Once managers realise that top performers are a bargain they should begin to demand that their recruiters and HR professionals begin to focus exclusively on hiring and retaining top performers. For CFOs, the lesson to be learned is that hiring and retaining top performers has as high an ROI as anything you can do (legally) in business ... bar none. Top performers are a bargain!
Dr John Sullivan is professor and head of the HR program at San Francisco State University, and is a noted author, speaker and advisor to corporations around the globe. He can be contacted at [email protected]
