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Tie pay and performance to thrive

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in Leaders & Managers,People Management

Former General Electric CEO Jack Welch earned kudos for his leadership, but his devotion to “ranking and yanking” personnel remains a glaring weak spot.

Welch favored “stack ranking,” assigning employees a ranking based on performance metrics. Every year, the lowest-ranking 10% were fired.

Other companies have adopted this process, which fosters internal competition and devalues the contribution of people who do not earn the highest rankings.

A better approach is to align pay with performance. At Bob Barker Co., which makes clothing and supplies for correctional facilities, adopting a pay-for-performance system has helped motivate employees and boosted results.

About seven years ago, the North Carolina firm developed a “balanced scorecard” of measures for staffers in each department. Teams helped set goals, integrated them into their scorecard and identified behaviors that they’d need to attain their monthly scorecard results.

Driven to work together to perform at a high level (and thus earn higher pay), their average merit pay increase was 6% while the national average was 1.4%. Their pay rose, on average, by 8% in 2010.

By focusing on each person’s performance as it related to a scorecard of desired results, the company enabled employees to increase their compensation by working harder and smarter. It also motivated everyone to contribute to the firm’s profitability.

In companies such as General Electric, by contrast, despite support staffers’ exceptional performance, they may feel underpaid and underappreciated while bigwigs receive disproportionately generous pay packages.

— Adapted from “Leaders Hold Key to Employee Performance, Not Ranking Systems,” Aubrey Daniels.

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