Will Paying Staff More Lead to Bigger Profits?

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Businessperson With Stack Of CoinsWe are seeing some extreme tactics to help win the current talent war, such as: poaching, tacit anti-poaching agreements between competitor companies, counter offers, exploding job offers, job title inflation—you name it, and employers are trying it. Stopping short of imprisoning employees in the building, employers are trying just about anything to find and keep talent.

And while many of these tactics may lead to good short-term and even medium-term returns, in terms of talent availability, it’s not always clear what the long-term impact of certain talent management strategies is on the business. This doesn’t come as a surprise as historically HR professionals have struggled to show a link between HR strategies and the bottom line business performance. That’s why I am especially interested in this study by Towers Watson, which has drawn a link between talent management strategies and profitability/share holder value. But, they have specifically focused on compensation strategies and the kind of compensation policies that HR or recruiters might adopt to attract new talent or retain existing talent.

In their study, they looked at executive compensation programs with 50 employers that had delivered the best shareholder returns over the last 15 years versus the wider market, (the S&P 1,500). They found that certain compensation practices were more prevalent within the top performing companies suggesting that these were superior HR practices that drove long-term performance.

For example, many employers might consider paying above the median rate for base salary in order to attract and retain talent, or others may contemplate paying less base pay in return for a larger bonus. Both these strategies might help to get staff in the door, but none of them were adopted by the top performing companies, suggesting they are not best practice.

Yes, the Towers Watson survey showed that the best performing companies paid their executives at median market rate for base salary, which suggests that inflated, upper quartile base salaries are a flawed talent management strategy leading to lower shareholders.

But, before you go thinking that these top performing company executives are being taken advantage of and not properly rewarded for upper quartile performance, I should make it clear that you don’t need to feel sorry for them. They are properly rewarded but this is done by them having larger than average bonuses meaning that their total compensation (base salary and bonus), is much higher than the market median. Yes, the total compensation package of executives in top performing companies is 43 percent higher than the median in large companies and 28 percent higher than the median for small companies.

So, the message here is that paying above average base salaries may be a good talent management strategy in terms of attracting or retaining talent, but, it won’t lead to an incremental performance gain and is therefore a flawed business strategy over the long term. (Just because they get paid a higher base salary they won’t necessarily perform better). Higher performing companies don’t pay over the odds in terms of base salary for talent, but they do pay well over the odds in terms of bonus and incentives – and adopting this kind of strategy in your business may well lead to longer term profitability.

By Kazim Ladimeji