Predictive Behavior and Predictive Pay

The predictive behavior and predictive pay model is a new slant on compensation and total rewards strategies. Pioneered by predictive marketing software companies, the idea is that if you buy a book from a vendor like Amazon.com a computer system compiles your buying habits and makes recommendations from a catalog of similar subjects or authors. Human Resources expert RobeRt J. buckley delves into this model and how organizations that keep a close eye on their talent pool predict employee behavior to support goals. Read on for insight as to how business can affect positive change in the HR arena. >>
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PRedictive beHavioR

n todays increasingly fast-paced world, the only constant is change. Organizations must be nimble, flexible and adaptable to shifting business requirements, while addressing the demands of globalization. There is a constant demand for todays businesses to have more agility than ever. In this environment over the past decade corporations have shifted the burden of corporate performance to employees with the use of pay-for-performance or at-risk pay models. Pay-for-performance models are considered to be a motivation-centric concept where employees receive increased compensation if they, or their team, reach certain company targets. The concept is known to be viable and organizations that have implemented pay-for-performance have enjoyed higher corporate valuations than those that dont. Yet, in a hyper-competitive world where global pressures dictate the need for a new type of business velocity, is there a better, more effective way to improve organizational performance? The predictive behavior and predictive pay model is a new slant on compensation and total rewards strategies. Pioneered by predictive marketing software companies, the idea is that if you buy a book from a vendor like Amazon.com a computer system compiles your buying habits and makes recommendations from a catalog of similar subjects or authors. Following this logic through to compensation, New York University professor Dr. Dennis Garritan says, People will do what you pay them to do. Garritan is the director of graduate programs in Human Resource Management and Development. His focus is on developing a new type of HR practitioner that partners with a business to understand the business drivers and how value is created at the company. While working on an MS in Human Resources Development and Executive Coaching, I became fascinated with the idea of predicting behavior or affecting the behavioral choices an employee makes before the decision is made. So, the following question arises: How can an employee be influenced to make the right decision in advance? The first step is by helping employees make better decisions more often, or by improving the underlying competencies that create a sustainable competitive advantage, wherein organizational effectiveness is improved and shareholders realize an appreciation in the value of their holdings. Pay-forperformance has been an effective influencer; by putting more of an employees pay at-risk, studies show that workers will do what is

required to get their share of the monetary pie. In the book, Coaching Leaders: Guiding People Who Guide Others, Daniel White writes: As a proponent of behavioral coaching, I think of behavior in terms of a mental model where thoughts precede behavior and in order to change a behavior in a sustainable way, an employees mental model must change. In order to predict how an employee will react, it is important to understand how people learn and what rewards people value for performing the specific tasks that an employer asks for on a day-to-day basis. More research done in the pay-for-performance arena comes from Aberdeen Groups 2008 Compensation Benchmarking Study: Taming Costs and Rewarding Employees. In the study, David Weldon discusses a Total Rewards strategy being used to encourage behavior versus a traditional pay-for-performance scheme. Since pay-for-performance rewards employees after the fact, the desired behavior tends to last only as long as the reward. Change the reward and the associated behavior often disappears. Sometimes reward changes are beyond a companys control fluctuating economic conditions, finite funding, or strategic initiatives, to name a few. What is created is a vicious circle where a carrot-andstick environment emerges, as new incentive plans are modeled and initiated to provoke the right behavior. In fact, very little attention is paid to how employees learn or how behavior is sustained. Today, very few strategic-level decisions can be made without assessing the talent level of the workforce. Coupled with the impeding shortage of employees both in numbers and knowledge as documented by the U.S. Department of Labor it is clear that there is no one-size-fits-all approach to attaining the needed employee pool. Therefore, implementing predictive behavior and predictive pay models may be the answer to building the best and most talented workforce.

KEYS To SUccESS
The key to long-term success is achieving behaviors that are sustainable and easy to replicate. Costly changes due to reacting and adjusting to last-minute issues are always more expensive in the long run, even though short-run costs may be higher because there are more elements to a predictive pay model. The desire to be able to retain or sustain the performance level of employees from year to year is not a new one, nor is the idea of linking pay to performance. Companies with a pay-for-performance strategy make an effort to rate their employees by using a performance management system. The system itself could be rudimentary listing employees starting with the most productive to something as sophisticated as a Balanced Scorecard or Six Sigma. However, an important point to remember is a performance management system is a philosophy of operation, not a software solution. If your firm, like most companies, has not surrendered to straight entitlements that spread a merit pool like peanut butter across your groups, then you probably use a series of matrices to make recommendations based on performance, position in salary range, comp-aratio and so forth. A good technology solution should be able to take your business rules and import them rather than make you change the way you do business to fit the solution. In an attempt to identify high-potentials and top performers from the general employee population, companies sometimes use a forced distribution to rank employees. This philosophy is normally represented
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the amoeba example

To understand the effects of the carrot-and-stick stimulus as applied to your workforce one can look to protozoa. An amoeba will react to direct stimulation of a positive or negative nature. When observing these tiny organisms under a microscope, it is possible to see that the single-celled creature will move toward a prize of a microscopic grain of sugar placed in its orbit. Conversely, it will move itself away from unpleasant stimuli like heat or sharp objects.

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ideal peRfoRmance Rating example

numbeR of employees
10 8 6 4 2 0 2 1.75 1.5 1.25 1 0.75 0.5 0.25 0

peRfoRmance Ratings
in a bell-shaped curve as shown in the following chart from an actual client case study. The ranking of (1) represents an employee who meets expectations. Since the majority of employees will be in this category, it is shown at the highest point of the arc. To follow suit, (2) exceeds expectations, and (0) not meeting expectations. As employees improve, their position and ranking on the curve will shift to the left. With every standard deviation in shift, there is an incremental boost of shareholder value that far surpasses the dollar adjustment the employee will be given. Total rewards authorities like Dr. Edward Lawler of USCs Marshall School of Business have stated that, pay is still the best way to drive behavior. The predictive behavior and predictive pay model states that, employees can be influenced through the use of predictive pay or laserfocused merit pay in advance of the event that triggers a decision and behavior. Predictive behavior makes clear the consequence of the right choice that supports the corporate objectives and mission. Imagine the incremental value that could be created for customers, bonuses for employees and value for shareholders if your entire organization made better choices just 1 percent more of the time? The predictive behavior model appears below. A company with a strategy of increasing market share may adopt a customer-centric focus. The competencies, skills and behaviors supporting that good customer service are measured and managed in the performance management system and rewarded seamlessly in the first true picture of direct alignment between outcomes and rewards to hit the talent management marketplace. It is easy to swap out the customer for a balanced-scorecard approach, growth, retrenchment or some other strategic initiative. Implementing a technology solution from a talent management vendor provides the best chance to manage the desired outcome because it enhances decision-making and analysis throughout the process. Competencies support the quality of behaviors and are a source of competitive advantage. In the predictive behavior illustration, a company focusing on market share or customer service might measure competencies from clusters like: entrepreneurship, including analysis and problem solving, innovation and planning, and organizing; leadership, including integrity, initiative or adaptability; communicating and influencing, including interpersonal skills, verbal and written communication, and collaboration. These competencies are then quantified, scored, aggregated, analyzed and finally rewarded. The benefits across a unified talent management strategy are ubiquitous. On the retention side, when predictive pay administration is done properly, there is also a perception of internal and external fairness. In todays economy, there no longer is job security, but there is income security. This means that an employee can change companies, take a similar job and receive a raise, just because talent is scarce. If employees perceive themselves as not being treated fairly with regard to pay internally on a job-to-job basis or externally to similar jobs in other markets then voluntary turnover can be seen. A few years ago, when I was analyzing a financial publishers situation their business was expanding but their margins were shrinking. Careful and in-depth analysis revealed that their environment and merit policies coupled with the inability to isolate the problem was costing this publisher market share and profits. Their environment yielded the results shown in the case study. The case study clearly indicates that merit modeling has a direct impact on the entire organization and, as such, effective merit modeling while tactical in execution becomes strategic in its role because the pain when supported, in fact becomes the reason for pain at the next igher level, so the chain is unbroken from employee to CEO/CFO.
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pRedictive behavioR model

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PAy-fOR-PERfORmAnCE HAS BEEn An EffECTIvE InfluEnCER; By PuTTInG mORE Of An EmPlOyEES PAy AT-RISk, STUDIES Show ThAT woRKERS wILL Do whAT IS REQUIRED To gET ThEIR ShARE of ThE moNETARY PIE.
case study
TITLE CFO PAIN Profit Margins Down REASoNS Delivery behind due to
double digit turnover what it will cost to get top talent, compensation practitioners need to inform hiring managers of changes to the job market. Offering creative combinations based on merit may lessen the cash drain of a candidate hired at too high a premium outside the salary range. These new hires could negatively affect your culture and incumbent employees by allowing their hire terms to be made public. This information often becomes well known and it could be devastating to your most senior and key people. Again, a technology-enabled solution is a better fit as employee counts rise.

TITLE VP Human Resources PAIN Double Digit Turnover REASoNS Expensive & difficult
compensation cycles

A STELLAR ExAmPLE
These ideas began to take shape during 2007 as the company I lead took a new direction relative to compensation, as a result of our recent, award-winning innovation. The solution integrates employee compensation for merit, variable pay/bonus and performance-based shares with transaction-based compensation, sometimes called sales compensation or incentives, in a single application. Spurred by years of experience with customers demanding a combined solution, the technology to deliver it and the creative power of a team of professionals including my partners Walter Martens who designed the technology and Olyia Buckley on the strategy side predictive behavior and predictive pay is a direct result of the need to link corporate strategy with the rewards systems that drive behavior. By solving one problem, others were able to be addressed as well and new ideas have come to light. The last piece to the puzzle is communicating to your employees: delivering employee self-service portals to show how performance is attained and what is expected from performance level to performance level; branding compensation strategy in the same way your products and services are branded to show your corporate uniqueness; and in turn reinforcing your messaging around compensation strategy to your employees. By communicating effectively, predictive behavior and predictive pay can help your company achieve greater retention of top performers, lower employee cost per revenue dollar, improve employee satisfaction and engagement and even improve top line revenues as a result. btQ

TITLE Director of Compensation PAIN Expensive & difficult compensation cycles REASoNS 1 Current process is very manual 2 Managers concerned @ brand vs. paper tasks 3 Weakness is dealing with large groups to make
performance based decisions

4 Rewards dont match performance by year 3 5 Perception of internal inequity

The impact of providing a superior tool was immediately felt inside the business. Voluntary turnover went from 16 to 6 percent and merit modeling and planning cycle times were reduced from 13 weeks to five. One of the primary reasons for the success of the companys initiative was the improvement in capability to model their merit pay and redistribute their finite pool of resources to better use for the company and for their top performers.

REcRUITINg TALENT
Predictive pay is also integral to recruitment as part of an overall talent management strategy. In understanding the job market and knowing

RoBERT J. BUcKLEY is the CEO of Green Total Compensation, an award-winning software company in the talent management/compensation market space. At Green Total Compensation, Buckley has harnessed his HR, finance and IT expertise and led the design and development of the Green Total Compensation Suite, the industrys first total compensation solution that combines employee compensation including merit, variable incentive and performance-based awards with transaction-based sales compensation on a single platform.

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