Trends in People Performance Management (ITAGroup) by ITA Group

WHITE PAPER ITAGroup, Inc.

TRENDS IN PEOPLE PERFORMANCE MANAGEMENT Companies must generate maximum return on their marketing, including investment in employee performance management programs. In recent years, however, several trends have emerged that not only justify this approach, but have refined it to the point where people performance improvement strategies are as important to a company’s success as are product innovation, customer satisfaction, quality and operational efficiency.

DIRECTING FUNDS TOWARD INTERNAL BRANDING The first trend is a shift in corporate attitude toward the role of employees and channel partners in the overall branding strategy and its effect on the bottom line. It is the growing realization that external efforts to promote a company’s brand to its customers are necessary, but in order to actually deliver on that brand promise, there also must be a plan for aligning employee attitudes and actions with that brand. Internal branding, which involves communicating to employees what the brand is and how each employee can bring to life, is becoming increasingly important in a company’s ability to differentiate itself from its competition. Although the link between engaged employees, satisfied customers and an improved bottom line has been supported intuitively by business executives, there is a growing body of evidence that quantifies this link. Brands aren’t logos and taglines; they are customer experiences delivered over time. And aside from the product or service itself, people can be the most important element in delivering on the brand promise. Studies show that companies that align their employees with the corporate mission and brand consistently outperform their competition. One example of research that connects employee engagement to employee satisfaction, and employee satisfaction to profitability, is a 2007 study conducted by the Russell Investment Group. The study analyzed the stock performance of Fortune’s annual list of the “100 Best Companies to Work For” and compared it to the stock performance of the broader market. The study found that since 1998 the companies on this list delivered five times as much to investors as the general market—a clear link between employee engagement and financial performance.1 Another example is a study of a major hotel chain conducted by Dr. Don Schultz, a professor at Northwestern University. The study tested the belief that engaged employees, who are focused on delivering on the brand promise of exceptional service to customers, can positively impact financial performance. Analysis of survey and spending data collected from customers © 2011 | ITAGroup®, the associated design/logo and Driven by Loyalty® are registered service marks of ITAGroup, Inc. All rights reserved. | Page 1 of 6

revealed that a 10 percent increase in customers’ perceptions that the hotel “tried to satisfy” them resulted in a 23 percent increase in overall consumer spending and a 20 percent increase in spending per visit.2 A third study, conducted by Towers Perrin/ISR, analyzed employee survey data collected from more than 664,000 employees from companies across 50 countries and the financial performance of those companies. The study found that not only do companies with highly engaged employees have lower staff turnover rates, lower absenteeism and higher customer satisfaction, but that these same companies perform better financially, as well. Specifically, the study found that earnings per share (EPS) for the companies with higher levels of employee engagement rose by 28 percent, compared to a drop of 11 percent in EPS among companies with lower levels of employee engagement.3 Aligning employee behavior with corporate direction and delivering on the brand promise takes a concerted effort, but the impact that employees can have on satisfying customers and financial performance is undeniable. Dollars used to improve employee engagement and customer experience are delivering a strong return on investment, and more companies are becoming a part of this trend.

MOTIVATING WITH TOTAL REWARDS—INCLUDING NON-CASH INCENTIVES For the purpose of attracting, motivating and retaining employees, the second trend in people performance strategy is the continued use of non-cash rewards in a company’s total employee rewards structure. To be complete, WorldatWork (a leading professional organization focused on human resource disciplines) has determined five elements that need to be included in a total rewards package: » Compensation » Benefits » Work/Life Balance » Professional Development and Career Advancement » Performance Reward and Recognition The last component on the list will be most effective only when the other four elements in the total rewards package are in place. When companies have addressed the first four components and the desire is to motivate employees to perform at higher levels, the question then becomes, “Should cash or non-cash incentives be offered?” Although it is certainly true that cash is necessary to satisfy employees’ basic needs, it is also true that at a certain point increases in compensation have a diminishing return as it relates to performance. Cash given as the only reward for increased performance can be described as “slippery.” The positive impact the reward dollars have quickly slips through recipients’ hands and out of mind as it blends in with regular compensation. Rather than purchasing something meaningful with the reward money, it is often used for everyday expenses such as the mortgage or groceries. In addition, cash rewards do little to build internal brand or company loyalty. Employees come to expect an annual payout, for example, and view it more as an entitlement than as an incentive to put forth extra effort. The benefits to utilizing non-cash rewards in performance management programs are numerous. Most importantly, non-cash rewards are more “sticky” as opposed to the slippery nature of cash. Tangible rewards stick in the mind of the recipient and work to build a relationship

between the company and the employee. While cash is fleeting, a trip to Hawaii, a TV or a company jacket is a tangible symbol of the achievement — one that will be remembered for years to come. Non-cash rewards also have what is referred to as “trophy value”— value that goes beyond the retail price of the reward. Not only does the reward tend to carry more value because of the effort the employee had to expend to earn it, but it is also something the recipient can show or tell others about. Bragging about one’s commission check falls outside of acceptable social graces, but discussing a trip or a new set of golf clubs that have been earned is perfectly acceptable. Incorporating a non-cash reward component as a part of a total reward strategy is a growing trend that is paying off. WorldatWork has found that non-cash rewards programs achieve three times the return on investment of cash-based programs. And a recent survey conducted by the Incentive Federation among users of both cash and non-cash rewards found that merchandise and travel incentives are more compelling than cash. Nearly four out of five respondents believe that travel and merchandise awards are remembered longer than cash awards and 60 percent think employees see cash rewards as an expected part of their regular compensation package.4

ONE SIZE DOESN’T FIT ALL Now more than ever consumers are demanding customization, and companies are giving it to them. Everything from automobiles, to computers, to ring tones, to stuffed animals can be made to order. These consumers are also employees who, not surprisingly, want the same type of personalization in the workplace — in the form of customized health plans, flex spending accounts and work schedules. Catering to the desire for personalization, companies are significantly boosting employee productivity and loyalty with highly customized performance improvement programs. The key to designing programs that work is engagement—grabbing the attention of the audience and getting participants excited about the prospects of what they can earn. The trick, however, is understanding that not all employees have the same abilities and not all are motivated in the same manner. In order to maximize productivity gains, a program must be highly personalized. Customizing the program rule structure by performance level, and personalizing the awards and communication for individual participants, will increase audience engagement and ultimately program results.

The key to designing programs that work is engagement— grabbing the attention of the audience and getting participants excited.

First, rule structure. In any organization there are top-, mid-, and bottom-level performers. In a one-size-fits-all type of a program, in which all employees are working toward the same performance goal, the top performers are going to out-perform the lower tier employees every time. This makes for a very de-motivating experience for lower-level performers. And in many instances the lower-level performers will decide at the onset of the program that the goals aren’t attainable, and therefore they won’t even try. The solution is to develop a set of program rules where different performance goals are established for each tier

of employees. Rather than there being a limited number of awards for which all employees compete, a more comprehensive program should be utilized—allowing all participants to earn rewards commensurate with their efforts. In the case of the program of one financial services company, the goal of top-tier performing channel partners was to maintain their already high levels of production; mid-level partners were asked for moderate productivity increases, and the bottom-level performers, those who had not been performing at all, were asked to simply sell one unit. Reward points were earned accordingly, with the end result being a significant overall improvement in production primarily generated by the midand bottom-level performers. Award selection is another means for enabling participants to customize his or her own program. The assumption that what will motivate one employee to put forth extra effort will also motivate another, is a recipe for disaster. While one employee might think a rafting trip down the Colorado River would be a great reward, another employee might prefer a family trip to Disneyland. Allowing both of these employees to select their own awards will ensure that the end goal is worth striving for. And finally, customized communication is another means of making program participation a personalized experience. A well-designed program will be unsuccessful if it is not wellcommunicated. Personalizing that communication is even more effective. Technology and database management make personalized communication efforts possible. At the beginning of the program, participants can be welcomed online by name allowing individual performance goals and reward opportunities to be communicated. Throughout the program, participants can log on to the program website to track their own progress, and personalized email updates can be sent with progress updates and words of encouragement that may differ by performance tier. The extra effort involved in designing and managing a program that makes participants feel like it is made just for them, can pay back exponentially in the productivity and loyalty gained.

MAXIMIZING TECHNOLOGY What makes program personalization possible is the fourth trend in people performance strategy—maximizing the power of technology. For several years program participants have been able to view program descriptions, program rules and awards catalogs online. But not until recently has the use of advanced technology and database management enabled programs to be completely customized and run more efficiently online from beginning Technological to end.

advances have made it possible to give participants and program managers access to real-time performance data.

Harnessing the technology available today can improve programs in three primary areas: program administration, participant engagement and, ultimately, program results. Utilizing the most up-to-date technological platforms and database management tools can make managing even the most complex programs possible and less expensive. Now most facets of the program, including the launch, communication of rules, enrollment, award selection, surveys/ testing,

performance tracking, reporting, ongoing communication and point redemption, can all be handled quickly and cost-effectively online. Today’s sophisticated platforms provide the technology base that can simultaneously support multiple promotions within multiple programs with a user interface that is easy for participants to navigate and easy for program managers to administer. For instance, a single landing page could be created for use by employees of a company with several programs running simultaneously. On that page, participants could simply click on individual program tabs to view program details and track their progress in each. On the same landing page, participants could also access their overall performance summary in which points earned in the individual programs are aggregated into one point total. As mentioned earlier, technology and database management also make possible the program personalization that can significantly boost audience engagement. Participants can be welcomed to the program online by name, and ongoing communication can include personalized messages with individual performance updates and motivational messages geared toward each participant’s performance level and award selections. Even more advanced use of technology might allow participants to customize their own program landing page with award themes of their own selection. For example, a participant working toward a trip to Cancun might have a landing page that displays photographs of the resort, shows the current weather in Cancun, plays mariachi music in the background and tracks individual progress toward the goal. The same type of customized site could be created around golf, NASCAR or any other program theme. Along with the fun, internal communication elements of a program, performance tracking and reporting components are critical to the success of any performance. Technological advances have made it possible to give participants and program managers access to real-time performance data. These same advances make the process of gathering and storing the data needed to analyze the end results of programs quicker, easier and more sophisticated.

THE RISE OF THE B AND C PLAYERS Until recently it has been common for performance incentive plans to be geared toward the top performers in the organization, or the A players. The logic behind focusing on the top tier was that incentive dollars would be best spent on those who had already demonstrated they were capable of performing at high levels. While it is true that these employees can contribute significantly to corporate performance, it is also true that if properly motivated, B- and C-level players can generate similar increases in productivity—and oftentimes, even more.

If properly motivated, B- and C-level players can generate similar increases in activity as A-level players— and oftentimes, even more.

The biggest problem with focusing programs on A players is that the majority of a company’s workers don’t fit into that category. In fact, as many as nine out of 10 employees in some organizations fall into the B or C player classification. The fifth trend in people performance strategy is designing programs that engage not only A players, but B and C players as well. The reason is simple. Motivating the many individuals who fall into these two tiers to perform just a little better will add up to substantial productivity gains.

The mindset and temperament of A-, B- and C-tier performers can be very different. B players are the steady contributors, the workhorses that make up the essential supporting cast of the corporate star performers. They tend to be smart, hardworking and more loyal to the company than A players. Top-tier performers are also harder to retain, because they are more likely to be chasing the next best offer. C players, on the other hand, are for some reason not engaged in the organization. They are performing at the lowest levels within the company, but could be pulled out of that bottom tier if given the right tools and incentives. The key to motivating B players is setting attainable goals, clearly communicating those goals and offering rewards they will value. The same holds true for C players; but first, the reasons for their disengagement must be identified. Is it lack of training, lack of tools, lack of interest or lack of ability? These issues must be addressed before a performance management program is put into place or be incorporated as a part of the incentive program itself. The importance of B players has been generating quite a buzz in the performance improvement industry, as well as in corporate management thought and academia. The potential contribution of C players should not be overlooked. As proved to be the case for one financial institution in particular, understanding the individuals in the third tier and strategically targeting program elements toward them generated millions of incremental dollars in revenue that otherwise would have remained untapped. Now, more than ever, companies are finding that B and C players can not only contribute to the financial return of a program, they can actually drive its success.

CONCLUSION As companies become increasingly aware of the impact their employees and/or channel partners have on their financial success, more and more initiatives will be directed at improving performance and/or increasing brand alignment. Fortunately, much has been learned about people performance management. The trends identified above provide a framework for the future along with solid financial rationale for continued investment.

Evaluation of “Fortune 100 Best Companies to Work For” list, Russell Investment Group, 2007 Testing the Internal Marketing Model: An Empirical Analysis of the Relationship between Employee Attitudes, Customer Attitudes and Customer Spending. Don Schultz. www. performanceforum.org 3 Towers Perrin/ISR Employee Engagement Report, www.isrinsight.com, July 2008 4 Federation Study 2005: Incentive Federation Survey of Motivation and Incentive Applications 1

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