By Sean Dean, Associate Editor

Employers should make market data a smaller part of their compensation decisions and should focus on performance-driven strategies that will motivate and retain employees, said Brad Hill of Tandehill Human Capital during WorldatWork's Total Rewards Conference in Anaheim, California.

Hill outlined 10 steps employers should take in order to maximize their return on investment in employee pay.

Step 1: Compensation will become part of the employment value proposition.

Hill noted that most employees leave their company for reasons other than pay, such as a lack of career development or unhappiness with management. He said that instead of a compensation philosophy, employers should develop an attraction, retention, or a development philosophy that discusses pay policy within a broader array of tools.

Step 2: Market pay data must ride in the back.

Hill said that employers should stop throwing money at the market. He said that if employers choose to pay at market, they may hinder their ability to maximize ROI. He said that even if a company pays the median pay level, 50 percent of companies will pay more. He said employers should focus on rewarding peformance.

Step 3: Every dollar in base pay increase will be viewed the same as a $5 bonus.

Hill said base pay increases are long-term rewards and should be tied to long-term accomplishments, such as improving skills, competencies, and responsibilities. A bonus payment should reward short-term accomplishments, such as having a good year, he said. He said that for performance reviews, employers should have two ratings: a growth-in-skills rating that is tied to base pay and a results rating that is tied to incentives.

Step 4: Cost of living changes will have no effect on pay.

Cost-of-living increases are not a way to maximize ROI on employee pay, Hill said. He added that for most companies, it would be irresponsible to give cost-of-living increases every year at a rate that is unrelated to the performance of the business. He said having cost-of-living increases can also limit the resources an employer has to reward top performers.

Step 5: The term "target incentive" will be replaced by the term "entitlement."

Hill said employers create an entitlement mentality with target incentives because a target incentive payout is "what the employee ought to earn on average given satisfactory performance." He said employers should "blow up" target incentives. He said incentive pay should compensate employees for performance above expectations and base pay should compensation for base performance expectations.

Step 6: Incentive pay opportunity will be based on "performance risk."

Hill said that performance risk is the difference between what the employer expects the job to contribute and what it actually contributes. He said that with small differences, there should be small incentive opportunities and with large differences, large incentive opportunities.

Step 7: Broad-based incentives will be provided to all employees.

Broad-based incentives for all employees ensure that all employees are thinking about improving processes, Hill said.

Step 8: Stock options will be replaced with motivational incentives.

Hill said that stock options are not a motivational tool for improving the business.

Step 9: Executive pay will be capped at a multiple of average worker pay.

He said that executive pay has to be based on an executive's contribution, not on the market. He noted studies that have found that the difference between executive pay and average worker pay has grown astronomically in recent years.

Step 10: If the cash is preferred to the perquisite, eliminate the perquisite.

If used correctly, perquisites can be a magical program because the value far exceeds the cost.

In summarizing his presentation, he said that pay is one investment in a company's people, but it's one investment of many. He said employers should stop thinking so much about the market and start thinking about motivating employees.

After Hill finished his presentation, Nicholas C. Brecker of Tyco Engineered Products & Services talked about how his company implemented control measures and performance-based reward systems after the controversy surrounding the reign of former chief executive Dennis Kozlowski. Brecker disagreed with a few of Hill's recommendations, such as the one about eliminating target incentives.