Recruiting top talent is never easy. So why was a recent project to find a talented vice president of marketing so trouble free? Do you think being underpaid and little appreciated by his former company had something to do with it?

According to the June 2007 Job Satisfaction Survey Report by the Society for Human Resource Management (SHRM), employees rate compensation number one as a “very important” aspect of job satisfaction. (Benefits are number two, as discussed in my previous article).

Realizing the importance of base pay issues and the message that base pay communicates to your peak performers about how they are valued can help you make effective compensation decisions for 2008 and beyond. And these decisions may help you attract, retain and reward the talent your organization needs to succeed.

Cold, hard cash—a way to retain peak performers—must be viewed as a strategic investment, not just as a market-driven fixed cost.

Successful retention strategies are usually related to factors in the workplace such as growth and development opportunities, positive relationships with managers, the nature of the work performed, and respect for the organization and its values. While these play an important role in retaining employees, a primary factor for turnover is often overlooked: cold, hard cash.

Retaining peak performers has always been a challenge, but within a few years it will be even more difficult. A main reason? An upcoming workplace exodus, resulting from the retirement of more than 11 million skilled baby boomers. This translates into more work for the fewer remaining workers. Industries such as e-Commerce, health care and information technology (IT) have already experienced this ever-widening gap between available positions and skilled people to fill those roles. What’s your company’s experience?

As a result, workers will increasingly control the market—making it more important (and difficult) for you to retain skilled, high-level performers who are motivated and invested.

The Cold, Hard Truth

Successful retention strategies usually relate to factors in the workplace such as growth and development opportunities, positive relationships with managers, the nature of the work performed, and respect for the organization and its values.

While these play an important role in retaining employees, a primary factor for turnover is being overlooked: cold, hard cash.

And while compensation is not the only factor, money accentuates the positive or negative aspects of the other contributing factors. If your people feel well paid, it is much easier for them to put up with that irritating and micromanaging boss they have. Simply put, money makes matters better or worse.

Using variable pay to drive business performance makes a great deal of sense, with top performers rewarded based on what they contribute. But merit-based pay systems are a different matter when it comes to retaining employees, especially star performers. In these systems, a 3 percent or 4 percent raise for mid-level employees is equal to one extra latte per day.

High-potential employees in a competitive market can demand to be paid what they are worth, and get it. If not from you then from someone else—even it involves relocating. You have little choice but to examine seriously and decide how important it is for you to retain top performers—and then pay them accordingly.

The Differentiator: Personal Value vs. Market Value

Traditionally, the market value of a particular job sets the rate for which an individual is compensated. What this doesn’t take into account is the value of the specific and unique set of skills and competencies that an individual brings to the table. The compensation system fails when a bland, homogenized model is implemented that treats peak performers and average performers virtually the same.

You’ll win and retain the loyalty and service of your best performers when a dynamic and effective compensation strategy is used. But successful compensation models will only work if the right values are placed on the right things, so:

• Focus on those individuals who are truly performing and producing.

• Analyze the unique, individual worth of these people and take into account a range of factors beyond a typical analysis of performance and the market value of their job.

Focus on the Individual

No longer is just “doing your job” the standard. In a knowledge-based business culture that prizes value-added contributions, employees are expected to collaborate on project teams, find ways to improve processes and transfer their knowledge to others. In many organizations the very notion of a job is passé.

Analyze Four Key Factors

Every element of your team member’s performance and potential must be examined. This includes the broader role they play in the organization and their personal value in the marketplace based on their skills, competencies and expertise. The following four areas can help to identify steps in the process:

1. Contribution. Look beyond the immediate performance. Factor in the long-term impact of their contribution plus the ripple effect they have on the performances of others. Does this person inspire and innovate, or is he or she happy with the status quo?

2. Value. Market value should be assessed from a basis of the person’s competencies and skills and expertise above and beyond the basic role that they play in the company.

3. Role. Look beyond the job title. Examine the individual’s role to move the company forward in terms of involvement outside his or her job position—on task forces and committees, influence on others, and advocacy of vision and values.

4. Potential. High-potential employees need to be paid in keeping with their potential; otherwise they are a flight risk.

A Changed Marketplace

A philosophical mind shift must take place in order to fully embrace today's changed marketplace. Base pay must be viewed as a strategic investment, not just as a market-driven fixed cost. The market-based negotiation strategy is an increasingly outdated approach as it fails to retain peak performers.

There are tools available to accurately determine what your key people are worth. With a shrinking workforce, the on-going demand for talent, and this expanded knowledge, the dynamics of the negotiation cycle have been dramatically changed.