Want to Retain Gen Y Stars? Forget Pay for Performance

Last Updated Oct 5, 2011 8:54 AM EDT

A lot has been written about what motivates Gen Y, much of it focusing on their need to see the point of their work and understand how it serves a larger good. But let's get real, idealism or no, many young people are facing some pretty grim financial realities. Money matters.

That's the starting point for a long and thought-provoking extract of the book Fuse: Making Sense of the New Cogenerational Workplace by Jim Finkelstein on the best way to compensate Gen Y, which recently appeared in Fast Company. Finkelstein lays out exactly why Gen Y is feeling so squeezed.

  • Student loan debt. With an average debt load of more than $20,000, young people today start their careers under the shadow of steep payments.
  • Salaries for grads are down. We've covered plenty of research showing this reality here on BNET and Finkelstein concurs: "The inflation-adjusted earnings of new college grads have fallen dramatically."
  • The cost of living has risen. "Education, housing, and healthcare costs have increased rapidly over the last decade. Rents have gone up 50 percent in major metropolitan areas in the last ten years. Even with home prices falling in many regions as a result of the mortgage crisis, median home prices have skyrocketed in geographically appealing areas across the country, severely limiting affordability for first-time buyers," says Finkelstein.
Under these conditions, even the most altruistic member of Gen Y is going to be thinking about money when deciding where to work, which is why pay for performance compensation schemes fail to motivate them, writes Finkelstein. With the financial stresses so high, the best employees, the ones you really, really want to retain, don't see their pay increase fast enough when raises are based on performance and time served rather than potential:
Pay for performance=a six-pack of beer. If you are making what the average worker makes ($47,569.60 per year, a 1 percent difference in your pay is $475.70 per year, $18.30 gross per pay period (if you have twenty-six pay periods per year), and about $12.81 net per pay period after Social Security, Medicare, and federal, state, and other taxes. That's about $6.40 per week. And according to our research, that's what you'd pay for a six-pack of beer. Or--if you are lucky, and you are bumped up a level--two six-packs!
So what system will keep your Gen Y star performers around for longer? Adding pay for potential into the mix using a "nine box system... With potential rated low to high on an X axis and performance rated low to high on a Y axis." Finkelstein goes into detail in the lengthy excerpt, but here's the basic idea:
It shows steady performers, potential stars, and rock stars as categories of potential. Potential is assessed in terms of "how high" (next level, top management, etc.) and "how soon" (readiness). So, imagine that you are an entry-level whiz kid--all the potential in the world, but still developing. Traditional salary increase programs in most companies will make you earn your spurs in time spent on the job before you start racking up the big bucks....

This is frustrating. It is why many money-motivated Millennials (and they do exist) will bolt to new opportunities as soon as the great recession of 2007-20?? eases up. Unless you happen to be in one of those organizations that... will accelerate your compensation not just based on your performance but on what you bring to the table, namely, an asset they want to secure for the long-run.

The excerpt goes on to talk about how career starters can compare pay packages and ensure their compensation is as high as possible, and is well worth a read for the interested. But do you agree with the basic idea that companies should pay for potential as well as performance to secure flighty young talent?

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(Image courtesy of Flickr user gretchichi, CC 2.0)
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    Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.