IS IT WORTH IT TO WIN THE TALENT WAR? EVALUATING THE UTILITY OF PERFORMANCE‐BASED PAY

Although the business press suggests that \"winning the talent war,\" the attraction and retention of key talent, is increasingly pivotal to organization success, executives often report that their organizations do not fare well on this dimension. We demonstrate how, through integrating turnover and compensation research, the Boudreau and Berger (1985) staffing utility framework can be used by I-O psychologists and other HR professionals to address this issue. Employing a step-by-step process that combines organization-specific information about pay and performance with research on the pay-turnover linkage, we estimate the effects of incentive pay on employee separation patterns at various performance levels. We then use the utility framework to evaluate the financial consequences of incentive pay as an employee retention vehicle. The demonstration illustrates the limitations of standard accounting and behavioral cost-based approaches and the importance of considering both the costs and benefits associated with pay-for-performance plans. Our results suggest that traditional accounting or behavioral cost-based approaches, used alone, would have supported rejecting a potentially lucrative pay-for-performance investment. In addition, our approach should enable HR professionals to use research findings and their own data to estimate the retention patterns and subsequent financial consequences of their existing, and potential, company-specific performance-based pay policies.