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Exposing the Peanut Butter Conspiracy: Testing for Pay Dispersion at a Super-Regional Bank

KeyCorp

Many organizations have recently adopted a practice of differentiating for high performance (DHP) in incentive plan outcomes. This practice calls for the delivery of polarized reward treatment across employees, such that superior performers receive disproportionately greater incentive payouts than lesser performers do. When managers are afforded discretion regarding the allocation of incentive awards, the adherence of outcomes to DHP is uncertain. Consequently, under conditions of discretionary incentive awards, the organization needs to calibrate and compare the outcomes of managers to expose any deviations from plan intent. This article introduces a method to test the effectiveness of incentive outcomes within the context of DHP. This method includes the computation of a pay dispersion metric based on the Gini coefficient. It allows the organization to assess the degree to which the distribution of discretionary incentive payouts by each manager reflects a concentration of rewards on superior performers. The application of this method within a super-regional bank is described.

Key Words: pay dispersion metric • incentive pay • differentiating for high performance • tournament theory

Compensation & Benefits Review, Vol. 35, No. 3, 29-34 (2003)
DOI: 10.1177/0886368703035003004


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