A new study by Hewitt Associates (www.hewitt.com) confirms what I, and I'm sure many other compensation advisors, are seeing in the marketplace: With base salary increases showing only minimal gains, organizations are increasingly relying on variable pay - performance rewards that must be re-earned each year - to motivate and reward employees.
Some key findings from the Hewitt study:
- In 2006, actual organizational spending on variable pay as a percentage of payroll is 11.2%, more than three times the 2006 average base salary increase. Spending on variable pay in 2007 is projected to remain strong at 11.0% of payroll.
- Variable pay has grown in prevalence since the early 1990's; 80% of responding companies currently offer at least one type of broad-based variable pay plan compared with 51% in 1991.
- The three most common types of variable plans are:
- Special recognition awards (which acknowledge outstanding individual or group achievements with small cash awards or merchandise certificates) - 63%
- Business incentives (which reward employees for a combination of financial and operational performance measures for the company, business unit, department, plan and/or individual performance ) - 62%
- Signing bonuses - 62%
According to Ken Abosch, business leader with Hewitt:
Variable pay is a win-win as employers can manage their costs and reward employees, and, at the same time, motivate and drive business results. Employees like variable pay programs because there is a tremendous upside and they feel like they have more control than they do in earning base salary increases.
My take on Mr. Abosch's thoughts: Although the implementation of variable pay programs in this time of flattened salary increases can and should be a win-win, this is not automatically so. It takes thoughtful design plus an unwavering commitment to ongoing education and communication to make employees truly feel that they are in the "driver's seat" with respect to their variable pay opportunities. With this in mind, I would propose that our lesson from the Hewitt study be this: That organizations must and will rely increasingly on variable pay opportunities to motivate and reward employees, but as the reward mix shifts it will also be increasingly incumbent on these organizations to provide the information and coaching that their employees need to fully understand how to maximize their earnings in the variable pay plans. (Browse my earlier postings on "Line of Sight in Incentive Plan Design" and "Making Incentive or Bonus Plans Pay Off") by clicking here.
To learn more about the Hewitt study click here.