Compensation Force

Making Incentive or Bonus Plans "Pay Off" - Part 2

The second in a two-part post on how to get more "bang" for your incentive/bonus "bucks".  When considering the move to a more structured bonus plan with up-front mechanics (as I advocated in Part 1), there are a number of strategies for increasing your odds of success:

Clarify it.  Be very clear on what you want the bonus plan to do for you and how you will measure whether it gets there or not.  Only then will you be in a position to gauge its success later on.

Challenge it.  The most effective bonus plans are almost never developed by one or two individuals working in a vacuum, no matter how smart these people may be.  Get the initial design ideas out in front of a bigger audience for input and reaction.  One of the biggest potential pitfalls in bonus plan design is something that we compensation professionals call “the law of unintended consequences” (or "I never dreamed that when I implemented a plan to reward people for focusing on productivity gains that our quality would suffer...").  The best preventative strategy for this is to involve as many different perspectives as possible during the design process.

Cost it.  Calculate your anticipated “return on payout”.  Don’t wait until year-end to discover how much you will be spending on bonuses; examine this early on as part of your design effort -- before you communicate anything to employees.  Make sure there is an appropriate balance, under different potential performance scenarios, between the dollars paid to employees and the value received by the company.

Communicate it.  Get the word out, preferably in face-to-face meetings.  Employees need to understand not only how the plan works, but also what they can do every day to improve the performance measures on which their bonus depends.  Then, keep them abreast of how they are doing with at least monthly updates.

Change it. That’s right.  Or at least evaluate it every year for its continued fit to your company’s reality and strategic objectives.  As your business priorities and opportunities change, so, potentially, should your bonus plan.  Otherwise, you are using this tool to focus people on yesterday's imperatives.

Making Incentive or Bonus Plans "Pay Off" - Part 1

Incentive/bonus plans (also described as "variable pay" plans) are becoming increasingly popular across all industries and all organization sizes.  According to a recent national study (WorldatWork's 2005/2006 Salary Budget Survey, www.worldatwork.org) 76% of organizations have one or more variable pay plans in place below the executive level.  While I believe that the growing prevalence of variable pay opportunities makes good sense, business-wise, I am also struck by the number of plans that are failing to produce tangible results or benefits.

There is a hesitancy, particularly among business owners, to formalize and document incentive or bonus plans.  The preference is to keep them flexible and discretionary, to leave all options open until the last minute (typically year-end), and then grant awards based on the degree of largess and good fortune felt at that particular moment. 

the upfront commitment that these plans require from business owners, but I have also seen their power to get employees engaged in making a difference.  And any risk associated with making this commitment can be significantly mitigated through solid planning and cost modeling.  Otherwise, you are left with a plan that is unlikely to result in real changes in performance; "low risk", but also "low reward".

This is fine, commendable even, if all you wish to accomplish is sharing the results of a good year with employees.  They generally appreciate the additional money and any willingness to spread the wealth around.  But what if you want more?  What if you want to:

· Focus employee attention on the key drivers of the company’s success?

· Propel performance improvements?

· Reinforce the outcomes that are critical for growth?

· Assure an adequate “return” on the additional money paid out in bonus awards?

Research tells us – and my experience confirms – that the way to get the most impact from an incentive or bonus plan is to establish a direct causal connection between performance and the reward.  In other words, there must be a clear “if this, then that” relationship in place.  To the extent that you introduce uncertainty and noise into this relationship, you greatly reduce the impact that the plan will have on performance.

I am a fan of incentive or bonus plans with up-front plan mechanics.  This means that the plan is designed with a few key measures tied to pre-defined award amounts for different levels of performance.  For example, the plan might state that if the company reaches its goal of $5 million in net income, every eligible employee will be awarded a bonus equal to 5% of their base salary.  If well designed and executed, this type of plan should generate the gains required to cover (or justify) the costs of bonus awards, plus some. 

I do appreciate

In tomorrow's post, a few tips for increasing your odds of success when you move to a more up-front, structured incentive or bonus plan.

Wake Up Call for Employee Recognition Practices

Recognition programs are in a reward class all their own.  By definition, recognition programs deliver rewards after-the-fact to reinforce and celebrate desired outcomes.  They can be cash (e.g., spot bonuses) or non-cash (e.g., gifts, gift certificates, event tickets), but the awards are typically smaller in economic value than other types of reward programs, such as incentive plans.  Because of this, recognition programs have a (mostly) well-deserved reputation for accomplishing a lot with a little. 

There is a well-meaning tendency among many employers to use company themed merchandise for recognition awards.  I suppose there is a sense behind this of killing the proverbial two birds with one stone;  you are both rewarding an outstanding accomplishment and doing it in a way that reinforces membership in the organization.  A recent study, however, may call this practice into question.

Zlimit.com, an on-line incentive and reward company (www.zlimit.com), reports that a recent search on the popular auction site eBay produced dozens of items (including company watches, high-end pens and jackets, even IPods) which the seller indicated were gifts from his or her company.

Recognition programs that deliver unappreciated rewards are not a new phenomenon.  It calls to mind one of the basic motivational principles underlying reward program design:  Make sure you are delivering a reward that the employee values  (alternatively referred to as the "Don't Give a Plaque to an Employee Who Has No Wall" rule).  How to avoid a situation where your recognition gifts end up as auction fodder?  The best answer is to involve employees directly in the design -- or evaluation -- of a recognition program.  An employee design team or committee (appropriately prepared and positioned for the task) will help you see the recognition program and its awards from the workers' perspective.  There is no better way to ensure that the rewards delivered are truly valued and appreciated by employees. 

Independent Contractor versus Employee: IRS Provides Info for Correct Classification

The IRS has issued an on-line fact sheet to remind employers of the importance of classifying workers properly and to provide information to help them do so. 

To access the IRS fact sheet click here.

Geographic Differentials: A Cautionary Tale

Geographic differentials, in the world and terminology of employee compensation, are the differences in pay levels that exist between different locations (typically different cities).  It is the task of the compensation professional to tailor the compensation program -- most specifically the salary range structure -- so that it provides pay opportunities that are appropriately competitive in every location where the organization has staff.

Information on geographic differentials is available through a number of sources; the ones with which I am most familiar (featuring domestic U.S. differentials) are the reports published by Mercer (www.mercerhr.com) and Economic Research Institute (www.erieri.com).  From resources like these, you draw basic information on pay differences from city to city.   You might learn, for example (to pick on some Midwest cities), that at a salary level of $50,000 and using the U.S. National Average as a baseline:

Chicago, Illinois is 109.2% of the national average

Rockford, Illinois is 101.1% of the national average

Billings, Montana is 89.8% of the national average

Information like this might lead you to the conclusion that there are three levels of salaries at work here; a level at, a level about 10% above, and a level about 10% below the national average.  The decision might be made to implement three different salary range structures, accordingly.

The problem comes (and hence my call for caution) when we try to use this data to establish salary range structures at intervals that are too small and precise.  The inspiration for this posting came after reviewing the recommendations of another compensation consultant for a series of salary range structures at 3-4% geographic intervals.  In other words, there was a structure set at 100%, another at 103%, 107%, 110% and so on. 

First of all, setting up range structures at such small differential intervals is creating administrative complexity where it doesn't need to exist (and where it, ultimately, will not add value).  Secondly, and perhaps more importantly, it is important to know and keep in mind that geographic differentials tend to be fluid over time.  In my experience, it is not unusual to see them drift up or down 2-3% or more over a couple of years - typically in response to local labor market influences.  With this in mind, I recommend establishing salary range structures at intervals no smaller than 5%.  In that way, you minimize the future risk of having to ratchet them up or down in response to minimal shifts in the local market, creating unnecessary hassle and leaving the credibility of the program open to question.

Commitment to Performance Management Matters

Yet more evidence has emerged to support what many of us in the field have long known:  that reluctance to deal with poor performers negatively impacts overall workplace morale.

A recent study conducted by Sirota Survey Intelligence and the authors of The Enthusiastic Employee demonstrates the cost -- in terms of employee engagement -- of a company's failure to step up and address those workers who are consistently poor performers.  Study results indicate that only 41% of employees who feel thier companies are doing much too little to correct poor employee performance are favorably engaged at work, compared to the favorable engagement of 73% of those who feel their companies are taking the necessary steps to correct poor employee performance.

The answer, I believe, is a healthy dose of managerial courage and commitment, supported by some skill in coaching and a sound performance management process.

To learn more about the study, go to www.sirota.com or click here.

2006 & 2007 Salary Increase Levels to Remain Below 4%

In news issued today, The Conference Board (a not-for-profit research and business membership organization) reports that salary increases for most salaried employees will average around 3.5% this year and stay at that same level for 2007.  Summary salary increase statistics from the report (covering nearly 500 companies) are detailed below.

Median Salary Increase Budget - 2006 Actual

Nonexempt 3.5%

Exempt 3.5%

Executive 3.6%

Median Salary Increase Budget - 2007 Estimated

Nonexempt 3.5%

Exempt 3.5%

Executive 3.8%

According to the report, salary structure adjustments (organizations with formal salary grade and range structures will review and adjust these on a periodic, often annual, basis) show a slight uptick for most salaried employees, from 2.5% in 2006 to 2.7% in 2007.  Summary structure adjustment statistics from the report are detailed below.

Median Structure Adjustment - 2006 Actual

Nonexempt 2.5%

Exempt 2.5%

Executive 2.5%

Median Structure Adjustment - 2007 Estimated

Nonexempt 2.7%

Exempt 2.7%

Executive 2.5%

To learn more about The Conference Board Report click here.

Competition for Hourly Employees to Drive Up Wages?

In this week's Trend Alert, The Herman Group, strategic business futurists, predict a new war for talent -- for entry level workers, beginning in the restaurant industry.  They cite a current bidding war in Billings, Montana as evidence of this trend:

The situation reported in Billings, Montana, is perhaps an early warning of what recurring conditions will be in the near future. Employers in that community are engaged in a bidding war for workers. Signs posted in store windows and shouting from marquees offer USD $6.50, $7.00, $8.00---and more---per hour, in an effort to attract applicants. Few jobs in this competitive environment pay the USD$5.15 minimum wage.

The competition is most evident in the restaurant industry. McDonald's ($7.00) is in a race with Dairy Queen ($6.50), while the pancake house is paying $8.50 an hour for cooks. Papa John's Pizza advertises $15 per hour income, which includes a $5.15 hourly wage, $1.20 trip fee, and delivery tips. Tips are unpredictable and lower when customers don't hold head-of-household jobs. The Papa John's assistant manager agreed that they had plenty of applicants, but they lose them quicker than they can hire them.

To read more, go to www.hermangroup.com and click on This Week's Trend Altert.

Salary Range Design - Part 2

This is a continuation from yesterday's post on salary range design, which focused on the classic approach.  While it is desirable to build salary ranges with a consistent, symmetrical design, it is also important that the ranges truly reflect your organization's specific needs and objectives.  Most times the classic approach provides an excellent fit; however, in some cases its worth considering whether a bit of tailoring is called for.

Tailoring Salary Range Design

The classic salary range with a 50% range width, as illustrated in yesterday's post, provides a range of salary opportunity to distinguish differences in individual employee experience and performance.  A newcomer with relatively little in the way of related skill and experience can be brought in at a rate as low as 20% below the market average/median; and your seasoned superstar can be paid at as much as a 20% premium above this market rate.  Sounds good, right?

But what if this doesn't exactly fit your model for attracting, retaining and motivating employees?  Consider the following examples of organizations who felt the need to tweak the classic salary range approach in order to secure a better fit.

A wealth management firm places a high value on retaining employees, at all levels of the organization, in order to build long-term relationships with its clients.  Having staff in place who know their clients well and understand their particular needs is a critical part of how they execute their mission.  In developing a new salary range structure, the firm began with a series of classically configured salary ranges, featuring a 50% range width for all positions.  Management was troubled, however, by the range maximum at 120% of control point/market rate.  They believed that keeping good performers in their positions to continue to bond with and serve customers was worth more than the 20% premium above market average afforded by this range design; therefore, they extended the maximum to 130% of the control point/market rate (resulting in an asymmetrical range with the minimum at 80% of the control point/market rate).  This range design was a better fit for their human resource strategy and needs.

A manufacturing company's human resource strategy is to seek good but relatively inexperienced people, and then provide extensive training and development in their particular production approach and philosophy.  They began design of their wage range structure with a series of classic ranges with 40% range widths (minimums at 83.5% of control point/market rate, maximums at 116.5% of control point/market rate).  In consideration of their staffing approach (and their hiring experience to date), however, the company decided to extend the range minimums down to 78% of control point/market rate, to allow them to hire employees at a lower entry wage, but then provide them with a series of wage increase opportunities to recognize and reward their progress through the company's training and development program.

A professional service firm that tended to hire highly educated, experienced personnel took an opposite tact to that of the manufacturing company.  Because of their need to hire staff with a track record and, often, an existing clientele, firm management did not believe that they could bring people in much below the going market rate for their roles.  And, sometimes, the opportunity to hire a "star" necessitated an offer above what was considered market average/median pay.  In developing their salary ranges, they wanted to put a range design in place that reflected this reality.  Their salary ranges were also asymmetrical, with minimums at 90% of the control point/market rate and maximums at 130% of the control point/market rate.

I don't want to leave you with the impression that you can establish a series of salary ranges that randomly vary in design and width.  This would leave you open to issues of perceived (and potentially real) discrimination, among other things.  In the examples noted above, the range designs described applied either to all employees, or all employees in a designated group (e.g., all hourly employees).  Understand and be prepared to explain the business case for your salary range design, particularly if you've tailored your approach to your particular human resource strategy - this should be an important part of your compensation communication.

Directors and Investors Agree -- and Disagree -- on Problems with Executive Compensation

According to a new report from Watson Wyatt Worldwide, there is agreement and some significant differences in opinion between corporate directors and institutional investors regarding the issues and controversy surrounding executive pay.

Some highlights from the report are shown below.

The  two groups indicate their level of agreement that the U.S. executive pay model at most companies:

(1) Has hurt corporate America’s image

Corporate directors 79%

Institutional investors 85%

(2) Has improved corporate performance

Corporate directors 65%

Institutional investors 22%

(3) Has dramatically overpaid executives

Corporate directors 61%

Institutional investors 90%

(4) Is too heavily influenced by management

Corporate directors 48%

Institutional investors 87%

(5) Is an example of poor U.S. corporate governance

Corporate directors 41%

Institutional investors 63%

The lack of alignment between these constituencies, as illustrated above, reinforces that we have work yet to do in straightening out the problems with how we reward executives.

To learn more about the Watson Wyatt report click here.