Compensation Force

More Organizations Relying on Variable Pay to Motivate and Reward Employees

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:
  1. Special recognition awards (which acknowledge outstanding individual or group achievements with small cash awards or merchandise certificates) - 63%
  2. 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%
  3. 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.

Career Encouragement

The colleague who was a driving force behind me starting this blog now has one of her own, and I am proud to share a little bit about it here. 

The Career Encouragement Blog offers daily encouragement (and lots of help and tips) for your career journey.  Peggy's intelligent, insightful and -- yes -- encouraging posts make it worth a visit no matter what your career stage or challenges.

Click here to check out The Career Encouragement Blog.

A Bit of Performance Management Humor

I received the following in an email from someone about ten years ago; I no longer remember who.  The statements are alleged to be actual quotes from employee performance evaluations.  I have been sharing them in classes I have taught on performance management as well as with client design teams working on program development - whenever the situation called for a little humor.  Here's hoping that you enjoy them, too!

Works well only when under constant supervision and cornered like a rat in a trap.

This employee is really not so much of a "has-been", but more of a definite "won't be".

Since my last report, he has reached rock bottom and has started to dig.

He would be out of his depth in a parking lot puddle.

This young lady  has delusions of adequacy.

She sets low personal standards and then consistently fails to achieve them.

Got into the gene pool while the lifeguard wasn't watching.

He's so dense, light bends around him.

If you stand close enough to him, you can hear the ocean.

This employee should go far - and the sooner he starts, the better.

Average Promotional Increases

In a survey of its members released earlier this year, WorldatWork (www.worldatwork.org) examined the practices and policies surrounding employee promotions.  According to the 1,166 North American organizations who participated in the study, average promotional increases (as a percent of base salary) by employee group are as follows:

Exempt employees - 8.9%

Nonexempt employees - 7.7%

Officers/executives - 11.4%

Free Summary Report on New SEC Executive & Director Compensation Disclosure Rules

To assist its clients in developing a better understanding of the executive and board compensation disclosure regulations adopted on July 26, Equilar (www.equilar.com), a compensation research firm, has published a new report titled:  Summary of the Final SEC Rules on Executive and Director Compensation Disclosure.

The report presents a summary outline and blueprint of the key compensation-related features of the rules.

To obtain a free copy of the report click here.

Rules of Thumb for Setting Incentive Plan Targets

There are some general rules of thumb for setting incentive plan threshold, target and maximum levels.  I've heard them repeated from a number of sources and, since they make sense to me, have begun sharing them more frequently with clients to guide these sometimes tough decisions.  So today I share them with you.

Threshold.  This term usually refers to the minimum level of performance required for any incentive award to be generated.  The question is:  Where to set threshold?  Rule of thumb: Threshold is typically established at a level that you would expect to be reached in 8 or 9 out of every 10 years.  In other words, plans should be designed so that there is some level of payout (typically minimal for this level of performance) 8 or 9 times out of 10.

Target.  This term usually refers to the level of performance that generates a "competitive", "plan" or "budget" level award.  It typically means you have reached the goal.  The rule of thumb suggests that target is typically established at a level that you would expect to reach 5 out of every 10 years (or about half the time).  (Remember that you have to blow past threshold to reach target; this is the reason that these figures are not additive.)

Maximum.  This term usually refers to the level of performance which results in the maximum award available under the plan being granted.  For plans with no maximum or ceiling, perhaps this level is designated "outstanding" or "exceptional".  At any rate, the rule of thumb for plan maximum is that it is established at a level that you would expect to reach 1 or 2 times out of every 10 years.

Happy plan design!

Dividing Up Company Equity in Startups

From VIEWPOINT in the August 14 edition of BusinessWeek Online, in "Bootstrap Report", author David E. Gumpert describes advice shared in response to a query on the Harvard Startups email list seeking "suggestions on the equity split between founders, directors, advisors, and an option pool". 

Among the suggestions offered by venture capitalists, lawyers and entrepreneurs:

Don't be afraid to divide equity unequally among founders, depending on their experience and expected contributions.  "If you have a very experienced entrepreneur, for example, that person might receive substantially more than other inexperienced people at the same level, because investors like to invest in experienced people," stated one respondent.  If everyone is fairly inexperienced, then a more equal division is appropriate.

Set aside about 20% of stock for employee options and allot 5% to 10% of stock for advisors and directors.  Each member of an advisory board can be granted 0.5%.  All such stock should vest in two to five years, and founders should consider buy-back provisions for people who depart.

Anticipate the founders being diluted substantially by an angel and initial venture capital round, likely winding up with 20% or less of the company (vs. 50% or more for investors).

Above all, capture everything in writing as early in the process as possible, and use an experienced lawyer to get the paperwork right.

Click here to link directly to the article.

Projected Increases Versus Inflation: Asia Pacific Countries

The following statistics on projected inflation and salary increases in Asia Pacific Countries were provided by Executive Resources, Ltd. (www.erlimited.com) and published in WorldatWork's (www.worldatwork.org) 2006/2007 Salary Budget Survey.

China

• 2007 Projected Inflation: 3.2%
• 2007 Projected Salary Increases:
  • Executive - 5.2%
  • Management - 5.1%
  • Professional - 5.0%
  • Employee - 4.8%

Hong Kong

• 2007 Projected Inflation: 2.1%
• 2007 Projected Salary Increases:
  • Executive - 4.0%
  • Management - 3.9%
  • Professional - 3.6%
  • Employee - 3.2%

India

• 2007 Projected Inflation: 6.5%
• 2007 Projected Salary Increases*:
  • Executive - 11.2%
  • Management - 10.7%
  • Professional - 11.0%
  • Employee - 8.1%

*The India high technology sector reports much higher increases than other sectors

Indonesia

• 2007 Projected Inflation: 15.2%
• 2007 Projected Salary Increases:
  • Executive - 14.5%
  • Management - 12.5%
  • Professional - 12.2%
  • Employee - 12.0%

Japan

• 2007 Projected Inflation: 0.7%
• 2007 Projected Salary Increases:
  • Executive - 3.2%
  • Management - 2.9%
  • Professional - 2.6%
  • Employee - 2.2%

Singapore

• 2007 Projected Inflation: 1.5%
• 2007 Projected Salary Increases:
  • Executive - 4.0%
  • Management - 3.7%
  • Professional - 3.6%
  • Employee - 3.1%

Taiwan

• 2007 Projected Inflation: 1.5%
• 2007 Projected Salary Increases:
  • Executive - 3.8%
  • Management - 3.2%
  • Professional - 3.0%
  • Employee - 3.0%

Using Salary Targets for More Precise Salary Management

Developing and implementing salary ranges is a fundamental step in building a sound base salary program, yet often not enough to sufficiently guide pay decisions.  As a result, a number of organizations take the additional step of defining salary targets or target zones within salary ranges, These tools provide more precise guidance on how the ranges are meant to be used and they can open the door to more sophisticated salary analysis and management.

For example, one simple approach might divide each salary range into three equal target zones, each of which represents a more precise target salary level based on (sustained) employee performance.  These target zones could be defined as follows:

Target zone 1 (the lower 1/3 of the salary range) is defined as the apprentice band.  It represents the appropriate salary level for new, relatively inexperienced employees and those who are still developing in their roles.

Target zone 2 (the middle 1/3 of the salary range) is defined as the performance band.  It represents the appropriate salary level for fully qualified employees whose performance consistently meets expectations over time.

Target zone 3 (the upper 1/3 of the salary range) is defined as the master band.  It represents the appropriate salary level for fully qualified employees whose performance consistently exceeds expectations over time.

Target zones like those illustrated above can provide more precise direction to salary decisions, both annual merit and special or technical adjustments.  They can even form the backbone of a merit increase matrix.

Some organizations take this concept a step further and define specific salary targets in order to support more advanced salary analyses.  Another simple example:

The apprentice target salary is 87% of the range midpoint or control point.  It represents the salary target for new, relatively inexperienced employees and those who are still developing in their roles. (Note that this and any other target salary could be further defined by variables such as years of related experience, etc.)

The performance target salary is 100% of the range midpoint or control point.  It represents the salary target for fully qualified employees whose performance consistently meets expectations over time.

The master target salary is 113% of the range midpoint or control point.  It represents the salary target for fully qualified employees whose performance consistently exceeds expectations over time.

If a target salary is identified for every employee based on his or her performance level, then the organization can analyze target versus actual salaries across a range of demographics in order to more deeply understand how salaries are being managed and salary decisions being made.  For example:

• Target salary versus actual salary across different performance groups in order to ascertain whether the organization is doing an equally effective job of paying people to target in every group (or whether they are, for example, shortchanging the high performers). 
• Target salary versus actual salary by gender in order to determine whether the organization is doing an equally effective job of paying women versus men relative to their targets.  Likewise for older versus younger workers, or across other protected classes.
• Target salary versus actual salary based on "years on the job" in order to examine whether employees are getting closer to their target salaries over time (or fallling short or drifting above).

Free Compensation Resources

As a business owner, I am always on the look-out for good deals and I thought this one was worth sharing.

Watson Wyatt Data Services publishes a free e-newsletter called CompReport(TM).  While its primary focus is on highlighting the different products (surveys, exhibit books, etc.) published by WWDS, the newsletter does offer some high-level findings from various studies plus complementary sample compensation plans, policies and other documents from the different WWDS exhibit books.  For example, this month's issue includes a number of sample documents for alternative reward plans including a sample skill-based pay plan document and a sample team-based incentive plan document. 

While I would never advocate implementing any plan not specifically designed for your organization's needs and context, these free samples can give you a running start on the design process and provide good ideas for plan documentation.

To sign up click here.