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I think incentive compensation, overall, will be pushed more and more to reflect long-term value created, rather than just short-term, because short-termism contributed so much to the financial crisis. So the Gaithner folks are already proposing that TARP recipients (and others, but they don't have the authority) should pay execs incentives in the form of restricted stock rather than cash or options.

It makes sense, in terms of a company's financial health, to align managers' and executives' incentives to the firm's longer term interests. So this is probably a good idea, although I'm still not in favor of enshrining it in a federal regulation.

The problem, of course, is that this will be very difficult to do for independent contractors, right? Any ideas?

Engaging post Ann. I believe I was at the same presentation, and concur with you on these trends.

I believe this the way most things compensation are heading: limited fixed cost pay growth (base pay), but more $$ devoted to performance-linked variable pay.

One really interesting prediction that came out of the same presentation: this year's salary increase or "merit" increase budgets would be about 3% and an additional 12% devoted to variable pay budgets. 10 years out, he predicted a 2% salary increase budget, but 16% of payroll budgeted for variable pay.

Bottom line: fewer and smaller base pay increases, but more variable pay available. Some will not do well under this new/coming reality, but others (high performers) will likely benefit.

Don:

Great points, all. Neither am I in favor of enshrining much of this in a federal regulation. I also agree that this trend - if it pans out - will be a challenge to apply to independent contractors. Will be interesting to follow!

Doug:

Interesting trends, aren't they? And you're right, that some will do better under this new reality than others. Which may suggest that some form of support and development may need to accompany the shift in pay practices - to help employees understand and position themselves for success as the change occurs.

Great post, Ann. I agree with you and the Hewitt expert on the trends. Let me jump in as one of those independent contractors.

I've always thought that I would do better, both in individual jobs and across a career if the amounts I earned reflected my contribution to my client. For over twenty years now I've been striving to have fixed project fees with incentives and penalties. That's seemed to me to be the way that's fairest for everyone.

I've found very few clients that are willing to do that. They seem to feel more comfortable with time-based fees as if there's something about them that's "right." I've had clients who agreed to a flat fee demand to know the number of hours I based it on.

I've also found that many clients are willing to agree to penalties in addition to a basic fee, but hardly any are willing to agree to incentives, even if those are clearly in their own interest. This seems to me to reflect the human propensity to value protection from loss above increased gain.

I share this as a way of making the point that it's one thing to project a trend based on a small sample, but it's quite a different and more complex matter to change entrenched practice and, even more, human nature.

Wonder how many will figure out a new method. Say, if you put independant contractors on an incentive scheme offering generous up-side positive payoffs for specific levels of confirmed output results with minimal starvation-level consulting fees as the failure-level base along with instantly-severable contracts. Then widely publicize the results to your regular employees, offering your confident risk-takers a similar option of low fixed guaranteed base with high re-earnable potential incentive payouts; expiring at certain intervals, with the concept being to mutually re-negotiate new and more equally-productive targets and formulae for future periods.

Letting your security/guarantee-oriented slow-boats drift behind or fall by the wayside would create new challenges, not necessarily good or bad. How to deal with that situation would be a different story altogether and a different blog topic.

Meanwhile, however, you could create an extremely nimble compensation system centered on extremely self-motivated hard-charging high-achievers. They would probably end up self-selecting any number of unique personallized reward and incentive systems, for mutual benefit. It'll take a number of carefully-studied failures before this new "Brennan-nimble incentive system" takes root as a process... (I 1st thunk it & first stated it, then I get to epynomously name it). It will NEVER become a fixed program, nor should it.

As an independant contractor, I am willing to work for performance based compensation: hourlry rate plus success fees.

The success fee, however, must be defined prior to the beginning of the engagement in terms of achievement required and amount to be paid. I do not do discretionary bonuses: that strays all too close to the definition of employee.

Hugh:

I totally agree that performance based compensation must be defined (both in terms of achievement requirements as well as payout) on the front end. To my mind, this should be true for all variable pay plans - discretionary bonuses have more than proven themselves to be ineffective motivators ... and in some cases much worse.

Thanks for weighing in!

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About The Author

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    Compensation consultant Ann Bares is the Managing Partner of Altura Consulting Group. Ann has more than 20 years of experience consulting with organizations in the areas of compensation and performance management.

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