Compensation Force

Incentives, HUH ... What Are They Good For?

Yes, a month has come and gone since the premier episode of our Influence Insiders radio show.  We're up again this Wednesday, December 2 (noon EST) for another hour long show with a topic that's sure to draw attention and debate: Incentives.

We'll talk about what incentives are and are not, when they make sense, when they don't and the perils and pitfalls of poorly designed programs.

Here's the link to our site on Blogtalkradio.

More background and details here today at Incentive Intelligence.

Please join us for what's sure to be an interesting conversation!

The State of the Sales Comp Plan Review

How often do companies revise their sales compensation plans, and why? Did the recession make 2009 an unprecedented year in the volume of sales compensation revisions?

These and other questions are answered in new sales compensation research released earlier this month by WorldatWork.  The research reflects the responses of 977 WorldatWork members on behalf of their employers.

Notable findings of the research include the following.

A majority of organizations report revising their sales compensation plans on an annual basis in recent years.  The annual sales compensation review does not appear to be solely a 2008/2009 phenomenon; in fact, it is a pattern that dates back at least to 2005, as the table below shows (note that the research was apparently not conducted in 2007):

(In fact, there is a noticeable decrease in proportion of revisions over the four study years - a finding that the research authors and advisors see as a result of significant changes being made in response to strategy shifts occurring during the upturn in the middle of the decade.)

Improving alignment between sales incentive pay and business strategy is - far and above the most cited reason for sales compensation plan revision, particularly in the past two years.

 

The reasons tied for #3 above were the biggest gainers from the 2008 to the 2009 research results, jumping up 13% and 10% respectively, demonstrating that tough economic times have led companies to heighten the emphasis placed on sales profitability and winning new business.

All in all, very interesting research. 

 

 

Good News! My 201(k) is Now a 301(k)...

The average 401(k) account balance rose to $60,700 by the end of Q3 2009, up nearly 13% from the end of the second quarter and up 28% from the end of the first quarter, according to research by Fidelity Investments.

Our two consecutive quarters of gains in the equity markets also brought relief and, ultimately, a positive impact to the investment returns of 401(k) participants. According to Fidelity, participants' median one-year personal rates of return (PRR) for the volatile 12 months ending September 30, 2009 was a postive 0.4%.  As a point of comparison, participants had annualized median PRRs of 3.2% and 1.9% over the past five and ten years, respectively.

Fidelity also reports that employers are beginning to reinstate their 401(k) matches as the economy shows signs of improvement.  Of those businesses that lowered or suspended their matches, 27% say they have already reinstated the match or have plans to do so in 2010.

So there.

Image: Creative Commons Photo "Smile" by alancleaver

Avoiding Executive Compensation Calamity: Case Studies & a Tool

Awhile back, WorldatWork created an Executive Rewards Questionary, a dictionary of more than 200 questions designed to help any interested party - be they Board member, HR practitioner, investor or journalist - think through the complex choices and implications involved in executive compensation design.  Questionary questions have been organized into four main categories: Internal Environment, Stakeholders, External Environment and Disclosure and Transparency.

Recently, a graduate student (Diane Vavrasek), funded by a grant from WorldatWork, took on the project of applying some of these questions retrospectively to some of the highest profile executive compensation debacles of recent times, from Enron and WorldCom to the Home Depot and the New York Stock Exchange.  The result, Case Studies in Optimizing Executive Compensation Design, is an interesting look back at the questions we all wish someone had raised early one in these high profile and ultimately embarrassing situations.

An excerpt from one of the case studies, this one on Fannie Mae:

In late 2004, both the CEO and CFO stepped down after the company restated earnings by roughly $10 billion due to accounting irregularities. The departures were publicly referred to as “retirements.” The CEO and CFO received the same severance and retirement packages they would have had they left with unflawed performance records.

The executive compensation program approved by the board included a special option program that granted options to executives that immediately vested once an earnings-per-share goal was met.
The board also gave the freedom to executives to sell vested options and shares at any time, allowing the CFO to collect on the sale of his shares despite the restatement of earnings.

Internal Environment
How does expected performance relate to the current business outlook?
What are the results that need to be achieved in the short and long term?
Is the legal department comfortable with this design in the current legal/regulatory environment?

External Environment
Will this information become public knowledge?

Stakeholders
What are shareholder expectations about your compensation programs, and how do they affect plan design?

The Questionary and the Case Studies are available to anyone in the community at large.  Enjoy!

Image: Creative Commons Photo "Question Mark" by Margaret Anne Clarke

2010 Salary Increase Plans Holding (Relatively) Firm

Some good news as year end nears: a new survey of 555 large U.S. employers from Hewitt Associates reports that companies are keeping their 2010 salary increase budgets relatively intact.

As the table below indicates, employers are making only minimal adjustments to their salary increase budgets from the original levels set earlier this year:

 Additional good news can be found in the dramatic drop in companies planning salary freezes or reductions.  While Hewitt's research showed that 48% of employers froze salaries in 2009, just 17% are considering doing so in 2010.  Not one company reported plans for salary reductions next year (compared to 10% in 2009).
  

The Job: Still Relevant?

Today, the notion of a job serves as the cornerstone of most HR programs and practices - from compensation to recruiting. But will the job remain relevant going into the future or will it go the way of the dinosaur, replaced by programs and practices that emphasize the person, rather than the role they fill?

Pat Zingheim and Jay Schuster - authors, partners in Schuster-Zingheim & Associatesand WorldatWork Keystone Award winners - recently conducted a study of 20 organizations that successfully made the trip from jobs to personal competencies as the foundation for their HR functions.  They discuss the study in a guest post at the Compensation Conundrum and in a recent WorldatWork Journal article.

In the journal article, Zingheim and Schuster summarize the reasons executive leaders give for the transition away from jobs.  These include:

People do work; jobs do not. With all the talk about the importance of people to organizational success, these leaders had realized that their HR programs were designed to focus on jobs, not the people who do work.

Jobs may create bureaucracy. “Jobs pile up like fire logs, and you only take logs off the top,” said one executive, meaning that the people in his organization were getting lost in the structure and bureaucracy of a formalized job structure.

Maximize performance per individual.  During times of cost pressures, organizations want fewer jobs and stronger performance from each individual.

Job descriptions are often rigid/obsolete.  Agility and flexibility are important to the executives interviewed for this study. They want people to learn, grow and acquire contemporary competencies and skills throughout their careers so they are not saddled with a potentially obsolete workforce from a capabilities standpoint.

Competencies relate better to business commitments.  Effective business strategies that people understand and respond to are commonly built upon concepts and commitments such as customer, quality, results, collaboration, teamwork, work knowledge and technology applications. These are workforce competencies and skills.

Could this trend, the authors ask, hold the key to an exciting new way to ground HR on a solid business foundation?

I admit to some skepticism.  On the one hand, I think that a more flexible and agile workforce will be increasingly critical to business success.  Perhaps the shift from a focus on jobs to a focus on people and their competencies is an avenue, even the avenue, for getting there.  On the other hand, I don't see the notion of a job as the key barrier to putting reward plans - and HR programs overall - on a more solid business footing.  I am, to some extent, swayed by my experience with and perception of broadbanding, a person-based pay approach that came into vogue in the 90's, but has come nowhere close to living up to its hype and promise.

Here's what I do think.  We are already seeing a shift away from the traditional idea of a job on many levels.  As work becomes more project and team based, dependent on relationships and influence both inside and outside an organization, jobs are becoming more fluid in nature.  In the area of rewards, specifically, we are witnessing a de-emphasis on base salaries, which tend to be job-based, and an increasing emphasis on variable pay and incentives.  The latter are often tied to project, work group and/or organizational results, rather than just job performance.

The thing is, I'm not sure that paying the job and paying the person are necessarily mutually exclusive concepts.  It may still make sense to do both, even if we find ourselves putting less emphasis on one and more on the other.  For the foreseeable future, I think that the notion of a job will still have a place in organizational life - an important element of structure, a helpful anchor as work becomes ever more fluid.  I think rewards should - and must - reflect both the core role a person holds in the organization and the manner in which they apply the skills and competencies critical to business success.

Or am I just stuck in an old paradigm?  What say you?

 

The 2009 Holiday Party: Holding On ...

Wondering about the fate of the holiday party in 2009?  Well, wonder no more...

BLR conducted a poll of employers recently to check the status of the annual gig.  Here's what they found in terms of 2009 plans versus last year's:

• For 37% of employers, the budget will be about the same.
• For 24% of employers, the budget will be smaller.
• 20% say they had no holiday party last year and won't have one this year either.
• 14% say they had one last year but won't this year.
• For 4% of employers, the budget will be bigger.
• 1% say they didn't have one last year but will this year.

To the 4% planning to spend more on this year's bash, I have to say I like your spirit!

Image: Creative Commons Photo "Christmas Time" by Flowery L*u*z*a*

On Veteran's Day: Are We Overlooking a Vein of Top Talent?

Off-topic for a compensation blog, but importantly on-topic today.  Awhile back, I came across a new book that carries an important message worth highlighting this day of all days.

The book is Start-Up Nation: The Story of Israel's Economic Miracle by Dan Senor and Saul Singer.  The book focuses on answering the big question: How is it that Israel - a country of 7.1 million surrounded by enemies - produces more start-up companies than large peaceful nations like Japan, China, India and the U.K.?

A large piece of the answer, and one of the key themes of the book, is military veterans.

The authors write:

Missed in the oceans of ink written about the Jewish state is a staggering fact: Israel is the world's quintessential start-up nation. Israel leads the world in technology start-ups per capita. More remarkable is that these start-ups have attracted more venture capital investments per capita - 2.5 times the US, 30 times Europe, 80 times India, and 350 times China.

Even more surprising is that one of the main sources of all this innovation is the Israeli military, and not in the way that one might think. Commercialization of military technologies is part of the story, but the greater impact is through Israeli culture and its connection to the military.

The military is where many Israelis learn to lead and manage people, improvise, become mission oriented, work in teams, and contribute to their country. They tend to come out of their years of service (three for men, two for women) more mature and directed than their peers in other countries. They learn "the value of five minutes," as one general told us. They even learn something more uniquely Israeli - to speak up regardless of ranks and hierarchy if they think things can be done better. ...

What Americans need to realize, though, is it's not just Israelis who can be focused, brash, and driven. While almost every Israeli has served in the military, many Americans have never met a Marine. America has an important part of what makes Israel so dynamic and innovative, but doesn't know how to tap into it: military veterans.

The authors go on to reflect on some of the reasons why we may be missing the boat here ... and a key source of top talent.

Yet the capacity of U.S. corporate recruiters and executives to make sense of combat experience and its value in the business world is limited. Many simply do not know how to read a military résumé. Al Chase, an executive recruiter who specializes in placing veterans, employers have trouble understand the leadership experience that veterans have, such as high-stakes decision making and management of large numbers of people and equipment in a war zone. The reaction often is, "That's very interesting, but have you ever had a real job?"

Junior commanders in America's new wars -- in Afghanistan and Iraq, especially -- find themselves playing the role of small-town mayor, economic-reconstruction czar, diplomat, tribal negotiator, manager of millions of dollars' worth of assets, and security chief, depending on the day.

And, finally, a call for us to take advantage of our veteran talent.

The US has incredible wellsprings of innovation, but they need to be tapped. Israel has a lot to learn from the US about building big companies. But there is a reason why so many of these companies have come to Israel looking for the innovations they need to compete in today's global economy. As America tries to reboot, Israel is the place to look for how to build a comprehensive culture of innovation that can restore and sustain economic growth. And American business leaders should be looking, as their Israeli counterparts do, to their countrymen who served as soldiers and marines to provide the critical drive they need to lead and innovate.

An important message worth heeding to all of us in the talent management business.

Special thanks today to all veterans for their service.

Attention & Responsibility: Underutilized Rewards

A recent McKinsey Quarterly article, Motivating People: Getting Beyond the Money, takes a look at recent firm research to highlight opportunities for motivating employees with non-financial incentives.

One particular reward stands out first in this discussion.  "Attention from leaders" is rated by study respondents as more effective than cash bonuses, base salary increases or stock options (63% rated it as "extremely" or "very" effective, compared with 60%, 52% and 35% for the three types of financial rewards, respectively).  It is also reported as relatively under-utilized: only 41% of respondents say it is used "always" or even "most of the time".

As one responding HR Director puts it:

One-on-one meetings between staff and leaders are hugely motivational — they make people feel valued during these difficult times.

Nearly as effective is "Opportunities to lead projects or task forces", with 62% rating it "extremely" or "very" effective.  A little over half (54%) of respondents say that this is used to motivate people "always" or "most of the time".

I'd be willing to bet that if you went specifically to top performing employees and asked how motivating these two "non-financials" are, you'd get even higher scores.

Think about it.  Leaders, even those with tight budgets and no salary increase dollars, hold the keys to two particularly effective motivators.  Not only can they use them to reward and retain their highest performers, but they provide a means of honing that talent and bringing that "up and coming" perspective to critical organizational challenges and initiatives .  Talk about your talent management win.

And yet, are we taking full advantage?  The research suggests not.

How to Kill Innovation: By Rewarding It?

No, no, I'm not going all Dan Pink on you, I promise.  Just hear me out.

In his column Innovative Insights at Harvard Business, Scott Anthony talks about why making enormous financial commitments to innovation can actually, paradoxically, stifle the very thing we are trying to drive.

It seems like every day features a slew of stories where leaders commit billions to new geographies, technologies, or acquisitions to demonstrate how serious they are about innovation and growth.

Here's the thing — these kinds of commitments paradoxically can make it harder for organizations to achieve their aim. In other words, the very act of making a serious financial commitment to solve a problem can make it harder to solve the problem.

As Anthony sees it, these large investments tend to have the effect of locking in strategies and assets, preventing the agility, the twists and turns that are necessary for innovation to occur. They push people toward the surer things, existing markets and technology, where the ROI seems more predictable, rather than the riskier possibility of dramatic breakthroughs.

I think the same case can be made for reward programs and metrics that too closely and specifically target innovative practices and outcomes. 

The biggest barriers to innovation, according to Anthony (who has consulted with major corporations and written three books on the topic), isn't a lack of money...

It is a lack of committed people, a surplus of inappropriate mindsets, and a whole series of standard operating procedures that run counter to the fast-cycle decision making, in-market learning, and iterative approach to strategy required for disruption.

He also relates an interview with Innosight, Intuit Chairman Scott Cook about innovation.  Cook tells him that in his experience, the most successful disruptive teams have "an executive that is rooting for them, cheering them, mentoring them, actively spending time with them every week and protecting them from the antibodies of the rest of the companies that are trying to love them to death, or, exterminate them."

So it is largely a leadership thing.  But a leadership thing that demands the right configuration of rewards, not an absence of them.  It strikes me that rewards, particularly incentives, have to be structured in a way that allows leaders to protect and nurture their innovators from the rules and norms, the SOPs and the short-term milestones (the "sucking sound of the core" as Anthony puts it) that impede their efforts.  To me, this suggests broad, cross-organizational metrics and longer-term measurement horizons.

The catch, of course, is the balancing act, isn't it?  While we need innovation for growth and longer-term survival, our organizations also need to bring it in and crank it out in the nearer term to be around long enough to contemplate a possible future.  That's why good reward design involves finding that right harmony with a combination of elements that addresses all aspects of individual and organizational success, over the short and the longer haul.

Nobody said it would be easy.