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.

Salary Range Design - Part 1

What follows is a basic overview of salary range design.

The Classic Approach

Salary range design always begins with your compensation philosophy, your intended competitive positioning, and - finally - the estimated market value for the job (or group of jobs) to be covered by the salary range.  If (for example) it is your organization's intention to use market average or median salaries as your reference point in building your ranges, then that average or median value (or the composite of these values for multiple jobs assigned to the same range) becomes the salary range control point.

Classic salary range design involves building a symmetrical range around that control point (which will then find itself in the middle of the range - hence the common term of "midpoint").  Classic salary ranges typically extend 40% to 60% in width from minimum to maximum, with broader ranges being used for higher level positions (executive and management positions where presumably there is a longer learning curve over which to reward skill and performance development).  Easy-to-use formulas for building ranges of these varying widths are highlighted below:

For a 40% range, minimum = control point x .835, maximum = control point x 1.165

For a 45% range, minimum = control point x .815, maximum = control point x 1.185

For a 50% range, minimum = control point x .8, maximum = control point x 1.2

For a 55% range, minimum = control point x .785, maximum = control point x 1.215

For a 60% range, minimum = control point x .77, maximum = control point x 1.23

Some organizations will opt to have ranges of consistent width for all positions; others will begin with narrower ranges at the lower end (lower valued positions) and move to broader ranges for management and executive positions (more highly valued).

A classic salary range, using the formula above for a 50% range width as an example, gives you a defined salary opportunity for a job which centers on the going market rate, but which provides room for new, inexperienced and still-developing employees toward the range minimum (as much as 20% less than the market rate) as well as room for the experienced high performer to earn up to 20% over the market rate.

See tomorrow's posting for Salary Range Design - Part 2:  Beyond the Classic Approach.

Perks for IT Workers

In Computerworld's just published 100 Best Places to Work in IT in 2006 report (www.computerworld.com), there is a list of some of the more creative perks offered by top employers in the study:

At Kennametal, IT employees attend a summer meeting at the Latrobe Country Club, home course of golf legend Arnold Palmer. In addition to the meeting, they enjoy a day of golf, entertainment by magicians, comedians or mind readers, and an opportunity to meet Palmer.

At Allstate Insurance, new parents -- including those whom Allstate has helped financially to adopt children -- get free car seats as part of the company’s Buckle Up Baby program.

Salaried employees at L.L. Bean get up to five paid days to participate in activities its products are designed for, such as hunting, fishing, kayaking and cycling.

Northwestern Mutual sponsors 31 employee clubs that offer activities such as running, skiing, biking, gardening, fishing and bowling. The company subsidizes the clubs with $300,000 in annual funding.

MasterCard recently built a new physical fitness center on its campus in St. Louis, which also houses a wellness center, a company store, a carwash and a beauty salon.

Marriott International recognizes above-and-beyond performance levels with free stays at one of its hotels anywhere in the country.

Best Places to Work Secret

Computerworld has published its 100 Best Places to Work in IT in 2006 report (www.computerworld.com).

The "Best Places Secret" claimed by the report?  It makes absolute sense, not just for IT workers but for any employees.  Get workers aligned with the business.  You will increase their engagement and job satisfaction, and you will position them to generate the value which more than justifies your investment in competitive salaries, benefits, perks and training opportunities for them.

How?  According to Frank Hayes, Computerworld's senior news columnist:

It's not enough to do ROI calculations and get business sponsors for every IT project. No, the way you line up IT with the business is by making sure your IT people are lined up with the business.

They have to see what the business does in order to make sure the systems they produce and run really meet business needs. And to do that, they've got to watch users solving business problems, listen to salespeople dealing with customers and understand how the products move and where the money comes from.

If you can show them that -- find ways to get them connected to the business, committed to the business -- they'll no longer think of themselves as just being in IT. They'll be in insurance or banking, retail or manufacturing, pharma or transportation, or whatever industry your company is in.

Now there's a recipe for success.

Guidelines for Promotions

Earlier this year, WorldatWork, the leading professional association dedicated to compensation, benefits and total rewards (www.worldatwork.org) published the results of a member survey on promotional guidelines and practices.

Some key findings of the survey, which included respondents from over 1,000 organizations:

The average 2005 promotional increase by employee group (for employees promoted one pay grade level):

• Nonexempt - 7.7%
• Exempt - 8.9%
• Officer/Executive - 11.4%

The most important factor(s) in determining promotional increases, according to respondents, is "the pay range for the new position and the number of pay grades between the old and new positions".

On average, the responding organizations reported promoting 10.5% of their employees annually.

Using Design Teams for Program Development

I am a fan of design teams, particularly when it comes to the development of broad-based incentive plans and performance management programs.  They ensure the fit of a program to an organization's style and culture in a way that no external consultant or even internal Human Resources professional can do on their own.  When they are cross-functional, they bring the advantage of a broader, more diverse perspective to design tasks.  And then, of course, there's the ownership thing.

Having worked with a lot of design teams, I have learned a few things about how to ensure the success of their collective efforts (which is critical, since nothing paints you in as poor a light as having wasted the time of a whole group of people).  Here's the short list:

1. Make sure that the design team's members represent all of the organization's key groups - don't leave out a major functional area or business unit.
2. Provide the design team with specific objectives and parameters (what they are to do, what they are not to do).  Do not allow them to flounder without clear and specific direction.
3. Provide the design team with appropriate education and background information up front.  This can be a few well-written articles or a more formal presentation on basic principles, trends, best practices, etc.  Also, if you've completed a recent employee survey or focus groups, the results of which might provide useful information on employee perspectives, be sure they have access to this information as well.
4. Get them on the hook for implementation as well as design work.  Design team members can play an invaluable role as champions and internal experts during program roll-out and orientation.
5. Enlist and coordinate with them regarding communication to the broader population - especially during the design process.  Fellow staff members will pester them to know what's going on; don't leave them on their own to invent the story.  They are your ambassadors for this effort.  Provide them with some talking points to guide them (but make them honest and real).
6. Finally, recognize and celebrate their efforts.  Designing compensation and performance programs can be tough work - let them know that the time and energy they are investing in program design is noticed and appreciated.

Minimum Wage Increase Recommended - But By Wrong Committee

The House Appropriations Committee voted in favor of an increase in the minimum wage from $5.15 to $7.25, a measure that is likely to be struck out when it reaches the House floor.  The reason?  The Appropriations Committee does not traditionally have jurisdiction over that area; that belongs to the House Education and Workforce Committee. 

Developing a Compensation Communication Plan

The communication of compensation programs is where we typically stumble.  But even the most brilliantly designed pay program will not achieve its potential without a carefully crafted and executed communication plan.

Developing a communication plan for a new (or improved/updated/existing) compensation program, at its most basic level, involves answering the six questions outlined below.

1. What are our objectives?  What do we want to accomplish—what behaviors and outcomes do we want to see as a result of our communication effort?

2. What will our key messages be?  What central idea(s) or theme(s) should be conveyed consistently through the communication effort?

3. Who are our audiences?  What individuals or groups must be reached through the communication effort, and how do their needs for information and understanding differ?

4. What media/activities should be used?  How can we best communicate with our audiences?  Success often requires a variety of media and activities in combination.  Key themes and messages bear repetition.  Don't expect to do it all with one memo.

5. What barriers might we face?  What potential roadblocks might prevent us from accomplishing our communication objectives—and how might we overcome them?

6. Who will play what communication role?  From the CEO to first line supervisors (and especially those first line supervisors), everyone should have a defined role in “getting the message out” with respect to the compensation program!

With a sound communication plan in hand and genuine commitment to its implemenetation, you can better stack the odds in favor of success and acceptance for your compensation program. 

Updated Occupational Wage Data Posted Online

In late May, the Bureau of Labor Statistics released its May 2005 Occupational Employment Statistics Survey.  The survey, which can be accessed online by clicking here provides national, state and metropolitan area data on employment and mean/median wages for 801 occupations.

Yes, the data is a year old at this point, but it is free and I have found it to be a good supplemental source of salary information (by which I mean that it syncs up well with other sources that cost me a lot of money).  This is especially true for metropolitan areas and occupations that are not well covered by professionally published compensation surveys.  In addition, it can be a limited but helpful source in examining geographic differentials.

Check it out, and be sure to age the data by 3.5% or so (approximate current average annual wage growth) to bring it up to date.

Incentive Pay for Teachers

As reported by the Dallas Morning News, the Texas legislature voted last month to create the largest teacher incentive pay plan in the nation.  The plan will be designed to reward teachers for improvements in test scores.  With this initiative, Texas joins a number of other states - including my native Minnesota - which have implemented pay for performance plans in their public schools.

And, as it has in my state, the initiative is drawing both praise and criticism.

It will be interesting to follow the progress of and learn from these initial steps into performance based pay for teachers.  Yes, as the critics argue, merit pay has proven tough to do well.  That doesn't mean, however, that it shouldn't be tried.

To read the Dallas Morning News article click here.

FLSA Penalties Up 22%

The Department of Labor's Wage and Hour Division, in its recently released 2005 Fact Sheet, reports that employers paid $4.3 million in penalties during Fiscal 2005, an increase of 22% over the $3.5 million assessed in Fiscal 2004.  The Wage and Hour Division also reports collecting $134.2 million in FLSA minimum wage and overtime back wages (which covered more than 219,000 employees).

Violations addressed included:

Employees paid straight time for overtime hours worked

Employees who were not paid for all hours worked

Failure to properly compute an employee's regular rate of pay

Failure to combine all hours worked for ovetime purposes

Misapplied exemptions

Missed last paycheck

One of the key national initiatives being undertaken by the Wage and Hour Division in 2006 is an investigation-based compliance survey of those industries that it has identified as low-wage, including:

Agriculture

Day care

Retaurants

Garment manufacturing

Guard services

Healthcare

Hotels and motels

Janitorial services

Temporary help

To learn more about the Wage and Hours Division's 2005 Fact Sheet click here.

Employer Role in Benefits to Shift?

Yes -- this is a blog dedicated to compensation.  But as we increasingly broaden our perspectives to address the concept of total compensation (the sum of direct compensation and benefits/perks), it is key that we professionals look beyond our traditional silos and pay attention to trends that affect all aspects of the employer-employee relationship.  That said, when I learned of the intriguing information and conclusions from MetLife's recently released Employee Benefits Trend Study, I felt compelled to share the highlights here.

As we shift more and more of the responsibility for selecting and funding benefits to employees, we need to be aware of their preparedness (or lack thereof) to make informed choices -- not just from the standpoint of understanding the details of benefits offerings and costs, but also from the bigger perspective of truly comprehending their personal risks, priorities and needs, which change as their lives evolve through different stages and in response to different "trigger event" (e.g., marriage, home purchase, the birth or adoption of a child, etc.).  According to MetLife's report, only 38% of the employees surveyed report understanding which benefits offerings best meet their life-stage needs.  At the same time, employees' responses indicate a growing dependence on the workplace for their purchase of financial products (things like life, dental and medical insurance as well as banking and investment products). 

Benefit costs would appear to have driven the employer's paternalistic role as the purchaser and provider of all employee benefits permanently into the past.  With this, however, there is an opportunity for forward-thinking employers to play a less costly but no less critical new role focused on access and education.  In this new scenario, the employer offers the ability to purchase a spectrum of benefit products at a subsidized group rate, augmented by targeted information and advice to help employees make wise decisions for themselves and their families.   In an era of increasing competition for top talent, the astute employer will embrace this shift sooner rather than later.

To learn more about the results of MetLife's studies click here.

Rewarding Teamwork

The United States has a proud and long-standing history of honoring the individual.  This is not surprising given that we, as a nation, were founded upon the principles of individual freedom and individual rights.  But organizational life doesn't necessarily work this way.  Organizations today are built on connections and the act of collaboration -- bringing diverse parties (from inside and outside the organization) to the table to work together -- is becoming a critical business capability. 

But do our compensation programs reflect this?

Too many organizations rely on compensation approaches that focus solely the efforts and accomplishments of the lone individual.  There is nothing wrong with the concept of individual rewards.  The problem arises when the scale is completely tipped toward individual performance with no counterbalancing recognition of group results.  In a company that professes to value teamwork, you then have competing messages blasting out.  On the one hand, you are telling people to work together, share information and resources.  On the other hand, you are telling them (loudly, via their paycheck) that you only pay attention to (and reward) their individual success.

If collaboration is truly critical to your organization's success, then your compensation package should include at least one group-level component.  Group can mean team, department or the whole company, depending on your situation and needs.  A good rule of thumb, though: When in doubt, go broad. 

One of the best routes to follow in introducing rewards for teamwork is through a broad-based incentive plan.  Some very powerful business results have been accomplished through group incentive plans that rallied an entire business unit or organization around making improvements in one or two key performance measures.  (Of course, this doesn't happen through the incentive plan alone, but via an incentive plan that is coordinated with related communication and education efforts.)

Another avenue to pursue in rewarding a group can be through a recognition plan, which celebrates a group accomplishment with a non-cash award of some type.  Think bagel breakfasts or pizza lunches, or a group outing of some kind.  An organization I once worked with rewarded its employees company-wide with a paid day off when an important group goal was reached.

Remember that compensation plans are vehicles for communication as well as financial reward.  The point here is to be sure that the messages they send really sync up with what's important to your organization's success.

Line of Sight and Incentive Plan Design

Line of sight:  a favorite phrase of compensation professionals and an important concept in designing incentive plans (assuming you expect them to actually impact performance).  But where did it come from and what does it mean?

Line of sight is an expression that has its origins in the military.  In this context, it means "distance to target". 

When we use the phrase in relation to employee motivation and rewards, it is defined as an employee's perceived ability to affect a particular performance metric.  Why does this matter?  Because the whole point of most incentive plans is to focus employee attention and effort on making some type of improvement happen -- more revenues, greater profits, more satisfied customers, etc.  If you choose a measure of improvement and base incentive awards on it, but the typical employee doesn't believe that there is anything he/she can do to influence that measure, what outcome can you expect?  A lot of people sitting on their hands (figuratively speaking), hoping for their incentive ship to come in.

So how do you shorten line of sight and engage employees in making a difference?  It usually has less to do with finding that one magical measure and more to do with communication and education.  You say that your organization needs to generate more profit, but most employees don't understand how the business makes money?  I say that you have your work cut out for you.  The solution to your problem is about 10% incentive plan design and 90% training and coaching, and not necessarily in that order.  When your employees show up each day knowing exactly what they need to do in their particular niche of the organization to drive profits up, then you can hang that carrot in front of them and expect things to happen. 

Rewarding Sales: Commission or Bonus?

Commission plans, where the salesperson is compensated with a percent of the revenues or profits generated, have become the time-honored default for sales compensation.  While commission plans certainly do drive and reward sales efforts, the particular activities that they reinforce - and those that they may discourage - are worth considering in light of your overall sales strategy.

A salesperson on a commission plan is predisposed to chase the quickest, easiest sales.  Accordingly, he or she is less inclined to spend time and energy pursuing longer-term and more complex sales opportunities, relationship-building activities and account coordination or servicing tasks.  The question is:  What do you want the salespeople to do?

There has been a trend underway to use bonuses, in addition to or instead of commission payments, when rewarding sales.  Determining the best approach requires a close look at the role that each salesperson - or sales position - must play in order to execute their part of your sales strategy.  Bonuses can be very effective in situations where the salesperson has important objectives that can't be recognized via a "volume only" type of measure.  Bonuses are also helpful in situations where a longer sales cycle makes it necessary to recognize and reward people for accomplishing the milestones that will lead up to sales.

Commission or bonus?  A well defined sales job with a distinct purpose and set of goals will typically point you in the direction of the best metrics and approach for compensation.

Turnover Benchmarks

Compensation Resources, Inc. (www.compensationresources.com) has released its 2006 Turnover Survey which measures average voluntary turnover for the 12 month period ending March 31, 2006 across organizations representing a range of industries and sizes.

According to the survey, average voluntary turnover for 2006 across all employee groups was 14.3%.

Average 2006 voluntary turnover by specific employee group is detailed below :

Executive - 8.8%

Professional/Technical - 12.7%

Sales - 15.9%

Administrative - 13.2%

Production - 17.5%

Interesting to note the difference between executive turnover and that of all other employee groups.  How does your organization compare?

Corporate Values Gaining Traction?

One of the challenges that organizations face when designing and/or updating their performance management programs is determining how (and sometimes whether) the process should reinforce the organization's mission and core values.  After all, this is a process which structures some of the most important conversations that the organization (via direct managers) has with its employees.  This has become particularly critical in the post Enron era, where there is increasing attention to the overall topic of organizational ethics and behavior. 

The results of a new national business ethics study conducted by employee research and consulting firm ISR (www.isrinsight.com) gives us hope that progress is being made on this front.  According to the study, employee perceptions of internal values (measured through positive response to the statement "values are clear") increased from 78% in 2001 to 82% in 2005.  Further, perceptions of management's consistency with stated internal values (measured through positive response to the statement "values are consistent with management decisions") increased from 60% in 2001 to 65% in 2005. 

While I applaud the evidence that we are making headway, I can't help but notice the gap between the perception of clear internal values (at 82% in 2005) and the perception that management decisions are honoring those values (at 65% in 2005).  There is still work to be done.

To learn more about the ISR study click here.

Peter Drucker and the Case for Shared Objectives in Management Incentive Plans

I have been sharing some words of wisdom from the late Peter Drucker with a number of consulting clients lately in response to discussions we are having about their management incentive plans.  There seems to be a tendency in many organizations to design incentive plans for managers which tie awards solely to the achievement of individual performance objectives.

While individual performance objectives are undeniably important, they should not play the starring role in an incentive plan for leaders.  Drucker provides excellent reinforcement for this point in the following excerpt from his book Management: Tasks, Responsibilities, Practices (HarperCollins, 1973).

A favorite story at management meetings is that of the three stonecutters who were asked what they were doing.  The first replied, “I am making a living.”  The second kept on hammering while he said, “I am doing the best job of stonecutting in the entire country.”  The third one looked up with a visionary gleam in his eyes and said, “I am building a cathedral”. 

The third man is, of course, the true “manager”.  The first man knows what he wants to get out of the work and manages to do so.  He is likely to give a “fair days work for a fair day’s pay.”

It is the second man who is a problem.  Workmanship is essential; without it no business can flourish;  in fact, an organization becomes demoralized if it does not demand of its members the most scrupulous workmanship they are capable of.  But there is always a danger that the true workman, the true professional, will believe that he is accomplishing something when in effect he is just polishing stones or collecting footnotes.  Workmanship must be encouraged in the business enterprise.  But it must always be related to the needs of the whole. … For it is the definition of a manager that in what he does he takes responsibility for the whole – that is, in cutting stone, he “builds the cathedral.”

Many management incentive plans do give individual objectives a minor role (and weight) and this is probably appropriate.  However, in honor of Drucker's unparalleled wisdom about the field of management, it should be said that the overall purpose of management incentive plans should be to focus the attention of these key employees on the cathedral, not the stones.

Market Strong for New Accounting Graduates

The market continues to be good to new graduates with bachelor's degrees in accounting, in the aftermath of Sarbanes Oxley and continued strong recruiting by accounting and audit firms.  The average starting salary for accounting degree graduates increased 5.4% from last spring to $46,188, according to the Spring 2006 Salary Survey published by the National Association of Colleges and Employers (www.naceweb.org).

Those managing compensation programs will need to continue to stay abreast in order to ensure that their internal pay opportunities for accounting professionals remain competitive.

Choosing Incentive Plan Measures

When selecting performance measures for an incentive plan, organizations frequently lean toward financial measures (e.g., revenues, net income, EBITDA) as indicators of economic success -- success which will in turn be shared with plan participants.  Nothing against financial measures, they have their role in incentive plans and its an important one.  But it may be worth taking a broader look at potential measures to ensure that you end up with a set that really fits your organization and where you (or the powers that be) are trying to take it.

I find it helpful to put measures into three categories:

1. Lead measures are predictive of success, generally over a longer period.  Examples of lead measures might include market share, customer satisfaction or retention, employee satisfaction or retention, or new product development. 
2. Operating measures focus on day-to-day operations.  Examples of operating measures might include output, productivity, or cycle time.
3. Lag measures reflect success which has already happened, typically as addressed through the accounting system.  Examples of lag measures might include net income, return ratios (return on equity, return on sales, etc.), or stock price.

While I am a firm believer that less is more when selecting incentive plan measures (i.e. no more than 3 or 4), I also think that there is a case to be made for balance.  I have heard it said that running an organization solely on the basis of lag measures is like steering a boat by watching its wake.  Lead and operating measures can play a critical role in an incentive plan, particularly if your organization is pursuing growth, re-direction, or performance improvement.  Lead and operating measures can also be an important component of management incentive plans in not-for-profits, which face IRS and other regulatory constraints on tying rewards solely to financial performance.

More on Compensation Philosophy

I can't help but follow on to the previous two compensation philosophy posts with this.

In an article published in the June issue of workspan entitled "New Rules: Paying for Performance, Part Two", my former colleague Brad Hill (now a principal at Tandehill Human Capital) and his co-author Christine Tande cite an example of a particularly powerful pay philosophy:

A major steel producers offers a pay philosophy that states, "We will hire five people to do the work of ten and pay them like seven."  This philosophy is fresh, vibrant and communicates an above-market pay practice closely tied to demanding performance standards.

Well said on all counts.

Compensation Philosophy - Part 2

We return to the key questions involved in articulating a compensation philosophy.

The primary question

What do you want your compensation program to do?  Try to drill down beyond the standard "attract, retain and motivate" to identify the (1 to 3) critical things necessary to push the organization forward on its path to success.  Examples of compensation objectives might be:

Driving and rewarding cross-division collaboration

Directing all discretionary pay dollars to the top individual performers

Encouraging employee learning and development in the technologies critical to the future of the Company

The secondary questions

Nailing down the critical objectives is the first step.  Then, it is important to detail how these objectives will be accomplished through the compensation program.  That brings us to some secondary questions, such as those below:

What do you see as organization's labor market or markets (other local employers across all industries?  other heavy manufacturers of similar size across the region?)?  Where do you intend to position compensation opportunities relative to this market or markets (at average or median levels?  higher?  lower?)?

What different pay elements are included in your compensation package (base salary?  profit sharing?  spot bonuses?  what about benefits?)?  What role does each of these play in accomplishing your primary objectives?

A compensation philosophy is simply a document (one page, please) which captures Leadership's agreement on what the compensation program should accomplish and how.  Don't just file it away.  Think of it and use it as an annual performance appraisal for your compensation program; let it be the statement of intent (what should be) against which your current compensation practices (what actually is) can be regularly measured.