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Read one of these past issues for Insightful tips:
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Revitalizing employee motivation, commitment and productivity in 2004
by Dave Brookmire
January 2004
Whenever we give seminars on the topic of pay we ask for audience participation to the question: "How many of you believe that you are being paid what you are worth?" A minority raise their hands. When asked, "How many of you believe you should be paid more for what you do?" the majority raise their hands. When asked, "How much more should you be paid?" usually majority of the hands are raised in the 50% to 100% ranges. So what's the problem with the traditional pay for performance system's "promise," that if you work hard, are loyal, trustworthy, cheerful, etc., you will be paid more than someone that does not work as hard, is not as committed, as loyal, etc.?
How much money you are worth is now calculated by how much money you generate for the company. Precious cash flow and scarce working capital are being better managed than ever before, and the message to the workforce is clear: Quality, service, value and productivity reign supreme! The traditional individualized pay for performance paradigm with rewards paid out for individual achievements is broken. We're recommending to our clients that bonuses and "full" pay is achieved only if the company performs better. And more of our clients have put pay at risk for everyone.
The pay for performance system that purports to link annual pay increases to performance has been dying a slow death for many years. Let's look at some trends to illustrate what leaders are facing. In the 80's and 90's merit pay was increasing close to double digits to keep up with inflation and retention needs. Medical benefits cost increases were rising at very low rates. Company profits were growing rapidly and stock options were introduced to offer cash compensation to employees at all levels. In 2004, merit budgets are projected to be around 2-4%, if budgeted at all, medical benefit cost increases are soaring again to10%+, stock options are becoming restricted stock, and fewer awarded, and profits are very difficult to attain in our global economy.
On the performance appraisal side of the equation, few companies have implemented very effective systems that accurately distinguish the high, average and lower performers. After all, leaders have been faced with the "social pressure" to avoid giving performers lower ratings and face conflict. Federal legislation along with HR role make it very cumbersome to deal with poor performers for fear of legal problems.
So, if the budget is 3% and performance differentiation is subject to all kinds of rater errors and biases, how many of you feel the truly higher performers get much more of an increase than the lower performers? Our experience has shown most leaders give everyone about the same raise. The problem is more acute when a leader aggressively manages out poor performers and is left with a team that is at or above target performance.
Before you invest 2-4% of your compensation back to your employees in a system that has not delivered increases in productivity in recent years, calculate an ROI, as you would on any investment in capital, headcount, equipment, marketing expense, etc. If you cannot justify the ROI you have to address the problem.
Our recommendations to clients that are in the dilemma we outlined above:
- Instead of plugging a fixed percentage into a pay for performance program, provide employees with a minimal increase and create an incentive plan that will payout at target and above if the company meets and exceeds its financial goals. For example, one of our clients had been traditionally paying out 4-5% merits regardless of how profitable the business had performed. We implemented a 1-2% adjustment based on individual performance and an incentive plan that provided for 4-6% additional pay as the company met and exceeded certain financial and operating thresholds.
- Make sure your base pay is at market before considering putting pay at risk. If not, you can create a real morale issue and decrease retention.
- Decide on how much variable pay you want to put at risk as a percentage of profits.
- Understand the behaviors you want to reinforce and have checks and balances in place to manage those behaviors. For example, if you decide to pay on quantity of product you may have a distribution channel stuffed with exactly that, less quality.
- Tie the incentives to team based measures. With the flattening of organizations and dependence on cross functional teamwork, few jobs are standalone in delivering results in today's lean and mean organization.
- Identify your top talent pool and ensure rewards are available to this group with retention programs. The labor force will have the upper-hand very soon.
- Address the performance management system problems and implement best practices to improve the effectiveness of your program.
This is a fundamental philosophy shift for those companies that have traditionally reserved incentive pay for key executives and sales professionals. It's time to try new approaches to rewarding performance that align the employee and shareholder interests more closely. There are proven methods to successfully develop and implement new pay plans that will foster employee and management commitment and buy-in to the new programs.
We at CPS look forward to a successful and prosperous 2004 for our clients and partners.
Dave Brookmire, President
Corporate Performance Strategies, Inc.
3340 Trails End Road
Roswell, GA 30075
Phone: 770-587-2265
dbrookmire@cpstrat.com
www.cpstrat.com
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