In the last year, perhaps at the beginning of 2008, you developed your strategy for increasing productivity. Maybe you decided to expand incentive compensation to employees other than sales staff and executives; after all, the trend is toward more incentive compensation, rather than less. You set up measures and performance standards, told people about the program, and waited.
One year later, the economy has tanked. Goals and expectations have changed, and there is no way your employees can meet the challenges you set out at the beginning of the period. How do you deal with the kind of massive shift we’ve been experiencing?
Vishrut Parikh, director of product marketing at compensation software development company Callidus (www.callidussoftware.com), wants you to understand that the principles of incentive compensation are sound, and can apply as easily to your rank and file workers as they do to your sales staff and executives. Along with public relations and analyst relations director Jock Breitwieser, Parikh recently spoke to us on the topic.
BLR: Is incentive compensation for non-sales, non-executive staff only done at large companies?
Parikh: No. It doesn’t matter what size the organization is. When you have instituted an incentive compensation program, the complexity is about the same as it is for a large organization. There are no overriding standards for creating these plans: people are free to create whatever plan they like in whatever way they want to create it. There are standards to follow when reporting the compensation, but when you create it, there are no standards. That’s why the complexity from a 10-person sales organization to a 100,000-employee company is about the same.
BLR: What trends are you seeing with regard to compensating employees with variable pay?
Parikh: Historically, two constituents have used incentive compensation: sales and executives. What we have seen is our customers asking for solutions that will allow them to extend pay for performance to all of their employees. The second thing we’re seeing is that, while budgets are being cut and bonuses are lower, the usage of bonuses to incent or motivate people is increasing – companies are trying to make them available to a much larger percentage of their employees.
BLR: So there is less money being spread to more people? How does that motivate them?
Parikh: It is counterintuitive, but that’s what’s happening. Companies are not doing away with incentive programs, but they have reduced the pool of available money. And they are mixing cash and non-cash rewards. Not everyone is paying huge incentive compensation dollars, but many companies are paying out a lot more in the form of gift cards, or other non-cash awards. That has been a very common practice in some industries, like banks. But now it is becoming more and more prominent for other types of employees.
Breitwieser: Companies are using non-cash incentives as motivation for their employees. If you’re a smaller company and you really want to motivate your employees, you give them a bigger upside from the incentives. So if the employee over-fulfills on his or her quota, or whatever metrics they’re working against, then they don’t get 100% of what their original salary would be, they get 110%, for instance.
Parikh: It’s a win/win situation. Companies are getting higher performance, and the employees recognize that their efforts are paying off because they get more than what they were signed up for.
BLR: In this economy, when the pool of available workers is large, why pay incentives at all?
Parikh: Companies can think like that, and they may be able to hire people at first. But that won’t last too long. Psychologically, we are motivated by rewards and recognition. That’s not new. If an employer takes a short-sighted stand, they will be able to hire people, but will they get the best out of those people? That’s a question leading companies are asking, because making sure they retain talent is a challenge even in this environment.
You want to keep your talent, make sure they perform properly, make sure you’re getting the best out of those employees. Retaining people is still a problem. Yes, there are more applicants out there (so you could get away with paying them less)., but if you compare the little less you’re going to be able to pay them to the cost of hiring and training, is it worth it? Do you want high turnover, or do you want to minimize turnover? And when the economy turns around, how are you going to find and keep talented employees if you have not treated people properly?
BLR: How well do companies really link pay with performance?
Parikh: Companies basically end up spending about 8-10% of their gross revenue on variable compensation. That could be a very large amount of money. If you ask them whether they are getting a return on that investment, they may not know. Companies will lay out strategies at the beginning of the year, decide how many people to incentivize, how much money they will spend on it, etc. Then at the end of the year they might ask themselves whether they have achieved the goals they set.
Did they get the performance they were hoping for? A lot of times companies have no way to measure that. That’s why the next year, when they’re going through the process again, the company just says they plan to grow by 10% or something, so they tack 10% onto the quota. They really need to make sure they have a way to measure the return on investment.
Companies should make sure that the solution they use can make corrections throughout the year, as well. Look at what has happened in the last 18 months! You cannot say strategies haven’t changed; they have changed significantly. How do you accommodate those changes in your incentive program? Is your solution flexible enough to allow you to make changes mid year, or whenever you need to so the program is in line with business needs? You don’t want to be limited by what the technical application is allowing you to do; make sure you’re actually doing what the business needs you to do.
BLR: What are some things to keep in mind about communicating an incentive program to a group of employees who never had one before?
Parikh: Make sure you have a consistent performance management program throughout the company, and that you’re communicating in a collaborative manner. Managers need to speak to their subordinates, making sure they understand why the objectives are set the way they are set, and that there is two-way communication.
There needs to be buy-in and transparency. If you don’t provide that to your employees, especially in a downturn like this, the new program could have a negative effect on employees. Building trust is equally important as paying out money. Employees need to understand and have a say in how their objectives are set, and that must be at the beginning of the process, not when its time to pay out the bonuses.
Point to Remember
While incentive compensation has traditionally been used in large organizations and for two specific categories of employees, the situation is changing. Maybe now is your time to find out why.