Is Your Variable Pay Plan Working?
Who: Surveyed companies using well-designed variable pay programs
What: Committed more money, had clear program goals, and targeted lower-paid
Results: Enjoyed double-digit corporate growth over sustained period
When employees of one high-tech manufacturing organization walk into the company's
cafeteria on the last Friday of each month, they immediately know whether they
met that month's corporate goals by the scent of either steak or pork and
beans hanging in the air.
This is an example of the kind of communication necessary to make a variable
compensation program successful. You don't have to change your menu, says
Paul Shafer, a business leader at Hewitt Associates ( http://www.
hewitt.com). But clear, deliberate, and timely communications are
Variable pay programs, which compensate employees over and above base salary, have existed for years, says Shafer. However, in the last decade, they have become much more common. "More than half of all employees in the United States are eligible for some type of variable pay plan," Shafer says. The programs are typically tied to organizational goals. "Goals are usually set each year, and employees are held accountable for the achievement of those goals."
Winning Attributes of Variable Comp Plans
Hewitt recently studied variable pay programs and how they impact corporate success. Using a definition of success that involves double-digit corporate growth over a 5-year period, they compared the designs of variable comp plans used by the successful companies with the ones that failed to achieve sustained double-digit growth. "What we tried to do was to identify those attributes that make a difference."
Some of the key differences identified in the study:
· "Double-digit growth companies are more committed to the notion of variable pay. One way they demonstrate that is with higher budgets. They have more funding per employee--in some cases, 30 percent more."
· "Double-digit growth companies pay more, as a percentage of the target, than do the single-digit growth companies, for the lower-paid employees. So for employees earning less than $50,000 a year, the double-digit growth companies are paying out a median of 120 percent of the target award. Single-digit growth companies are only paying out 85 percent to 90 percent of the target award to those employees."
· "Another key difference is that there wasn't a single double-digit growth company that had cost savings as one of the goals of the plan. Of the single-digit growth companies, fully 25 percent of them had cost reduction as a measure in their plan. Variable pay plans send messages to employees about what's important. If we're sending messages that say grow, but save money, what's a person to do? So, for those companies that value growth, they don't confuse their employees by having conflicting measures in their plan."
Use Variable Pay To Effect Change
Shafer says that companies must be absolutely clear in defining their goals for the variable pay plan. If the goal is cost savings, by all means include measures that will support that goal. But if growth is the overriding goal, those same measures would only cause conflicts. Be sure to very carefully think through each goal and measure, and how they interact with the others.
Once the goals and measures are defined, be very clear in communicating them to employees. "It's amazing how many organizations do not communicate where employees stand against the plan at points throughout the year. If we don't tell people how we're doing, then how will they know if any corrective action is required? How will they know if they're doing things right?" Shafer asks.
"Line of sight is a wonderful plan design notion. If I can see the connection between the goal and my role, then I understand what I can do to impact the business results. That's where the selection of measures is so important. If I have a goal that no matter how hard I try, there's no way I can influence, then I'm not going to do anything differently. If there's no change in behavior, then why would we expect any change in business results? What we're looking for in a variable pay plan is a change in employee behavior," Shafer says.
Shafer says the company mentioned at the beginning of this article uses many of these ideas in shaping its variable pay program. "They've
had variable pay in place for at least
a dozen years. For them, this plan
is really their hallmark and their
identity. It's a big part of their employer/employee value proposition. They consider it to be part of
the fabric of what makes their organization great--it's the fact that they link their organizational success to sharing it with their employees. They invest heavily in communications, written, electronic, [and] in person. They even put aromas in the air.
"The importance of variable pay as a component of total compensation
has been growing and is expected to remain as strong, if not get more important,
over time. So it is critically important that organizations, if they do this,
do it well."