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Bonuses Are Back, with Emphasis on Hard Measures
 

By Stephen Miller  7/21/2010

 

More companies globally were awarding bonuses in 2010, but bonuses were more likely to be strongly tied to the bottom line with more challenging targets and greater focus on return on investment, according to a report by Hay Group, a global consulting firm.

In May 2010, Hay Group surveyed over 1,300 companies from across 80 countries on their variable pay policies and plans. The survey report shows that:

  • 39 percent of companies worldwide have increased or plan to increase the proportion of variable pay in their employees' compensation packets.
  • With new bonus prospects comes a renewed focus on performance, with 47 percent of companies stating they have increased or are planning to increase performance thresholds.

Financial Metrics

One of the most significant legacies of the global economic downturn is a trend for employers to move away from "soft" performance metrics, such as employee satisfaction or turnover, to more emphasis on "hard" financial measures, according to Hay Group, which found that:

  • Half (51 percent) of companies surveyed were using more financial metrics in performance-based pay, such as revenue, profit and sales.
  • Just 9 percent were placing greater emphasis on employee satisfaction.

Only 5 percent of companies considered risk reduction as a major driver of change—a cause for concern, according to the report.

“An emphasis on financial metrics can encourage employees to be focused on short-term financial gain without considering risks to long-term sustainability, company brand or broader social concerns," said Thomas Haussmann, variable pay leader for Hay Group. "The most successful reward strategies encourage long-term goals and recognize the need for a balance between financial, operational and employee satisfaction measures.”

Too High a Bar?

“At this time of change it is important that companies are aware of the serious impact that raising performance thresholds can have on employee engagement," said Haussmann. "Many employees have seen limited or no pay rises and bonus payments over the past two years. If the variable portion of their pay is made too difficult to earn, there is a danger they will disengage altogether, just when companies most need them onboard. Our research into employee engagement has shown that companies with the most engaged employees report revenue growth at a rate two-and-a-half times greater than their competitors with the lowest level of engagement."

‘If the variable portion of their pay is made
too difficult to earn, there is a danger that
employees will disengage altogether.’

Straight from the Top

The main reason cited for changing variable pay programs was strategic, with 61 percent of companies saying that the most important driver for change was better alignment of variable pay programs with the business strategy. This is followed closely by improving organizational or team performance (40 percent).

The report reveals that variable pay has become a board-level issue, with 55 percent of organizations indicating that the board had become more involved in the decision-making around variable pay.

Clear Messages

Increased attention is also being paid to the effective communication of reward programs, with almost 60 percent of companies changing the way they convey these to employees.

Yet some companies are still falling short:

  • Just over half (58 percent) believe that their variable pay programs are understood by employees.
  • Only a third (34 percent) believe that their programs are communicated effectively by line managers.

“The best reward programs are those that reflect the company’s particular business model and culture, rather than those which are simply copied from ‘best practice’ or industry standards," Haussman said. "A variable pay strategy will not drive performance if the objectives and link to company strategy are not clear. As the research indicates, communication of pay schemes and their link to the business strategy must be clearly defined and flow down from the very top of an organization in order for them to be successful.”

Measuring Effectiveness

With variable pay policies, businesses will need to focus on measuring the effectiveness of these policies and the return on investment from their reward spend. The report shows that one in five (19 percent) of companies had begun to do this in the two years preceding the May 2010 survey, and nearly twice as many (36 percent) were planning to make these changes over the subsequent two years.

Stephen Miller is an online editor/manager for SHRM.

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