In Their Shoes

What Goes Up May Come Down by Martha Frase-Blunt HR Magazine, August 2001

Undoubtedly there were a lot of disappointed workers at mid-year bonus time this summer. Companies that are tightening their belts for the first time in years are finding their variable pay plans put to the test.

HR professionals are in for some noise from employees about variable pay this year, says Jay Schuster of Los Angeles-based compensation consultants Schuster-Zingheim and Associates.

During the recent boom times, variable pay awards and stock options with value have been treated like entitlements, Schuster believes. At too many organizations, HR has not done a good job of helping leadership communicate the realities of variable pay that value goes up and down over time and, if goals are missed, cash incentives do not pay off.

Communicate Come Rain or Shine

The best-managed variable pay plans are clearly and continuously communicated to staff. Every study of workforce attitudes suggests that honest and frequent communication of the facts creates improved employee understanding of the realities of how people can help a company thrive, says Schusters partner, Patricia Zingheim. And with better understanding comes better support, acceptance of what the company is doing and subsequently improved morale.

Frequency is the key, whether the news is good or bad, according to Mark Stiffler, president and CEO of Synygy, a Conshohocken, Pa.-based provider of enterprise incentive management software and services. Many companies fear having to disclose bad news to employees, but if it comes as part of a regular and frequent distribution, it may be easier for employees to understand and accept. A good rule of thumb, says Stiffler, is to communicate incentive plan results two to three times as often as you pay them out. Employees shouldn't just be issued a check and a statement.

So if bonuses are awarded quarterly, individual results and news about the incentive program should be disseminated monthly. If bonuses are paid annually, the company should communicate to all staff every four to six months. This also gives the organization a key opportunity to reinforce to employees the rules and the purpose of the variable pay plan.

Synygy recommends tailoring the information to individuals in confidential reports tracking their performance and bonus expectations. If the amount is tied to company performance as well, that component also should be disclosed. Companies should aim for frequency, accuracy and timeliness, as well as understandability, in these reports, Stiffler advises.

Diane Gherson, global practice leader for performance and rewards at Towers Perrin in Irvine, Calif., agrees that its crucial to make employees understand how they are tracking against the company's goals throughout the year. The better-managed plans do this. At least on a monthly basis, employees should know what their bonus would look like if they were paid out that day. If the numbers are disappointing, leadership should communicate what actions it is taking and what actions employees should take to get on track. When bonus time rolls around, they know the story; there are no surprises.

Even when the news is bad, don't be afraid to pass it along in exactly the same manner. Don't make a special case out of it, like calling an all-hands meeting to explain, Gherson urges. If you do, then your variable pay plan will be perceived as a benefit or entitlement that can be taken away.

Also, fight peoples natural inclination to let diminished variable pay affect their morale, she adds. It should not be a morale issue. Most leading companies aren't talking morale; they are talking engagement. Engaged employees are given enough information so they can make decisions and adjust their behavior.

Cranking up communications about variable pay is a major chance for HR to help the business and become a business partner at the same time. When pay expectations are in danger of being dashed, HR needs to communicate what is going on, why this is happening and what the company is going to do if anything about going forward, Schuster advises.

According to Stiffler, before-and-after surveys show that the frequency and manner that plan information is communicated can have a very significant impact. When the communications efforts are changed for the better, we've seen jumps from 40 percent to 90 percent of employees who say they understand the plan fully.

Make sure the plans objectivity is demonstrated clearly and that all the rules are exposed. Hide none of the details. Make sure the formulas are very clear. If people understand their plan, and company strategy is reflected there, they will change their behavior. Calls about the plan drop. HR spends less time fielding questions.

Plan communication also should cover expectation-setting. Let them use what if calculators to see the effect of improved performance on their bonus, Stiffler recommends. And remind them that, while variable pay will depend on the company's performance to some degree, an employees performance counts even when the company does less well. Employees don't have to be victims of the economy. Even when companies announce an across-the-board base pay cut, they can still earn great money with variable pay.

But what if a company hasn't been quite so consistent about its communications, letting the plan's success up to now speak for itself? If your plan paid out a lot of money in the past, then expectations have been set, says Stiffler. If you pay out a lot less this year, people are going to get upset and there will be turnover, as well as demands to make it up to disgruntled workers in some way.

But it sets a damaging precedent if a company decides to override the plan parameters and supplement a disappointing payout. It will send the message that the company will take care of you no matter what, and yours is no longer a pay-for-performance plan, he warns.

A Towers Perrin study of 750 variable pay plans last year showed that one-eighth made the mistake of paying out supplements, Gherson notes. Each of those companies fell into the lowest category in terms of the effectiveness of their plans.

Don't Abandon Variable Pay

In fact, having a plan that doesn't consistently provide employees with an annual windfall is an effective lesson about performance pay and gainsharing. The current economic climate gives all HR professionals the chance to really add value to the business, believes Schuster. Missing performance goals provides the business case for communicating the measures and goals needed to make the company a success. It is not a time to panic and return to a base pay only mentality.

You cant change the plan every time goals are missed, notes Schuster. The [economy's] move from 2000 to 2001 was a unique change and must be communicated as such.

And you cant just scrap the variable pay plan because some vocal employees express their disenchantment. The alternative is going to be more base pay or an automatic bonus award granted retrospectively at the end of the year both of which are probably unaffordable unless results improve, Zingheim explains.

You need to educate your employees on the whys and what-fors of variable pay. The message must stress that variable pay is the company's agile reward--it can communicate new goals and directions as the company needs them addressed, while base pay does a good job of reflecting the skills and capabilities a person uses to perform a specific role. Variable pay is the best way to reward performance whether by companywide, business unit, division, department, team or even individual. It is how the company creates a financial partnership with employees, Zingheim believes.

Stiffler believes that the companies catching the most flak about disappointing bonuses are those that had poor plan designs that paid out unrealistically. You want your plan to be financially controllable in both up and down times.

While an organization may have missed the mark relative to setting goals, or even choosing goals, in 2000 and 2001, that's part of the normal state of things under unusual economic circumstances, and it will do better now going forward, Zingheim notes. The message is, We are learning, but we don't want to throw out the baby with the bath water.

Do It Right the Next Time

Instead, when a company's performance falters, it may be the perfect time to revisit the variable pay plan for a tune-up--not to ensure a bigger or more consistent payout, but to align it with a changing business strategy that takes into account the shifting economy. Think of it as driving a car that's not properly tuned, Gherson says. Variable pay plans have lots of moving parts, so they need to be checked and tuned regularly.

Changing the plans metrics, performance expectations and goals should not become commonplace or people will lose confidence in the company's ability to achieve even short-term business plans, Zingheim warns. But if the name of the game for the company has changed, the reward system should be aligned with these new directions.

And the strong message to employees should be about what has changed in the business, what leadership is doing about it and what everyone else can do to get the company engine running properly again. It cant be, Well, we missed these goals so we picked some new ones we think we can now meet, she stresses. Its necessary to build a case for why the new goals are better, why they are achievable and how people can really influence goal performance as a result of doing things within their reach to make the company get to where it needs to be.

Consider outsourcing the plan design and communication program, Stiffler advises. Everyone thinks they know how to do this, thinking, How complex can this possibly be? But it is challenging to create a variable pay plan that works correctly, especially in an up-and-down environment. When you change the design, it can take months to implement and revise payroll accounting systems, he says.

If the plan is changed, should the organization try to retroactively calculate and pay the previous periods bonuses? If staff turnover might be a problem, its worth a shot. Synygy has had clients do that, but your payroll staff will go into a tailspin without some professional help, says Stiffler.

According to Towers Perrin data, We know that the most common plan out there is an organization wide plan that has a 70 percent chance of failure, Gherson notes. These are the plans that don't have line of sight--that is, employees cant see clearly how their performance can make a difference.

Instead, do everything you can to get employees to believe in the company's success strategy, and demonstrate their important role. Let them know that even in a tough economy, your company and its staff are winners, she says. Remind them that there are lots of organizations doing well out there now because their people are very focused and intend to overcome every obstacle.

Martha Frase​-Blunt is a freelance business writer based in Alexandria, Va.

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