LAS VEGAS—The age of
base pay as the most important compensation component is over, and the
era of variable comp is at hand, said Stacey R. Carroll, SHRM-SCP,
during her June 29, 2015, concurrent session, “Effective Incentive Plan
Design,” at the Society for Human Resource Management 2015 Annual
Conference & Exposition.
“Despite what some
high-priced consultants will tell you, you can do this on your own if
you have the right framework and ask the right questions,” said Carroll, president of Honolulu-based HR Experts On-Call. “More often than not, you can design your own program, and perhaps then have a consultant review it”—an option that is much less expensive than a consultant-created program.
As to why incentive pay plans are important, Carroll quoted Jack Welch, former
CEO of GE, who said, “It goes without saying that no company, small or
large, can win over the long run without energized employees who believe
in the mission and understand how to achieve it.”
As Carroll said, “A 3
percent across-the-board pay hike may make your middling employees
happy, but you’re likely to lose your top performers.” Likewise, she
said, if top performer Sally gets a 3.4 percent raise, and Joe, who
works next to her, gets 2.8 percent for doing the bare minimum, Sally
isn’t going to feel appreciated. And it’s Sally you want to keep, not
Joe.
“Compensation sends a
message about what you value as an organization,” Carroll noted. She
drew a distinction between two popular types of variable pay: incentive
pay, which is metrics-driven and uses a clear-line-of-sight formula (“if
you do this, then you will get this”), and bonus pay, which is more
subjective. At the end of the year, bonus programs might reward “good
performance” in the eyes of a manager, but they’re less effective at
driving behavior.
Meaningful Goals
Goals tied to
individual incentive payouts should challenge and stretch employees, or
else “they become entitlements very fast,” Carroll said. “If they’re not
challenging, the payouts are just base pay by another name.
“Your employees’ first
response should be ‘no way can we achieve that!” And then you help them
to see that it is possible, and they get excited.”
Goals should be tied back to what you are trying to do as an organization, she added, “or else they’re not worth doing.”
Goals should be
measurable, of course, and focused on outcomes, not activity, which is a
common mistake. “Employees figure out ways to achieve activity goals
that are far afield of achieving desired outcomes.”
For example, a sales
team that has a goal of increasing the number of calls per day to
potential customers might dial the phone but hang up after the first
ring.
Similarly, if the goal
is to increase customer retention, measure that, not how well customer
service is viewed. While it may seem that good customer service would
lead to customer retention, that might not always be the case. Customers
might find your call center reps friendly but still feel that the reps
weren’t able to provide value.
“In almost all
situations, a general profit-sharing plan is ineffective, due to the
poor line of sight between behavior and goal,” Carroll noted. She
advised scrapping them.
“Your rewards should be
commensurate with the outcome that was achieved and is meaningful to
the employee and sustainable by the organization. It should be a symbol
of success,” she said.
For incentives to be
meaningful, payouts to top performers should be equal to at least 7
percent of salary, Carroll advised. “Giving out $500 on a salary of
$75,000 won’t drive behavior.”
She also recommended having no more than three metrics linked to incentive payouts, or employees will lose focus.
Having too many metrics
also tends to reward the same thing twice, since target outcomes A and B
are both intended to lead to target outcome C. “If you can’t count the
metrics on one hand, you have too many,” she said.
“The closer to the
action the award is, the better,” she explained. This may mean trickling
incentive pay out over four quarters, so that a 10-percent-of-salary
payout is delivered in installments of 2 percent in the first, second
and third quarters with a larger, final payment of 4 percent in the
fourth quarter.
And if annual goals are
not met? “Make adjustments going forward, such as reduced raises,” she
said, “rather than trying to claw back the payouts, absent indications
of misconduct.”
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.