Wednesday, September 29, 2010
If, as we have seen, traditional merit and salary plans no longer work to achieve the desired results of many organizations and are currently funded at 2% to 3%, what options do organizations have? Organizations could attempt to re-engineer their merit based pay plans to obtain a more closely aligned outcome with their organizational needs. However, traditional merit and salary plans represent fixed overhead costs, which are present regardless of whether the organization achieves its goals or not. Furthermore, they bring into question both the reliability and validity of their measurement systems and that of the rater’s bias, the supervisor. What is needed is a plan that focuses attention on the desired organizational issue of the day and are variable costs resulting in expenditure only when the desired organizational goal is met using a priori quantifiable statistics.
While variable pay may be called by any number of names, e.g., incentive pay, pay for performance, bonus, reward, profit sharing, and may be any combination of financial and non-financial payments, variable pay is designed in a way to overcome many of the issues associated with merit pay. Variable pay plans have been around since the 1930’s; however, over the decades they have evolved and become much more widespread both across and down the organizational structure.
In “Rewarding Performance: The Role of Variable Pay” by Joseph R. Bellavary and Robert W. Allen of the Graduate School of Business Alumni Management and Human Resources at California State Polytechnic University, Pomona, the authors point out that costs, efficiency, and the ability to differentiate among employee performance levels are several of the key drivers associated with the variable pay plans.
Cost: when considering the cost of any reward system, thought must be even to both how will the system pay for itself and how will it be administered. Since variable pay, plans can be significantly more complex than a single dimensional bonus plan, the tracking, recordkeeping, payment, and possible legal issues need to be addressed. The desired cost structure should be a variable cost rate which decreases both as a dollar amount and percentage per unit designed, produced, sold, financed, shipped, etc. While it is possible to build a system that will meet the objectives of the organization, it is also possible to design a process that is too cumbersome to administer.
Efficiency: the organization will want to make the best use of its human, capital, physical, and financial resources. Un-moth-balling an old out of date factory and re-tooling it may not be the best application of any of the organization’s resources. However, re-tooling a current plant or mill to take advantage of a new product manufactured from what was previously waste might be a project that is appropriate for variable pay. At one time, sawmills burned their wood wastes for fuel, now much of that ends up in particleboard, plywood, oriented strand board, medium-density fiberboard, and various paper products. Someone had to conceive, design, manufacture, market, distribute, and sell these products; variable could have been used to reward those tasks.
Cost: when considering the cost of any reward system, thought must be even to both how will the system pay for itself and how will it be administered. Since variable pay, plans can be significantly more complex than a single dimensional bonus plan, the tracking, recordkeeping, payment, and possible legal issues need to be addressed. The desired cost structure should be a variable cost rate which decreases both as a dollar amount and percentage per unit designed, produced, sold, financed, shipped, etc. While it is possible to build a system that will meet the objectives of the organization, it is also possible to design a process that is too cumbersome to administer.
Efficiency: the organization will want to make the best use of its human, capital, physical, and financial resources. Un-moth-balling an old out of date factory and re-tooling it may not be the best application of any of the organization’s resources. However, re-tooling a current plant or mill to take advantage of a new product manufactured from what was previously waste might be a project that is appropriate for variable pay. At one time, sawmills burned their wood wastes for fuel, now much of that ends up in particleboard, plywood, oriented strand board, medium-density fiberboard, and various paper products. Someone had to conceive, design, manufacture, market, distribute, and sell these products; variable could have been used to reward those tasks.
Performance differentiation: a major criticism of merit and simple bonus pay systems are that they fail to identify the top performers among a group of employees. While supervisors often state they “know” who their top performers are their perceptions are often based on bias. An organization’s variable pay plan must be able to ferret out performers by achievement level. That means being able to identify and track those statistical measures that can be used objectively to reward behavior. It will be essential that an organization can track who sold what, when, where, to whom, in what quantities, was it a repeat sale to the same or a new client, how as it financed, did the client default on the financing, was the sale profitable, and was a single product sold or multiple products sold. A variable pay plan at a large health insurance company included an incentive pay to include sales representatives from other product lines and an incentive for cross selling clients with multiple lines from health, life, 401(k), and FSA product lines. Since performance is differentiated at the employee, group, plant, mill or organization level, top performing employees, groups, plants, mills or organizations become apparent.
Variable pay, as the term implies, is flexible enough to be altered midstream if business or economic conditions change requiring are re-alignment of organizational objectives. Although care and caution should be practiced here, least the organization loses creditability with its employees. While there is no sin in raising the expectations bar periodically, great attention should be paid to the timely and communications of such changes. I once lived in a community with a shoe factory. Each time the workers met their production goals, the goals were moved upward with no notice and without giving credit for meeting their earlier goals. It was not long before the plant was unionized.
Variable pay, as the term implies, is flexible enough to be altered midstream if business or economic conditions change requiring are re-alignment of organizational objectives. Although care and caution should be practiced here, least the organization loses creditability with its employees. While there is no sin in raising the expectations bar periodically, great attention should be paid to the timely and communications of such changes. I once lived in a community with a shoe factory. Each time the workers met their production goals, the goals were moved upward with no notice and without giving credit for meeting their earlier goals. It was not long before the plant was unionized.
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