Friday, March 25, 2011
We all know that there should be a strong and positive relationship between an employee’s pay and their performance. For decades, employers have been attempting to link that relationship, on the individual as well as the group level, some organizations more successfully and others less so. The history of pay for performance is littered with a host of programs designed to incent, motivate, simulate, recognize and reward work related behaviors to affect productivity.
Base Pay:
This is pay for the individual performing the routine aspects of the job.
Balanced Scorecard & Pay-For-Performance:
According to the Balanced Scorecard Institute, this is an attempt to “align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals” and the in individual employee. To do this, the organization’s individual and group reward systems must themselves be in alignment with the goals and objectives of the organization.
Broadbanding:
Typical salary ranges have widths from minimum to maximum of upwards of 50%. As organizations attempted to “flatten” their structures, there emerged a need to develop ranges far wider than traditional salary ranges. Thus “Broad Band” ranges were developed in the size of 70%-100% or even 200%. The end result is fewer but wider ranges accommodating greater individual growth potential and overlaps in job functions found in flatter organizations.
Cash Bonus Plans:
Such plans are simply a “cash” payment in exchange for achievement of some organizational goal. Plans may be simple or complex and usually employed over a short duration in design, associated with either a single employee or groups of employees in mind. Cash Bonus Plans may be used with virtually any level within the organization.
Gain-Sharing:
Gain-Sharing may be thought of a variation of a “bonus incentive” plan. The intent of Gain-Sharing is to increase organizational “productivity through employee involvement”. In return, some of the economic gains achieved are in turn “shared between the employer and the employees”. Gain-Sharing is typically applied with groups of employees but those groups could be a single or multiple organizational sub-units, such as departments, factories or a line of business.
Geographic Differential:
The cost of goods and services varies from one geographical region to another. Therefore, it is only logical that the cost of labor would likewise vary. To address this issue, many organizations establish a benchmark rate and index local labor rates to that benchmark. An example might be wages in Alaska are significantly high than in the Lower 48, thus an organization might find it must have a 50% base pay differential for workers in Fairbanks as opposed to St Louis. Such differentials generally apply to any employee assigned to the geographic location for the minimum prescribed period of time.
Goal Sharing:
Goal Sharing attempts to achieve enhancements in organizational effectiveness through “continuous improvement” in a specific strategic business unit over a well defined period of time. Group rewards, are typically paid in the form of cash payments and are paid out at the end of some predetermined time frame.
Long-Term Incentive Pay:
This is a performance based reward system which recognizes changes in organizational productivity over extended periods of time, typically over multiple years and may involve cash, stock or both. Rewards and goals may be tied to individual performance, as long as the employee is a member of the eligible class. Often such reward systems are highly complicated and require significant legal and financial management expert assistance in their design and operations. While focused on individual performance, the overarching design of the plan may involve the successful performance by several employees in a coordinated effort. Pay out of rewards may be in stages as certain significant points of achievement or at the end of the period. Deferral of current income has significant legal and tax issues relating to IRS Code Section 409.
Merit Pay:
In its simplest form, individual employees are paid cash for performing at or above the organization’s expectations. This usually takes the form of an increase to the employee’s existing base pay following some periodic (semi-annually/annually) performance review and thus compounds over time. In employees at or near the organization’s range maximum, rewards may be paid in a single lump sum.
Pay For Performance:
Similar to Merit Pay, but may be focused on a specific task(s) over a period of defined time. As with Merit Pay may take the form of an increase to the employee’s existing base pay following some periodic (semi-annually/annually) and thus compounds over time. May also be considered a form of Incentive Pay. As with Merit Pay, employees at or near the organization’s range maximum, rewards may be paid in a single lump sum.
Profit-Sharing:
A legally defined Plan sanctioned and regulated by the DOL/IRS which allows an organization to distribute a portion of “profits” to employees. Often found in combination with 401(k) plans and other retirement plans. Reward payments may take various forms related to details of the Plan. Generally are highly complicated and requires significant legal and financial expert assistance to design and operate.
Shft Differential Pay:
Pay designed to compensate employees who work evenings, nights, weekends, rotating shifts or off hours schedules. Shift Differential Pay attempts to offset the inconvenience and hardships associated with working hours other than daytime and weekday.
Short-Term Incentive Pay:
This is a individual or group performance based reward system which recognizes changes in organization productivity over short periods of time, typically less than one year. May be focused on a specific task(s) over a period of defined time. Typically involves cash compensation, but could include non-cash rewards as well. See Pay For Performance.
Skill-Based Pay:
The individual employee is paid for the organizationally needed job skills they possess and can use at some specific level. Employees may be required to learn, master, demonstrate, and maintain skill levels in different areas as the needs of the organization change over time.
Team-Based Pay:
Individual compensation is based on the overall performance of a team of employees working towards a predetermined and predefined set of goals and objectives. Rewards could be paid in proportion to roles, time on the team or other factors “designed” to motivate achievement of the goals and objectives. Could be used in a project or production environment to focus on the organization’s desired results for the team.
Total Compensation and Benefits Statement:
A periodic and highly personalized, usually annual, written summary of the employee’s current and deferred cash and cash-valued compensation. May include mandatory governmental funding such as Social Security, unemployment and worker’s compensation tax payments. Helps the employee understand the “value” of rewards other that strictly cash compensation.
Variable Pay:
A catch-all phrase, may take the form of any manner of compensation such as incentives, bonuses, skill-based short/long term incentives or team-based pay. Any form of pay which fluctuates as the performance of the employee, team or organization varies.
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