Can Variable Pay and Non-Financial Rewards Replace Annual Increases?

Friday, July 26, 2013

 

2013 is shaping up to be yet another year in which merit budgets and compensation increases are modest at best.  The surveys from WorkatWork, the Hay Group, Milliman and a score of others point to about a 3% target for most increases.  At the same time, the economy is slowly improving, organizational hiring is up moderately, and employees are beginning to think about alternative employment opportunities.  With an emphasis on holding fixed labor costs down, employers are trying to balance employment costs with the need to retain their best talent and hire a limited number of talented employees.  To accomplish this, organizations are relying more on both variable pay and non-financial rewards to keep their workers motivated.  But can theses efforts replace the standard model of annual increases?

 

Variable pay can take many forms, from short and long term bonuses and incentive plans to spot awards for exceptional performance to sales commissions, and even employee stock and ownership plans.  Variable pay plans may be based on individual employee or group performance, e.g., a department, a plant or an entire company.  For Variable pay to be effective, it must never permanently add to an employee’s base pay, benefits are generally not based on a definition of compensation which includes variable pay, and employees clearly understand that variable pay must be re-earned.  This definition means that a portion of an employee’s compensation is “at risk” of not being earned or being less than it was during some former period.  This risk factor contributes to the employee’s motivation to strive to re-earn a similar amount and even more than they did previously.

 

As with variable pay, employers are engaging in the use of non-financial rewards as a means to motivate employees while keeping compensation costs down.  And just as with variable pay, non-financial rewards can take on a multitude of forms such as training, trips, recognition awards, gift cards, promotions, special assignments, letters of commendation, merchandise and even bragging rights.  Organizations often overlook the most common form of non-financial reward, simply acknowledging the employee’s contribution and efforts with a “Thank You”!

 

It is known and understood that any reward system which occurs on a regular and predicable cycle will sustain behavior, but only at a fixed level.  However, rewards which take place on a variable basis tend to increase behavior to its maximum level.  Therefore, a compensation system with a portion of its pay based on a variable reward design will tend to increase performance.  At one end of this method is a function whose compensation is 100% commission and at the other extreme is a job paid 100% by fixed wages.  For most variable pay designs, the desire is to have a reward system designed between these two extremes.

 

Variable pay and non-financial rewards will see even greater use in the future, even in jobs which traditional have been compensated on a 100% fixed based salary.  However, it is unlikely that annual pay adjustments will completely disappear from the compensation manager’s tool box.  There will always be a need in some situations with selected jobs to annually review and adjust base pay due to organizational demands, labor market pressures or the contributions of individual employees.

More Jobs are Requiring More Education

Friday, July 12, 2013

 

Tell me something that I did not already know.

 

In a June 2013 report co-authored by Anthony P. Carnevale, Nicole Smith, and JeffStrohl, “Recovery: Job Growth and Education Requirements through 2020”, the Georgetown Center on Education and the Workforce authors point to a somewhat bleak picture of the supply of job candidates vs. the skills demanded by the workplace.  The study estimate that by 2020, on a national level, 65% of jobs will require some level of post-high school education.  And if that was not already a slap in the face, 66% to 76% of jobs in the top half (28) of the states will require education beyond high school.  With the exception of New Hampshire, Utah, and Wisconsin, every state and the District of Columbia are projected to be unable to meet the educational job-market demands by 2020.  So what is the message for many business organizations?

 

Most business leaders already know that many high school, community, and college graduates possess a significant gap of varying degrees for both soft and hard skills.  While vocational and trade schools may be training workers for trades, most traditional colleges do not see that it is their role is to produce job ready employees for an specific industry or employer.

 

What’s an employer to do in the search for top talent?  Karen Klein, writing for Bloomberg Businessweek on May 17, 2013 in her article titled, “How to Recruit the Best of the Class of 2013”, describes seven issues that small businesses should address.

 

1.     Sell your size: smaller organizations often expose employees to a wide range business area, link them to organizational leaders, and open doors to mentoring by owners and directors.

2.     Promote culture: current graduates want meaningful employment and associations, an employer’s culture and passion will be important to that top grad.

3.     Find grads before they graduate: start early with college alumni networks, college career centers, get involved in mentoring and internship programs.

4.     Pay them well:  ensure compensation is competitive and have a good employee-review process.  Leverage the motivating power of technology, such as providing the latest mobile device.

5.     Use social networks: highlight fast-track career opportunities in social media. Use social media to help screen applicants.

6.     Make your company look good: make your organizational brand stand out.  Again, social media can be a platform to reach that new top grad.

7.     Be realistic:  there are no guarantees, as with any new employee.  Top grads do not always make for a top performer.

 

As the economy continues its slow and protracted recovery, employers can be extremely selective in their new employee hiring processes, especially for recent college graduates.  It is important that organizations focus their recruiting efforts on those candidates who possess the right combination of soft and hard skills.  This is uniquely true of small to midsize employers who often make a limited number of technical and four year college hires.

Performance-Based Pay and Employee Engagement

Friday, July 05, 2013

A recent study (Kelly Global Workforce Index) by Kelly Services, a workforce and staffing solutions company, indicated that employees prefer compensation based on job performance. The study reported that for those employees not on a pay-for-performance system, 40% of respondents indicated they “would be more productive if they had their earnings linked to performance/productivity outcomes”. Steve Armstrong, Sr VP/GM for Kelly’s U.S. Operations was quoted as saying, “the trend reflects widespread recognition that organizations and individuals are most productive when their interests, including incentive-based pay, are aligned”.

Employee pay-for-performance systems are most effective when employees’ interests align with the organization’s business goals and objectives. In an April 26, 2013 report on Gallup's Employee Engagement Index, Daniela Yu, Jim Harter, and Sangeeta Agrawal found that U.S. managers had the highest (36% vs. 26% in 2009) level of employee engagement. The lowest level of engagement was attributed to “Manufacturing or production workers” at 24%. Equally, significant, the report clearly shows an increase in engagement for all worker classifications between 2009 and 2012. While at 36%, even the highest engagement level is well below an acceptable level, nevertheless, a 10-percentage point improvement over 2009 is certainly significant. The authors attributed this increase in manager engagement, in part, due to an increase in their organization’s new hire activities and thus an “improved view of the hiring situation at work”. By extension, a worker’s increase in engagement correlates with an improvement in their organization’s “hiring situation”, i.e., workers feel more secure about their future prospects.

Towers Watson, a professional services company, reports that organizations often struggle to show a relationship between performance-based compensation programs and employee engagement. In a 2013 white paper titled, “Using Targeted Incentives to Drive Sustainable Engagement”, Towers suggests the linkage between reward and engagement is related to; “… behaviors that organizations can promote via incentive plans [which] are limited only by their ability to observe, measure and communicate …” This clearly relates to the axiom, “If you can’t measure it, you can’t manage it.” Towers goes on to define engagement as, “… discretionary effort in order to achieve work-related goals.”

While it may be apparent, it bears restating, employee engagement behavior resides at the upper bounds of employee performance levels. In other words, employees must stretch their performance to achieve engagement. Merely reporting for work will not achieve employee engagement. Kathy Orr, Principal, Orr & Associates, has described this process as “rasing the bar” of employee performance expectations and hence employee engagement. Employees may not want to hear it, but the performance and engagement levels they delivered last year, may not be acceptable this year. For performance-base pay to be effective at engaging employees, organizational leaders must design reward and recognition systems, which drive the work behaviors of more than 36% to 24% of workers.