Variable pay programs provide flexibility, incentives

630

In the seventies and eighties baby boomers came to expect hefty, regular raises every year, regardless of fluctuations in the bottom line. Those 10 percent increases have faded away, along with the fat bottom lines that financed them. Today, with salary budgets on the decline, and merit increases expected to hover at about 4 percent for 1996, those good old days seem rich indeed.

In fact, salary increases are at a six year low. And the dilemma company’s face is this: how can a company ask for more quality improvements and productivity from its employees, without offering to reward employees for those efforts? And with fixed payroll costs biting into slimmer margins, what is a company to do?

Necessity once again is the mother of invention. Non-traditional, variable pay programs such as individual performance awards, group incentives, on-the-spot bonuses and lump sum payments have begun to catch on. Eighty percent of the 1,184 employers surveyed by the consulting firm, Watson Wyatt Worldwide, reported having some type of variable pay programs with 39 percent planning on expanding or adding programs.

The good news for employees is they can add substantially to their own bottom lines, in spite of shrinking merit pay. Variable payouts can be quite hefty. For example, in another survey by consulting firm, Hewitt Associates, they found that individual performance awards usually average 9.4 percent of the employee's pay. Group incentives were even higher with 10.4 as the average.

Companies can afford to reward people for specific goals, when they don't have to pay out guaranteed amounts to everyone, regardless of performance. Companies are setting aside money in increasing numbers. They can pay out these incentives to employees during periods of solid earnings, without adding fixed payroll costs. And when company earnings are down, the company isn't forced to pay out guaranteed raises that threaten the company's existence.

And although variable pay can't be guaranteed, employees will be more likely to keep their jobs and good performers will flourish. Companies that have found creative ways of rewarding employees for their accomplishments aren't as likely to go through a painful downsizing due to high overhead.

Designing a variable pay program is no small task, however. If it's done well, it will be designed with plenty of employee input to create a program that rewards the right behavior. Care should be given to design a program that:

·        links to the business philosophy

·        is based on long term objectives not just short term results

·        has deferred compensation opportunities to attract and retain employees

·        is well-understood by every employee through education and regularly scheduled, face-to-face meetings about company results

·        has goals that are within reach for employees

·        is built on things the employee can control

·        rewards team accomplishments as well as individual goals

·        fosters cross-department cooperation and big picture decision making

·        pays out at the earliest meaningful time.

The most important thing variable pay plans create is ownership. It makes sense to treat employees like "owners." Paying them according to their contribution to the company's success gives employees a stronger sense of connection to the company and more satisfaction and pride for the contribution they make.

Advanced Consulting Skills for HR Professionals is Joan Lloyd’s intensive, interactive full-day workshop for HR practitioners.  Human resources professionals—both functional experts and generalists—have a new found opportunity to act as internal consultants who can help their organizations with organizational changes, performance coaching, conflict mediation and other value-added services. This workshop focuses on giving HR professionals the tools and strategies they need to help their organizations as well as advance their careers.

As a participant, you will have an opportunity to work on the problems and opportunities you face in your own organization, as well as to hear innovative ideas from other organizations.  Few training opportunities provide this level of intimate, hands-on experience. Call us for information about having Joan Lloyd work with your HR Team (800) 348-1944.  (Occasionally, we run this workshop as an open enrollment training offering.  Subscribe to Joan Lloyd’s “Article of the Week,” where we announce these sessions, as they are scheduled.)