Not so many years ago, getting paid for work was as predictable as a morning sunrise.
Put in your 40 hours, line up at the pay window on Friday afternoon, collect your weekly check and be on your way.
Come Christmas, and as regular as St. Nick’s visit, the year’s last check contained your 5 percent bonus. Happy New Year.
With increasing pressure from a global economy that’s shrinking costs and stabilizing prices, however, traditional pay practices are being replaced with the more complex cost-controlling practice of variable compensation.
Simply stated, a growing number of employers link pay to business outcomes, business strategies and performance-related goals.
Going away are graduated pay scales, predictable annual pay increases (often tied to inflation) and the guaranteed annual bonus.
The shift in compensation has been as gradual as it’s been benign. In the 1990s, fewer than half of companies surveyed said they used variable pay with any employees. Two years ago, the percentage had risen to 77 percent.
Executives are the most likely to receive variable pay, but lower-ranking employees gradually are being phased in as well. The trend is tied directly to cost-cutting business models of the 21st century.
“With fixed costs growing and a … link between pay and expected performance, a key way to increase a business’s bang for the buck is putting more into variable pay,” compensation consultant Doug Sayed told a recent meeting of the Snohomish County chapter of the Society for Human Resource Management.
Even so, employees and some managers do not universally embrace the practice. “I know that given the chance for a guaranteed 25-cent-an-hour pay increase or the variable pay potential of a 50-cent-an-hour raise, most employees would take the 25 cents straight to the bank,” said Sayad, principal of Applied HR Strategies of Kirkland, www.appliedstrategies.com.
Some managers balk because administrating variable pay can be a technical and procedural nightmare, especially if it’s not applied companywide.
Achieving the several design principles of variable pay so employees fully understand what they face is time-consuming and complex, Sayad said. The plan needs to be tightly aligned with the organization’s strategic goals, and the amount for a maximum payout if goals are met must be included in the annual budget so the plan is self-funding, he said.
Employees must see the direct connection between performance and goal achievement and payout” or the plan will fail to motivate, he said. And goals must be specific, measurable, attainable, results-focused and time-bound.
If they are not, the plan will collapse under its own weight. “If the goals are ill-planned or incentives too low, employees will take one look at the plan and say, ‘Why bother?’” Sayad said.
When applied individually, they also must be tied properly to the scope of the employee’s job. Although Federal Express was usually very good at setting employee goals and paying well for meeting them, exceptions cropped up occasionally. When he was a regional human resources manager for FedEx, Sayad said, his bonus one year was partly tied to reducing turnover. Unfortunately, he had little or no control over factors that contributed heavily to turnover; he couldn’t increase pay or benefits or offer other financial incentives.
“Most importantly, a key step is to communicate, communicate, communicate,” Sayad said. “A lot of companies eagerly announce their variable pay plan when the budget is completed, only to shove it back in the desk for the rest of the year. Then, when December rolls around, they announce at the Christmas party, ‘Sorry, folks, we didn’t make goal.’”
Sayad said he sees businesses continuing to expand strategically aligned compensation programs. He also sees more employees paid based on performance, with companies moving away from entitlement programs.
“I think we’re seeing less and less of the CEO offering bonuses to people he likes and saying to those he doesn’t, ‘Well, sorry.’”
Write Eric Zoeckler at The Herald, P.O. Box 930, Everett, WA 98206 or e-mail mrscribe@aol.com.
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