The three interconnected factors in incentive compensation plans

by on June 16, 2009 · 0 Comment POSTED IN: HR Info Center

Bonuses and advancement are all contingent upon performance in incentive compensation plans

Performance regulates everything in incentive compensation plans
Performance last year, it does predict your bonus. If you had a really good year and you’re a bonus eligible position, you can probably count on some extra money from an incentive compensation plan. Your performance last year does predict whether or not we keep you, okay?

In these interesting economic times, you kind of want to be coming off a good year where people feel that you really contributed above and beyond the call of duty. Frankly, if you’ve got salmon syndrome, and you want to go up the organization, your performance as perceived by your superiors is going to determine in large part your promotability.

Everything — assignments, office space, perks, whatever we can throw your way, your performance will influence all those things. Who gets the tickets to the ball game? Who gets to borrow the company car? Last year’s performance is really, really important-it’s just not the best predictor of this year’s pay.

Excellent incentive compensation plans don’t make up for poor base pay
The market makes the rules, okay? And to be honest with you, you don’t want to pay above the market. You have to be competitive but, you don’t want to pay the over the market rate either.

You start paying your people below the market and what would happen? Clearly, your best people will leave you. It’s your best people who have the options.

If you don’t pay fairly for something, they’re going to go to somebody else who does. You will have to pay their replacement fairly, so if you think you’re getting a bargain, you’re either getting a bargain with somebody who don’t have any options, somebody who has no ambition or somebody that doesn’t know any better. And those are not really good bargains.

You need to know what the market is. We need to pay the market. That means by definition that this year’s salary adjustment is going to be a lot more about the market than it is going to be about anything else.

If you’re a company like Toyota and you’re making a little bit of money while the other companies are losing money, you’re probably not going to have salary increases because your people aren’t going anywhere. If you happen to be in a business where your competitors are making money, and you are coming off a bad year, you might have to put money in your budget and give out raises anyway. If you don’t, you’ll have to spend more money on replacements. The market makes the rules.

Now, I’ve heard a rumor. I’m pretty sure it’s true. Some of the people in our organizations, if you quit paying them, wouldn’t keep coming to work. I’ve heard that all over. I’m pretty sure it’s true. What does that mean? Money may not be the most important thing, but, it is one important thing to your employees. Pay not the most important thing in their reasoning to go to work. Job security, in some cases, is probably higher for them and doing something meaningful, whatever, but pay is on the list and we better figure out how to pay properly.

How to pay properly.
What kind of philosophy? Okay, I’m going to give you a policy statement here that I find universal. We pay you fairly for what you do. I haven’t found a better way to say it.
What’s that mean? Well, it means, the company looks at the market and we say, “What are other companies paying for people doing the kind of work our folks are doing and we make sure we’re paying in that range” Each year’s adjustments are really about making sure we’re in there for the people that are doing a good job that we want to keep.

That’s pretty logical, isn’t it? I don’t know how to say any more concisely or any better than that. It recognizes the reality, the necessity to pay market and it does it in an adult-to-adult fashion.

Okay, so that’s pretty concrete suggestion. That’s what – I suggest you adapt that philosophy and just put that in your policy guidelines and manuals and rocket forward.

Edited remarks from the Rapid Learning Institute webinar “How to Drain the Drama from Salary Reviews: A Conversation Roadmap” by Gary Markle

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