July,
1997
How Attractive Is Your Compensation
Plan?
THERE IS NO END to surveys proving that people change jobs
for a variety of subjective and objective reasons, most of
which have nothing to do with pay.
All that
having been said, executive recruiters know one great truth:
While candidates have been known to decline high-paying jobs,
few will accept low-paying ones.
Many
employers, nonetheless, find it increasingly difficult to
offer superior candidates superior salaries. That’s
because salary ranges have fallen victim to disappearing merit
budgets, the flattening of corporate organization charts and
the growing emphasis on pay-for-performance incentives in
place of high base pay.
Hiring
managers and HR professionals can address this challenge by
keeping three compensation principles in mind: (1) there is
more to compensation than salary; (2) not all components of
compensation serve the same purpose; and (3) different kinds
of organizations need different kinds of compensation plans.
Adding
up Total Compensation
Total
compensation consists of four main elements – fixed
pay, variable pay, special awards and benefits.
Fixed
pay (or base salary) has fallen victim to a combination
of corporate cost-cutting, the growing suspicion in many companies
that "merit" increases have become too automatic,
the resulting use of merit budgets as basically cost-of-living
adjustments and the emerging belief that pay should be viewed
as a reward for the achievement of specified objectives –
as opposed to an entitlement based on position and years of
service. Moreover, as organizations have become more horizontal
(with fewer opportunities for promotion), the number of position
levels has decreased. The resulting salary compression does
little to excite either job candidates or incumbents, unless
offset by other remuneration.
Variable
pay (aka bonus or incentive comp) was once viewed
as a means of motivating selected employees, such as sales
representatives, to meet production targets or quotas –
and to reward higher levels of executives whose individual
performance could impact the company’s bottom line.
When the bonus was considered to be achievable and tied to
the employee’s own performance, it became a true reward;
when the bonus was tied to ever-shifting targets or to the
achievement of poorly understood corporate/divisional performance
ratios, it became a disincentive. But whether seen as positive
or negative, the bonus was in many cases a relatively insignificant
portion of total compensation.
More
recently, a number of companies have begun to introduce organization-wide
pay-for-performance programs. These are designed to replace
what these companies view as a flawed merit-increase system
with a new incentive pay plan that freezes or reduces base
salaries (except for cost-of-living adjustments) and ties
a substantially increased bonus pool to defined improvements
in individual and small-group performance. Often, 25 percent
or more of potential cash compensation is placed at risk.
In theory, each and every person will earn what he or she
deserves.
Special
awards include hiring bonuses, stock options, stock
grants, profit-sharing distributions, non-cash awards, etc.
When recruiting new employees, they can be used to offset
other limitations (e.g., providing a hiring bonus to compensate
for the lack of an attractive relocation package), to create
long-term incentives (as in the case of stock options) or
to provide great reward for great risk (e.g., the use of mega-stock
grants by high-tech start-ups). Also, devices such as restricted
stock (which cannot be sold before a specified date) and interest-free
loans (forgiven after X years on the job) can be used as the
tie that binds.
Last
but not least, benefits should always be viewed as part of
the company’s total compensation package. The existence
of a wide range of benefits, a particularly flexible cafeteria
plan, a liberal vacation policy or generous retirement and
savings plans add up to real dollars in the employee’s
pocket (not to mention real expenses to the employer).
Using
the Right Components to Sell the Job
Pay for
performance was designed to send employees a message: An ever-increasing
salary is a privilege, not a right – and will be based
upon your contributions to the performance of your department
or team. Earn it or lose it.
While
a number of well-known companies have used this message to
awaken their workforces, it may have somewhere between a neutral
and a negative impact on prospective employees.
Stripped
of all artifice, the act of changing jobs requires trading
the devil one knows for the devil one doesn’t. That
in turn prompts the candidate to ask, "What am I getting
for what I’m leaving behind?" The more tangible
and immediate the reward, the easier it is to take the risk.
The promise,
therefore, that "You’ll earn what you’re
worth," or, "The sky’s the limit," is
not terribly reassuring to the potential new hire.
When
it is impossible to offer a significant improvement in base
salary, throw in a tangible, calculable reward in the form
of cash or stock – even if distribution restrictions
apply. Add up the dollars and cents improvement in the benefits
you provide. And, if variable pay will be a substantial component
of the total compensation package, supply specific formulas
by which it will be calculated.
Tailoring
Compensation to Your Needs
Last
but not least, no one size fits all when it comes to compensation
plans.
Traditional
organizations, with their rigidly defined functional lines
(such as manufacturing, marketing and sales) and highly vertical
reporting relationships, adapt least well to pay-for-performance
models based upon the accomplishments of cross-functional
teams or the achievement of ever-changing short-term goals.
In the traditional organization, salary generally should remain
the principal component of the compensation package.
By contrast,
companies whose success is tied to an ongoing series of time-sensitive
accomplishments (for example, winning new contracts and completing
them on time and under budget) can make great use of sophisticated
variable pay programs. The same is true for organizations
seeking significant progress in some critical aspect of their
operations (such as customer service and responsiveness).
When performance improvement is crucial, rewards should be
commensurate.
In similar
fashion, blue-chip companies such as General Electric, Microsoft
and Procter & Gamble have relatively little difficulty
attracting and keeping top talent, so the basic objective
of their compensation programs is to remain competitive with
other good companies. (In essence, the place of work becomes
its own reward.) Conversely, the blue-chip executive joining
a high-risk start-up may need lavish remuneration –
and, as recent news reports have shown, is likely to receive
it.
Unfortunately,
company owners and corporate executives sometimes view their
fiefdoms through rose-colored glasses and have an unrealistically
low expectation of what it takes to compete for talent in
the personnel marketplace. If your compensation program is
totally out of sync with the outside world, the wisest course
of action may be to engage a compensation and benefits consulting
firm. Often, however, a good first step is to have a frank
discussion with a knowledgeable, trusted executive search
consultant who deals daily with clients and candidates in
your industry. This can provide an objective comparison of
your company’s total compensation program to the industry
at large and, as an added bonus, may yield helpful intelligence
on innovative programs at other companies.
Employees
these days want compensation plans that recognize their achievements.
As a famous athlete said when asked why he earned more than
the President of the United States, "It’s because
I had a better year."
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