After two years of painful payroll reductions, there’s enough light at the end of the recessionary tunnel for some employers to begin considering pay raises.
In many organizations, pay hikes will come in the form of variable compensation plans. Properly implemented, they can drive productivity while also controlling the fixed costs associated with salaries and hourly pay. (See “3 variable pay trends help weather recession”.)
But in a volatile economy, implementing performance incentives and bonus plans that motivate employees and avoid windfall payments is easier said than done. Experts say two tactics can help HR pros create variable pay plans that strike a balance between risk, reward and fiscal stability.
1. Set a sliding scale
Base variable compensation on
Set a base bonus amount—for example, $1,000 per employee. Then pay out bonuses that vary according to how close employees come to achieving or exceeding the target. Example: Someone who meets or beats the target goal might get the full $1,000 bonus. An employee who hits 80% of the target might get a $500 half share.
Tip: Set a payout floor—for example, no bonus for anyone who achieves less than 50% of the target goal.
Advantage: Sliding-scale variable pay is a good employee motivator.
Disadvantage: The wildcard is predicting exactly how much your variable pay will amount to. You’ll know the maximum top end, but it’s likely you won’t spend it all. That’s OK.
2. Use discretionary bonuses
Create an organizationwide or departmentwide bonus pool and let managers designate who will receive extra money.
Managers can recommend amounts, but shouldn’t have the final say, according to Jim Hudner, managing director for compensation consulting firm Pearl Meyer & Partners. Hudner recommends establishing some basic performance criteria and then having an impartial group of executives make the final decisions.
Tip: “If it’s a new plan, don’t communicate a lot of specifics,” suggests Hudner. “You will always have the luxury of becoming more open and sharing the parameters to motivate employees, as the economy becomes more stable.”
Advantage: Discretionary plans allow managers to award larger bonuses to top performers.
Disadvantage: They may fail to fully engage the entire employee population.
Details that matter
• Consider shaking up the bonus calendar—for example, switching from annual to quarterly incentives. Managing the bonus process is the same regardless. You’re still basing pay on employee performance relative to a set goal; you’re just measuring performance and calculating payouts more often.
This can be especially effective in organizations with seasonal business cycles, where measuring month-over-month results gives a better picture of effectiveness than year-over-year comparisons.
According to Shari Dunn, managing principal for the compensation and performance consulting firm CompAnalysis Inc., shorter bonusing timeframes allow for midyear adjustments and provide flexibility to deal with changing business needs. If revenue or cash flow suddenly stagnates, it’s relatively easy to suspend or reduce bonuses.
• Be careful when setting bonus caps. It’s essential to place an overall top limit on bonuses organizationwide. You can’t budget without one. But avoid caps on incentives for employees in revenue-generating positions, such as salespeople and business-development staff. Your variable pay plan should keep them motivated to continue pulling in customers and driving new revenue.
• Give yourself some flexibility. You can model every conceivable incentive scenario and still find that your plan misses some of your intended goals. Make sure employees understand that you reserve the right to make midcourse incentive-plan corrections to ensure the proper balance of risk and reward.
Have an attorney review your variable pay plan. Discuss how to communicate it to employees without creating any kind of contract. Except for set commissions (which should be bound by a contract), never promise bonuses in any way.
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