The days of organizations handing out bonuses like Halloween candy seem to be over.
While employers have returned to awarding bonuses in 2010, they’re attaching more strings than ever and are more likely to look at “hard” financial performance metrics when making variable pay decisions.
About four in 10 employers have increased or plan to increase the proportion of variable pay in their employees’ compensation, says a new Hay Group survey on variable pay.
However, with new bonus prospects comes a renewed focus on performance. Almost half of companies surveyed (47%) say they’ve increased or are planning to increase the performance thresholds employees need to earn those bonuses.
“One of the most significant legacies of the economic downturn has been a trend away from ‘soft’ metrics, such as employee satisfaction or turnover, to hard financial measures,” says the Hay Group study.
More than half (51%) of employers said they’re using more financial metrics—such as revenue, profit and sales—in calculating performance-based pay. Just 9% are placing greater emphasis on employee satisfaction.
Advice: Linking bonuses to “hard” numbers is wise, when possible. But don’t make financial factors the only driver of variable pay. Many employee activities aren’t directly connected to the bottom line, such as support and nonsales functions. Plus, a singular focus on financial metrics can encourage behavior that’s focused only on short-term gains.
Proof: When the Hay Group teams up with Fortune magazine to determine America’s most admired companies, it always looks at variable pay metrics. Almost every company says it focuses on revenue growth and profitability. But the most admired companies go further, rewarding such things as long-term thinking,, building human capital and customer loyalty.
Employee communication is key to revamping your variable pay practices.
“A variable pay strategy will not drive performance if the objectives and link to company strategy are not clear,” says Thomas Haussmann, leader of Hay’s variable pay group. “As the research indicates, communication of pay schemes and their link to the business strategy must be clearly defined.”
Pressure to tighten bonus criteria is coming from the top. In 53% of organizations that have changed their processes for awarding variable pay, the impetus came straight from the boardroom. The goal: to better measure their effectiveness and return on investment.
Note: Read the Hay Group variable pay report at www.haygroup.com/ca/downloads.