Companies Ready to Tackle Changes Must Use Kid Gloves

As the economy continues experiencing growing pains, more organizations are revamping their compensation programs.

Sometimes they want to open up the purse strings and make up for withheld compensation over the past few years. In other cases, the need is to better align compensation systems with business goals and ensure that the right people are being rewarded for the right things.

Some organizations are shifting their compensation strategies to variable pay, where the full amount an employee receives is based on a number of quotas met by the individual, group, department and organization. Other employers are adopting behavioral compensation practices—using compensation and bonuses as the carrot to drive desired behavior and employee performance.

Whatever the goal, experts warn that there are plenty of potential pitfalls when tinkering with a compensation program. A well-executed program can motivate and engage employees, but a poorly executed one will almost certainly frustrate workers. Employees often fear the worst when their compensation plan comes under review.

Charles “Chuck” Baker knows that fact well. Currently the director of benefits and fleet services at GAF Materials Corp., a roofing and building materials manufacturer based in Wayne, New Jersey, Baker has been involved with numerous mergers and acquisitions for both his current and previous employers. Three years ago, for example, GAF bought Elkcorp Inc. and followed that acquisition a year later with Correct Building Products, a deck and railing manufacturer.

Each time he marries different compensation cultures together following an acquisition, Baker spends most of his time on education and communication, easing fears about lost income potential. He also pays special attention to one of the most common pitfalls: putting all the attention on the top performers. “It is a hard trap not to fall into,” Baker says. “The desire to make sure all the high-flying talent is rewarded, and let everyone else suffer.”

Baker believes that’s the approach taken by too many compensation managers who want to keep top talent at any cost. But that strategy could backfire on companies as employees see more opportunities in the job market and head for the door. “People have long memories, and they will remember how you treated them during the tough times,” Baker says. “You need to make sure everyone is covered by your incentive program, regardless of the job they do.”

Coupled with that is the need to design a compensation plan that is flexible and responsive to individual contributions, that is not locked to job titles, and that has standardized processes for aligning desired behavior with performance goals, says Robert Buckley, a behavioral pay and predictive behavior consultant.

Other pitfalls include designing a compensation plan that is too complex and hard to understand. It might lack clarity about how people are rewarded and for what kinds of performance, for instance, or it might include bonus programs with too many variables or hard-to-achieve goals.

Variable pay is becoming increasingly popular for many organizations. Under this plan, a certain percentage of an employee’s pay is fixed, and the remaining portion is goal-based, bonus potential, or at-risk of not being paid out. However, while the intention is to use variable pay as a motivational tool, it can cause havoc if it isn’t handled well.

When employees feel there are too many variables involved in earning awards or that rewards are tied to the performance of too many other individuals, motivation and morale can suffer. Likewise, when employees don’t understand how compensation amounts are determined or can’t track their performance against the benchmarks they are held to, they might grow frustrated.

Some organizations may segment bonus offerings so much that employees simply go for the low hanging fruit. That’s the case at a leading retailer, which is working with Salary.com. According to Salary.com’s director of compensation, Teanna Spence, the retailer offers 30 incentive programs, each paying $500. Employees have gotten into the routine of targeting only the easy-to-achieve incentives and ignoring the others, Spence says.

Another common problem is designing a compensation plan that is too subjective, leaving employees at the mercy of how their supervisors interpret policy. Jan Rose, a partner with the consulting firm Mercer, notes that one manager’s assessment of an employee’s performance can be very different from another’s.

Many companies also fall prey to designing reward systems that don’t address critical business needs. Rewards are most effective when they can be tied directly to a corporate goal. At Kronos Inc., managers work one-on-one with employees to set goals. Senior managers then evaluate the individuals’ goals to be sure they are in line with the corporate goals, says David Almeda, vice president of human resources at Kronos.

Workforce Management, September 2011, p. 10 — Subscribe Now!