It's fairly common to find articles written by those who advocate increasing the eligibility of employee incentives, to push inclusion further down the organization's hierarchy. The argument is that all employees affect a company’s success, that every employee will chase the almighty dollar of variable pay, and that the opportunity for ever larger rewards will motivate them to do great things. All of which would in turn deliver improved financial results for the company's bottom line.
And maybe it's not such a good idea after all. Perhaps it's a bit of a crap shoot as to whether higher compensation costs would deliver improved financial gains. Let's take a look at the challenges ahead when you consider a broader eligibility for your annual incentive program.
What's The Plan?
What do you consider an incentive when designing a compensation program? My view is that a variable reward should be paid out for performance that goes above and beyond the norm, beyond what's expected. Thus it shouldn't be a reward for performance that would have occurred anyway. The intent of an incentive is to prompt a change in behavior, to get employees to do something they wouldn't ordinarily have done, and to get them to do it because they've been offered a financial reward.
That should be the plan. Otherwise it's a giveaway.
You'd expect that the "above and beyond" objectives would differ from year to year as the needs of the organization evolve and adapt to changing business conditions. This emphasis on annualized objectives reinforces the intent that incentives should be designed to reward effort beyond what's called for in the job description. And they shouldn't be repetitive, the same objectives year upon year. That's what the job description is for.
Incentive rewards shouldn't be provided simply because an employee performs their job well. That particular carrot should be the intent of the annual merit increase. In fact, such an exercise would be considered “double-dipping,” paying for the same performance twice. You shouldn't be using an incentive as an inducement to get employees to perform their expected duties. Again, that's paying twice to reinforce the same behavior. It’s also using compensation to replace the leader’s own responsibility to manage their staff.
Is There A Company Advantage?
When deciding on whether to add a variable pay opportunity to an existing base salary compensation model, you need to ask yourself, "what will the company receive in return for the increased costs of an incentive program?" If you're planning to increase targeted compensation costs by 5% or 10%, how will you answer the ROI question?
Caution: Always provide a business (financial) rationale, and not subjective phraseology like “survey says” or “everyone else is doing it" or even “it’s the right thing to do." Management tends to frown over such weak rationalizations.
Employees lower in the hierarchy have a reduced line of sight between their actions and business success. Which makes it harder to create meaningful, quantifiable objectives for performance that integrate vertically with department, functional and / or organization objectives. If you don't integrate what you’re telling employees to do, you may find yourself paying out incentive rewards when the company as a whole hasn't been successful.
So ask yourself to consider the business urgency in your organization for lowering variable pay eligibility to those below the management ranks.
- Is the employee line of sight (performance / business results) direct, or remote? If remote, what are you paying for?
- Can you quantify the expected ROI? The wrong answer here suggests a giveaway.
- Can you balance the increased compensation costs against assured financial gains for the company?
- Would the variable pay become strictly an added cost, or would any portion of base salary be at risk? "No pain, no gain," or "no risk - icing on the cake?"
If you have a reasonable doubt on any of the above points, I suggest you think long and hard before implementing such a program. It would be very difficult to dig yourself out of that hole.
Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations. He is also associated with several HR Consulting firms as a contributing consultant. Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation. He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.
Creative Commons image, "Handout," by DianeWorth