Compensation Cafe

Numbers That Lie

Hard numbers can turn out to be really soft and squishy upon closer examination.  Perhaps that is why predictive foresight is rarely fully accurate, even when based on the Best Available Data.  (Note the nifty acronym, proving that even an optimal decision is still doomed to be a BAD decision.)

Reliance on data¹ does increase the certainty people feel when making their mistakes.  Numbers are therefore fondly embraced by most compensation people, because numeric data seem to confirm the accuracy of measurements.  But those very numbers can cause us to stumble because they promise a degree of precision that can be quite misleading, if not downright false. 

Last year, the initial Apple effect greatly skewed exec comp survey results (see The Apple Effect note at the bottom here).  Some frowned at the $376,000,000 in stock options granted to the new Apple CEO Tim Cook (which temporarily ballooned in value to over $600 million shortly thereafter) but little attention was given to his subsequent 99% pay cut this year… perhaps because it’s all RELATIVE.  Funny, how a relative increase gets headline attention but a relative decrease is ignored.  Surveys that did not make allowances for massive swings in isolated observations like that would leave their followers spinning in confusion.

Maybe it all depends on whether you want to find what is normal (the median), discover the most popular (the mode) or simply compute the average.  Those arcane terms are really important in compensation work, because each has a different precise meaning. 

When Bill Gates enters a Starbucks, the average customer in the shop becomes a millionaire.   Averages are directly impacted by outliers, while medians are the middle figure no matter how high the high or how low the low observation.  Conventional society tends to favor AVERAGES even though they are more problematic in statistical terms.  There are all sorts of fancy tricks statisticians use to manipulate the figures they process into “hard numbers.”  They include winsorizing, trimming, hot decking (where a missing value is replaced by a similar but different observation) and others .  Excuse me, but some of those gimmicks strike me as flat-out falsehoods; yet they are enshrined in statistical lore and thus may be applied without your knowing.

Likewise, anyone who finesses you with a claim that pay falls in a bell-shaped curve is yanking your chain (or pulling your thumb) in a big way. Wages are never symmetrical nor do salaries have a normal distribution.  That means some of the standard statistical techniques just don’t fit the world of total rewards where the observations are living, breathing human beings.  Whenever the science of number-crunching is invoked, the art of judgment must be added to assure its proper application.

These are just a few of the common compensation conundrums of lying numbers.  What are your favorites?

¹Mark Twain - There is something fascinating about science. One gets such wholesale returns of conjecture out of such a trifling investment of fact. 

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Creative Commons image "Bell Curve" by hardeep singh

Switzerland Pay - Great for Employees, Less So for Execs

In the past several months, Switzerland has made some interesting compensation headlines. Swiss voters recently passed a referendum on executive compensation that is more far-reaching and restrictive than anything we currently have in the U.S. This new set of rules was supported by a convincing 68% of voters. At nearly the same time, a UBS report from September 2012 shows that Swiss employees in Geneva and Zurich receive the highest net wages in the world. Does this tell us anything?

The highest paid employees in the world just voted for some of the most restrictive executive compensation reform we have seen to date. To be fair, Geneva and Zurich are among the most expensive cities in the world, but UBS reports they also have some of the lowest tax rates. I think it is telling when people who are doing relatively well compared to the rest of the world still have an issue with how much executives are making. I am just not sure what it is really telling us.

Are executives paid too much? Is there a misunderstanding of how and why executive pay came to be at its current levels? Has the media, or have politicians, flamed the fires of executive compensation unrest? Or are executives in some sort of compensation cold war, outspending each other to show their relevance and power? Let’s be honest, all of the above are far too simplistic, but each is believed by groups of employees, shareholders or others.

The new Swiss limitations on executives apply to publicly traded companies. Among the new rules is a requirement that pension funds vote in the interest of their members. They must also report how they voted. There are also annual say on pay votes, annual elections for directors and a ban on severance and golden parachute payments. Companies’ Articles of Association (similar to U.S. Articles of Incorporation) must add new details on compensation structure and rules for how compensation may be used for several groups and purposes. The final kicker is the potential for criminal penalties and fines if these rules are broken.

These new rules may simply be a shot across the bow in the new battle to bring executive compensation levels into publicly acceptable ranges. Several other countries, including the U.S. and a few Western European countries, have incomplete rules on the books or in the works. Executives may find themselves boxed in by the many stakeholder and influencers with different perspectives on this issue.

A decade ago when the UK rolled out its Say on Pay rules, few consultants or companies believed that similar restrictions were likely to occur in the US. They were right for almost ten years. While we will not see aggressive new restrictions on executive pay in the immediate future, the approval and gradual acceptance of these rules across the Atlantic may be writing our future. In the past, rules like this have taken 5-10 year to reach our shores, but we all know that cycles are speeding up. We may well see restrictions like this sooner than expected. Are you ready, and will you support or oppose these efforts? 

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Executive Pay Can’t Be Fixed! But….here are 3 things to consider

Several times a year, I see articles and presentations discussing how to “fix executive compensation”. This presumes that executive compensation is some sort of monolithic thing. In fact, executive compensation is simply a topic linked to a wide range of purposes, data, facts and opinions. You can no more fix executive compensation than you can fix sports or music. It is simply too broad and varied for any fix or fixes to apply universally.

Executive pay is effective and problematic because every company and executive is different. Yet, somehow, every magical fix for executive compensation includes a set of rules that will work for the tens of thousands of unique companies and individuals that will be impacted. Let’s set the facts down clearly. No one “solution” will work for the majority of companies. There is no “silver bullet”. Heck, there isn’t even a box of silver bullets that can fix executive pay. So, if executive pay is broken, but it can’t be fixed, what should we do?

1) The secret is there is no secret.

Focus on you. There is no special sauce that will fix executive compensation. No secret formula, no wish upon a star. The only way executive compensation can be fixed is for each and every company to understand their business strategy and how their compensation philosophy and programs can support the delivery of that strategy.

2) It’s not only about how much is paid or how it is delivered, it’s about both.

In an attempt to gain instant acceptance from the compensation community, academics, consultants, shareholders, politicians and the media frequently frame their “solutions” as either being about the volume of pay or the structure of pay. Any credible compensation professional will admit that any solution must deal with both (and many other things). Any solution that claims it can fix things on one side without impact to the other, simply doesn’t understand the complexity of compensation.

3) The solutions provided are usually solving THEIR problems, not yours.

Until Copernicus, it was generally believed that the sun revolved around the Earth. People saw the world from their perspective and created an answer that met their expectations. Executive compensation is similar. When you see an article discussing fixing pay, you probably read the first paragraph and decide if you can relate to the writer’s point of view. You won’t read much farther if you determine they don’t understand your issues.

Each company must do their best to look at executive compensation from two perspectives. First, from their unique internal perspective with the personalities, idiosyncrasies, politics and budgets that comes along with that. Second, look at it from a global perspective. This is harder since you must step back from the problem far enough to see the issue from everyone else’s perspective. You may also need to make decisions on who needs to be marginalized, or even ignored, to meet your current goals. As long as you have considered everything thoroughly, you will have a reasonable defense (or offense) for the decisions you make.

There is no “fix” to executive compensation that isn’t specific and unique to each company. Like any compromise, a good solution will leave every party a little less than 100% happy. If any stakeholder is perfectly happy, it means that another was probably too marginalized, or simply ignored, in the final solution. As every compensation professional knows, it’s never about one thing, it always about everything.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

The Revolt Against Executive Pay

"It is difficult to get a man to understand something when his salary depends on his not understanding it." ----- Upton Sinclair

In case you didn't see the news article recently, on March 3, 68% of voters in Switzerland overwhelmingly backed an initiative to give shareholders of Swiss listed companies whose shares are publicly traded a binding say on executive pay.

It includes a ban on "golden parachutes" and any bonuses for buying or selling corporations.  Breaching the rules can lead to a fine of up to six years’ salary and up to three years in prison. 

Swiss businesses had better hope that this law goes far enough.  Says the Economist, “The country’s Young Socialists are demanding that senior executives’ pay be capped at 12 times that of the lowest-paid worker.”

But the news doesn’t stop with Switzerland.  Excessive executive compensation is also being discussed in the EU. The EU has agreed in principle to impose a strict limit on executive bonuses for banks. It would limit bonuses to one times base salary, or double that if shareholders agree by a two-third majority. These bonus rules would also be valid for branches of foreign companies within the EU.   It will affect the UK even though the UK currently has a non-binding say on pay.

The Netherlands is talking about a 20% cap on executive bonuses.  

In Germany the government has announced it will shortly introduce a law to regulate management salaries.  One possibility being discussed is capping salaries. 

OK let’s talk about the U.S.  Our “say on pay” legislation is non-binding.  Why are we not seeing changes? Let’s look at two reasons why:

1) Corporate governance

U.S:   CEO duality allows the CEO to also be the Chairman of the Board which dilutes the oversight function of the Board.   In addition the CEO/Chairman influences the selection of Board members --- some of which serve on the Compensation Committee which determines CEO pay.

UK:   There are long established norms of good corporate governance which do  not include the practice of CEO duality.  It is a rarity in the UK.

Germany:  CEO duality doesn’t exist in Germany.  Also in large German firms half of the board members must be employees which creates a wider range of interests than just financial.

France:  CEO duality exists.  However, the power of the French CEO is offset by  large and powerful shareholders represented by the Board.

Japan:  The Chairman of the Board is usually a retired CEO or retired  government official.  The Chairman’s interests are broad and represent a wider range of company interests than just shareholder value.

2)  Culture

U.S. and UK:  There is greater tolerance for high CEO pay in countries that have individualistic cultures based on pay for performance and personal achievements.

Japan:  On the opposite end of the continuum is Japan which is a collectivistic society. Boards in Japan are less tolerant of high CEO pay since it is likely to produce social tension.   The ratio of CEO base pay to worker pay here is probably the lowest in the world.

Germany and France:  Germany and France represent the middle ground with the U.S. and UK on the high end representing individualist values, and Japan on the low end representing collectivist values.

Will U.S. companies follow other developed countries and reform their executive pay programs? 

These questions might need to be addressed first:

1)  Will corporate governance rules change to ban CEO duality?
2)  Will Boards of Directors change performance measures of CEOs to include non-financial measures?
3)  Can CEOs be weaned from their entitlement mentality?

There is a lot of talk about changing the measurements used for executive pay.  But this is not likely to succeed unless the culture/mentality regarding executive pay changes first.
 
So how do we break through this logjam?  If there is no reform, it may start raising questions about the U.S. stewardship capabilities of CEOs, boards and even shareholders themselves.

What do you think?  

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expat twice during her career.   Her true love is working with local national issues.  Jacque has the following certifications:  CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology and an MBA.    She belongs to SHRM, Human Capital Institute and World at Work.   Jacque been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications. 

Finding Meaning at Work (and Why Compensation Doesn't Help)

In my daily blog, I write regularly on broader topics around the idea of employee recognition – employee engagement, motivation, meaningful work, the value of values, and more. Here on Compensation Café, I try to focus my posts on topics that link directly to the topic of compensation, but I’m thrilled when my two blogging worlds collide in unexpected ways.

For example, over the weekend I was reading an article in the McKinsey Quarterly about the “meaning quotient” at work. The researchers see this as the third-level measurable quotient for effectiveness and impact, following the much better known intelligence quotient (IQ) and emotional quotient (EQ). I knew this would make a great post in my daily blog, but the longer I read, the more I knew I would have to share this with fellow imbibers at the Compensation Café.

First, an explanation of what the researchers mean by “meaning quotient”:

When we ask leaders about the ingredient they think is most often missing for them and for their colleagues—and by implication is most difficult to provide—they almost invariably signal the same thing: a strong sense of meaning. By “meaning,” we and they imply a feeling that what’s happening really matters, that what’s being done has not been done before or that it will make a difference to others.

I think nearly all of us will agree that “meaning” by this definition is both important, but also hard to pin down. How do we know what has “meaning?” As the more skeptical among us will ask, why does this even matter? The researchers tell us:

When a business environment’s Meaning Quotient is low, employees put less energy into their work and see it as “just a job” that gives them little more than a paycheck. The opportunity cost of the missing meaning is enormous. When we ask executives during the peak-performance exercise how much more productive they were at their peak than they were on average, for example, we get a range of answers, but the most common at senior levels is an increase of five time.

A five times increase in productivity – from knowing that our work is meaningful. Not too shabby. Indeed, Teresa Amabile and Steven Kramer tell us in The Progress Principle that the number one motivator for employees, by far, is making progress in meaningful work. In other words, we can’t wait until the annual bonus or the end of a multi-year project to acknowledge, praise and recognize the meaningful work occurring along the way. We need to be far more deliberate in our efforts to “catch someone doing something good."

Finally, here’s the link to compensation I promised. The McKinsey article ends with several strategies to uncover the Meaning Quotient. Strategy #3 is “Use small, unexpected rewards to motivate”:

When business objectives are linked to compensation, the motivation to drive for results is rarely enhanced meaningfully. The reason is as practical as psychological. Most annual-compensation plans of executives are so full of key performance indicators that the weighting of any one objective becomes largely meaningless in the grand scheme of things. Furthermore, most compensation plans typically emphasize financial metrics whose results depend on myriad variables, many beyond individual control. On top of that, most companies don’t have deep enough pockets to make compensation a significant driver of MQ in the workplace.

The lesson here is that when we aren’t expecting a reward, even a small one can have a disproportionate effect on our state of mind. And that’s also true of employees in the workplace…

Some managers might dismiss these as token gestures—but employees often tell us that the resulting boost in motivation and in connection to the leader and the company can last for months if not years. As Sam Walton, founder of Wal-Mart Stores, put it, “Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They’re absolutely free—and worth a fortune.”

It always comes back to the difference between incentives (if you do X, you’ll get expected reward Y) and real recognition (now that you’ve achieved X, here’s unexpected praise and reward Y).

How well do you understand the meaningfulness of your work? On a scale of 1-5 (1 is low, 5 is high), how do you rank your own “meaning quotient?”

 As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Frustrated? Here's How Compensation Practices Can Change for the Better

Look up the word "classic" on Wikipedia, as I just did, and you'll find the definition, " . . . something that is a perfect example of a particular style, something of lasting worth or with a timeless quality."

I just ran into a classic that can change the way we work and make our compensation design decisions far more effective. I feel the urge to share!

"The Inconvenient Truth About Change Management: Why It Isn't Working and What To Do About It" by Scott Keller and Carolyn Aiken was published by McKinsey&Company in August 2000. It's a must read for most of us as we struggle with incentive, recognition, merit and executive compensation designs that fail to live up to their promise. After all, pay-for-performance is, at its core, a form of change management since we are trying to shift behaviors and results from their current state to our desired future state where our strategy-driven performance targets have been met.

Keller and Aiken's inconvenient truths have "consistently delivered business results far beyond expectations" and they have the research to prove it. Their breakthrough is that while the programs that we design are entirely rational, a basic scientific insight about human nature is that, ". . . people are irrational in many predictable ways."

This is a fundamental truth of which HR is fully aware because it gets in our way every day. We can replace some of our frustration and improve our odds of leading successful change by applying their research-based insights to our purely rational designs.

Keller and Aikens list nine "inconvenient truths" that we can apply about ". . . the irrational (and often unconscious) nature of how humans intepret their environment and choose to act."  Here are four that jump out from the page -- but truly, don't miss the entire article. 

#1 What motivates you doesn't motivate most of your employees. Here's one that should influence compensation program design.  There are at least five sources of meaning that motivate employees. Research about employee preferences shows a consistently even 20% split across these dimensions: Achieving industry leadership, making a better society/community, improving things for the customer, belonging to a team and finally, impacting "me" personally. If you  tap into only one of these motivators -- for example, compensation's typical What's In It for Me (WIIFM) theme -- you will only build support from 20% of the employees.

#3 It takes both pluses and minuses to create real energy. Here's one that can really upgrade performance management efforts. Most of our programs ask people to look for the problems that need to be fixed and identify solutions. But research indicates that a relentless focus on what's wrong leads to fatigue and resistance. Analyzing what works and why also achieves marketedly improved results. Why do we do this so infrequently? Our excuse is that humans " . . . inherently dislike losses more than we like gains." When you drop this excuse, there's potential for huge performance gains.

#6 Money is the most expensive way to motivate people. You hear this a lot on the Compensation Cafe! Keller and Aiken provide some telling research indicating that small, unexpected rewards can have a disproportionately positive impact that can last for months. The reason? People see these rewards as a "social exchange" and feel a range of favorable emotions that don't come into play with compensation-based "market exchanges."

#8 Employees are what they think. This one applies to any dimension of pay-for-performance. In our rational program designs, we address behaviors because they drive performance. However, we ignore what drives behaviors. There is extensive research that shows . . . "Mindsets (the thoughts, feelings and beliefs held by employees) drive behaviors." If we want to truly achieve behavior change, it is misguided to keep insisting it's purely about good data and effective measurement.

Margaret O'Hanlon is founder and Principal of re:Think Consulting. She'll join Ann Bares and Dan Walter of the Compensation Cafe to speak the unspoken -- Everything You Do (in Compensation) Is Communication -- in an upcoming book. Margaret brings deep expertise in compensation, career development and communications to the dialog at the Café. Before founding re:Think Consulting, she was a Principal with Towers Watson. Margaret is Deputy Director of the International Association of Business Communicators (IABC) Pacific Plains Region. She earned her M.S. and Ed.S. in Instructional Technology at Indiana University, Bloomington. Creative writing is one of her outside passions, along with Masters Swimming.

Is Disclosure Good or Bad for Executive Compensation?

Today's Compensation Cafe post is a bit different. It is part blog post and part infographic. In the US, disclosure of executive compensation has been required, in some form, since 1934. Survey data regarding executive compensation has only rocketed to the forefront over the last 30 years. During this period executive compensation has increased at a rate faster than corporate performance, faster than the growth in company size and faster than the stock market.  This gives rise to the question: Is disclosure good for executive compensation?

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Compensation Peer Group Voir Dire

So, I was recently doing my civic responsibility by serving on jury duty. As it happens, when I am just sitting around, my thoughts turn to compensation issues (just like yours!). A strange and crazy thought came to me. Imagine if your peer group for compensation was selected in the same manner as a “jury of your peers” in a criminal court case. Besides it being almost glacially inefficient, how would this historically proven method (even the ancient Greeks used it) for choosing one’s peers impact the world of compensation?

Let’s first review the current compensation peer selection process. A company sets its goals. Next, it decides on its peers, sometimes with the assistance of an outside professional, other times using only internal expertise. Key components usually include the industry and size of the company. There is sometimes a bias toward companies with similar compensation philosophies and/or pay levels. In all cases, companies use a combination of quantitative and qualitative factors to create a group that meets their specific needs.

Then shareholders, or their advisors, choose a peer group based on their goals. These peers are chosen more “scientifically” and often do not take into account company culture, idiosyncrasies, history or future business plans. The peers chosen by the company and those chosen by investors are often quite different. Imagine if criminal trials worked this way.

Look at it from the defendant’s perspective. The defendant would have a professional, in this case a lawyer, simply pick twelve people who have similar interests and backgrounds. Perhaps all of them would have a criminal history. Maybe all of them had been falsely accused in the past. Maybe interviews showed the group unanimously did not support the law that was allegedly broken. Justice would be easy. The charges would prove groundless and the case would disappear. People who disagreed would scream and yell from the sidelines and demand to have a voice.

How would this look if the prosecution controlled the process? The prosecutor would gather a group of citizens who had previously indicated that they not only supported the law, but also blindly trusted the people enforcing the law. The prosecution would just need to explain why the person was on trial and the verdict would likely go their way. Of course, both extremes are equally unjust.

In the world of compensation, especially executive compensation, we have both scenarios happening at the same time. Because both sides choose peer groups based on their own perspective, they both feel they are right. Because each side is 100% right, the other side is required to be 100% wrong.

Now imagine a world where peer groups were chosen through a debate between companies and investors, with a trusted overseeing figure making final decisions (the “Comp Judge”). Each side would put up its list of peers. The company and the investors would then evaluate these at the same time. Each side would be given the opportunity to remove some, but not all, of the peers suggested by the other. The Comp Judge would be able to replace rejected peers with new peers until an uncomfortable balance was achieved. Neither side would be perfectly happy. Neither side could say the peers were completely wrong. Final compensation levels and strategy for a given company would be linked to peer group market data that was specifically chosen for the current season and neither side could immediately dispute the decisions made.

Each side could appeal in future years (let’s two or three) and attempt to modify the peer group. This would only be allowed as long as a Comp Judge could be persuaded that there was a real issue with the last peer group decision.

Of course, this is all fantasy because companies would never give up their autonomy and some shareholders will always think that some companies are trying to game the system. But, you have to wonder if compensation creep (the inexorable rise of pay) and the related wailing and tearing of clothes would calm down a bit and let us put more focus into strategy, communication and business results.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

It's a Good Time of Year to Be a Hero

This is an incentive time of year. Whether you're getting ready to pay out 2012 bonuses, putting the finishing touches on 2013 measures or tracking the Q1 payout for your short term plan, incentives are probably on your to-do list.

My colleagues sure have been thinking about incentives. Derek's suggested ways to key in on what really motivates in, "Bonuses, Perks and Benefits - Finding What Works (and What Doesn't). Dan reminded us that "mo' money" can be a pointless expense if it is not related to increased motivation in, "How Much More Is Enough?" Ann introduced us to "reward sensitivity" as the psychological term to describe how people react to the prospect of rewards in "Extroverts and Introverts, Rewards and Risks."

Now they've got me going. I'm picturing the meetings that go on in February and March about bonus targets and payouts. How perfunctory they tend to be.

    "I want to give you your bonus for last year. The amount is $15,000."

    "Here's how it was calculated. Your rating gave you this multiplier. You had a great year!"

Maybe the employee says something more than thanks. But probably not a lot.

Exaggerating? Well maybe a little bit, but not really. And what a loss of an opportunity. There's no way that you can have any insight into employee motivation given these kinds of interchanges. 

So, why not be a hero this year? Gather some real data about whether your company's incentives are worth the investment. Find out if there are lower cost motivators that would be considered as valuable to your employees.

How do you get the data? Here's what makes you a hero. You'll need to prepare your managers to have a better conversation. Give them a discussion outline and some direct questions to ask. Find out if the employees connect their effort with the size of their bonus (and why they see it that way). Ask them to blue sky it -- "If you had a chance to design the incentives for your job, what would they be?"

How can you motivate them to give you the info? Expect the feedback from the managers before the bonus checks are deposited, for instance. Or ask the employees to input the responses, with the same deal on the check deposit.

Chuck wrote a blog post this month to encourage you to be prepared when leadership asks, "What Do You Think?"  Your execs want you to tell them how compensation is affecting the business. They think you've got the data!

So many incentive plans are based on HR's best guesses/old information about what motivates or delivers. Get some data that will give you real insights on your employees' reward sensitivities. Slay the dragons. Be a hero.

Margaret O'Hanlon is founder and Principal of re:Think Consulting. She'll join Ann Bares and Dan Walter of the Compensation Cafe to speak the unspoken -- Everything You Do (in Compensation) Is Communication -- in an upcoming book. Margaret brings deep expertise in compensation, career development and communications to the dialog at the Café. Before founding re:Think Consulting, she was a Principal with Towers Watson. Margaret is Deputy Director of the International Association of Business Communicators (IABC) Pacific Plains Region. She earned her M.S. and Ed.S. in Instructional Technology at Indiana University, Bloomington. Creative writing is one of her outside passions, along with Masters Swimming.

How Much More is Enough?

Many of us spent time during the last week watching the news about a man in Southern California who was wanted on suspicion of murder, including the killing of at least one police officer. Horrified and fascinated, those of us in, or near, Los Angeles were aware of what this man looked liked. And most of us wouldn’t have hesitated to contact the police if we had even glimpsed this guy’s shadow. So, what does this have to do with compensation?

First, it was announced that a $1,000,000 reward was being offered for information that would lead to his capture. You read that right, one million dollars. As compensation goes, this is not chump change. A day or two later, while I watched the evening news with non-compensation professional friends, it was announced that an additional $100,000 had been added to the reward. One of my friends said, “Why would an extra $100,000 convince someone to call when the first million didn’t?”

As the compensation guy in the room, I tried to figure out a way to explain this from a compensation / behavioral economics / carrot-stick or any other perspective. As it turns out, I had nothing except. “That’s crazy!”  These were truly insightful words coming from someone who figures out effective pay as a profession.

Later, as I worked on metrics and goals for a long-term incentive plan, this brief conversation came back to me. I had to ask myself, “How much more is enough?” If you have determined that n dollars should be enough to get someone to do what you need, but the need was not filled, is offering n+10% really going to make a difference? And, how would you know?

This is one of the most important issues in variable compensation. In the age of Say on Pay it is even more of a factor in executive compensation. At what point do more dollars simply ensure that someone keeps working, without having making a material change their behavior? Before we decide that more money is the right answers, we need to ask more “why” questions. We have to be better than simply citing survey data as our reasoning.

When carpenters are asked to solve a problem, their first solution has something to do with wood. When a hairstylist is asked how to make someone look better, they usually start with hair. When a compensation professional is given an issue, we often start with money (or its direct equivalent). The next time the opportunity to offer a solution arises make sure you have considered as many “non-money” solutions as possible before you say “add another $100,000”. Trust me, your judgment will be lauded and your solutions may be far more effective.

Tell me about a time you added more money, but got nothing new in return. Or, share a time where you decided against more money and got better buy-in than might have seemed possible.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay