Compensation Cafe

Executive P4P: What Came First, the Chicken or the Egg?

It’s an age-old negotiation. Pay me more and I will perform.  Perform better and I will pay you. So, what comes first, the payment or the performance?

Hay Group’s Annual CEO Compensation Survey was released last week. The results show the highest weighting ever (31%) for long-term performance plans. Was this a result of executive pay programs that have been re-geared with performance metrics since the advent of Say on Pay?  Was this the result of CEOs performing better as more attention has been paid to their actions and behaviors? Or, was caused by something else?

Some have suggested that this is proof that if you perform better you get paid more. Others argue that this is evidence that executive compensation has been gamed to ensure amazing pay when things are great and pretty darned good pay as long as things are better than terrible. Hay Group’s recent article mentions that superior performance resulted in a cash-pay premium of only 9 percentage points over poor performance, even though the difference in net income was more than 70%.

Obviously the overleveraged hockey stock graph that is claimed by many to show cranked up pay of top executives doesn’t apply to cash compensation. The incredible (although inedible) stock market has driven equity compensation to impressive highs. (Those who express any surprise at this must either admit they do not understand the impact of steep drops in the market (2008 anyone?) or stop talking about executive compensation for ever more.)

Let’s face it, even less than stellar performers are lifted when the market rises.  And, with the leveraging action of stock options mixed with rising stock prices, it is hard to create separation between the high and low performers of the corporate world.

Another spoiler alert for the upcoming future are performance unit programs using TSR as a metric. TSR is impacted when the market gets hot. As top performing companies begin to plateau, investors push the prices of mid-range performers more than some underlying fundamentals may support in the long run. From 2010 to 2011, net income for the group measured increased by 13.1% and TSR went up by a median of 3.1%. From 2011 to 2012, net income increased by a far less impressive 2.1%, while TSR went up by equity spiking 14.4%.

These results give rise to the ongoing question: Whose fault is it that executive pay continues to climb, seemingly in every market turn?

The argument regarding executive compensation continues. When pay is up, one side picks a set of metrics to explain why it should have gone up more. The other side picks a set of metrics that shows why it never should have been so high in the first place.

Does better pay drive better performance? Of course! Not always, not perfectly, but…of course.

Does better performance result in better pay? Yep. Sometimes more, sometimes less than desired, but it certainly does.

Which comes first, the performance or the pay? In today’s world of executive compensation pay must be great to get performance, but performance must be great to justify pay in the long run. I guess this is just a long way of asking: What do you think?

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.

Nine Ways to Sabotage Your Incentive Plan

I continue to be amazed at the many ways that companies manage to sabotage their own incentive plan efforts.  Just for fun, I thought I'd compile a list of some of my favorite fails.  I'm sure you have your own to add!

1. The Borrowed Plan.  Why bother with the hassle of creating an incentive plan designed to support your company's competitive challenges, business priorities, values and culture when you can simply slap in the one your old employer used or the one that the guy from your networking group emailed you.  Easy, peasy.  Problem solved.

2. The Last Minute Roll-Out.  You just couldn't find the time to work on the incentive plan until your boss reminded you (again) that it's one of your KPIs for the year.  Thus reminded, you put one together quickly and slide it in place quietly two-thirds of the way through the fiscal year.  Maybe nobody will notice.  Heck, it's not like you're trying to get people's attention or change their behavior.

3. Refuse to Say What You're Trying to Accomplish.  Defining plan purpose and objectives? Seriously? This is the real world where we don't have the time for such academic exercises.  The Board has declared that there will be an incentive and so an incentive plan there will be.  I already have a design in mind that I like, so that's what we'll go forward with.

4. Ignore the Real Problems.  You and I both know that the reason for our drop in manufacturing productivity is the lack of organization and the poor communication surrounding all the recent product changes.  Engineering and manufacturing management haven't been on speaking terms in months, and plant employee morale is at an all-time low.  But senior management is insisting on an incentive plan to spur productivity, so let's give them what they want - no questions asked.

5. Ignore Funding and Cost Questions.  What will it cost?  What will it pay out under different scenarios? Return on investment?  Seriously, who has time to sit and figure all that out?  Plenty of time to worry about that at year end.

6. Documentation is for Sissies.  Formal plan documents?  You must be kidding!  We explained the basics of the plan at the quarterly staff meeting.  People basically get it - at least at a high level - and they're all excited about the possibility of a payout.  It's all good.  What could go wrong?

7. The Payout Fail.  So now it's year end, incentive goals were not met, the plan isn't going to pay anything out, and people are ticked.  Really ticked.  Yes, you probably could have explained it better and set the plan threshold more thoughtfully.  OK, it's a disaster.  So let's just pay them out something - anything - just enough to take care of all the complaining and get this whole thing behind us.  We'll start over with a fresh new plan next year, and this time we'll really mean it.

8. Squandering the Teaching Moment.  Plan roll-out was completed and the plan announcement memo from HR went out on time.  But now people are going to their managers with all these questions.  How is net income calculated?  What things can the company do to maximize earnings?  What does their department do that helps the company be profitable?  Are there things in their job that they could do differently to better their odds of earning an award?  Our managers are already busy and overwhelmed - they are not prepared for these conversations and they don't really have the time for the distraction.  What to do?

9. Balance? What Balance? Hey, management wanted us to use incentive to increase productivity, so we gave them a straightforward productivity-based incentive plan.  How were we supposed to know that a relentless, single-minded focus on productivity could result in problems with quality and employee safety?

What incentive plan fails have you witnessed?

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a wide range of client organizations.  Ann was recently named President Elect of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and has joined the Advisory Board of the Compensation & Benefits Review, the leading journal for those who design, implement, evaluate and communicate total rewards.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a bookhound and aspiring cook in her spare time.  Follow her on Twitter at @annbares. 

Creative Commons image "Spy vs Sci 567" by Anonymous9000

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

One Size Does Not Fit All

"If you find a good solution and you become attached to it, the solution may become your next problem." ----- Robert Anthony

I had an "aha" moment recently and then very quickly became embarrassed for what should  have been obvious in the first place.

“One size does not fit all”.  My “aha” was realizing that this doesn’t apply just to HR/compensation --- but everyone in business --- even (drumroll) CEOs!  

JC Penney, the department store chain, recently fired Ron Johnson their CEO of 18 months.   He came from Apple where he created the retail operation that was a smashing success. 

Many people believe his firing was due to poor execution of a strategy that hadn’t been fully thought out.  Some of his innovations were radical, like ending discount sales in a department store known for its markdowns. Perhaps the biggest reason outsiders give for his failure is that he did not listen to customers.

Let’s look a little deeper.  How could such a wildly successful executive from Apple fail so abysmally at JCP?  He obviously had exhibited both great strategy AND great execution at Apple.  Why would his ability to think strategically and execute flawlessly fail him at JCP?

The simple answer:  “One size does not fit all”.

He took a page from Steve Job's playbook:  “Customers don’t know what they want until you show it to them.”  That sounds arrogant but for Apple it made sense.  Let's look deeper still: “If you ask customers what they want, they will tell you, ‘Better, faster, and cheaper’—that is, better sameness, not revolutionary change. They can describe their desires only in terms of what they are already using."   But big wins happen when you go beyond better sameness.

Ron’s mantra at JCP was --- guess what:  “Customers don’t know what they want”.  Like Jobs he wanted to go with revolutionary change --- not sameness.   But JCP’s products are commodities ---- not revolutionary tech products.  Apple’s business model doesn’t work at JCP.

Here’s an example of someone who wasn’t effective at Apple.   John Sculley took his commodity business model at PepsiCo with him to Apple.  As the new CEO he tried to change Apple from a “techie” company to one similar to PepsiCo ---- buttoned-down, slick and marketing oriented. 

In the end he failed because he began producing mass market machines to compete with IBM and was opposed to licensing Macintosh software. Apple is not in the commodity business like PepsiCo. Its products are about revolutionary change. 

The point to all of this is that CEOs/top management take what has worked for them at Company A and then go to another company, another industry, another culture and try to replicate what was a smashing success at Company A.  And they fail.

Of course we already know this applies to HR and compensation.  Like we haven’t heard it enough?!

I tried to take a team bonus plan for manufacturing assembly lines (line A, B, C, etc.) to another company and it failed.  In the first company it created a healthy competition where assembly lines competed with each other, had fun and celebrated winning.   In the second company it led to divisive competition where teams laughed at each other's failures, took shortcuts in their work leading to defective parts and scrapped material.   Not so successful.  Different culture.

Morale of the story:  Think about what you need to create.  Is it a revolutionary design for a compensation plan that will satisfy a need the company doesn’t even know it has?   Or is an upgraded  “sameness” plan what is really needed?

Put this someplace where you will see it daily. "If you find a good solution and become attached to it, the solution may become your next problem."

P.S.  Aren’t you glad that compensation people like us aren’t the only ones that forget “one size does not fit all”?

Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and SeagateTechnology. 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. 

Image courtesy:  http://money.cnn.com

Memo to Dan Pink and Friends: Incentives Do Not Undermine Employee Motivation

Editor's Note: I am proud to feature today's guest post from Dr. Gerry Ledford, who shares some key findings and points from his presentation at this week's WorldatWork Total Rewards and his recent WorldatWork Journal article.  As a big fan of Gerry's work, I am particularly pleased to be able to share his thoughts and wisdom with the Cafe audience.  Take it away, Gerry!

The rewards field is filled with mythology about what research has to say, and practice is guided by the mythology. Consultants, famous executives, the business press, and ultimately academics who don’t know their stuff monotonously repeat the popular wisdom until it becomes generally accepted as truth.  All too often the body of research flatly contradicts the popular wisdom. 

 Two of my favorite myths are Herzberg’s claim that money is hygiene factor rather than a motivator (not supported by his own data, by the way) and the undying faith in the idea that a happy worker is a productive worker (the underpinning of much of the work-life and best place to work movements).  We will leave a discussion of these myths for another day. Here I focus on a destructive myth, namely that extrinsic rewards such as monetary incentives undermine intrinsic motivation to such a degree that they make incentives ineffective. 

You might imagine that effects of extrinsic rewards on intrinsic motivation is an obscure academic topic of little interest to practitioners.  If so, you would be wrong.  In fact, this position was championed the authors of perhaps the two best selling books on rewards in history, Alfie Kohn (1993) and Daniel Pink (2009).  For example, Kohn claimed in his 1993 book that, The bottom line is that any approach that offers a reward for better performance is destined to be ineffective.” Furthermore, “Possibly the most compelling reason that incentive systems fail is . . . (that) extrinsic motivators not only are less effective than intrinsic motivation but actually reduce intrinsic motivation . . . Furthermore, the more closely we tie compensation (or other rewards) to performance, the more damage we do” (emphasis in original).  Both books were heavily referenced, but neither author was particularly qualified to review the hundreds of research studies on this topic.  Kohn was a high school teacher and Pink was a political speechwriter turned author. 

The research says something quite different than Kohn, Pink, and their friends suggest.    

• Monetary incentives generally lead to increased performance.  There have been six major reviews of the literature on incentives in the past 20 years, and there were several others during the 1980s.  As I demonstrated in my presentation at the WorldatWork meeting this week, all these reviews reached the same conclusion: monetary rewards increase performance. Even academic proponents of the Kohn and Pink position such as Edward Deci concede this.  So much for the claim that any negative effect on intrinsic motivation is so serious that it causes incentive failure. 
• Extrinsic rewards actually can increase intrinsic motivation depending on how they are implemented.  All relevant academic theorists agree on this point.  Good implementation means communicating the importance of the task and how the incentive works; setting specific, meaningful goals; providing supervisor feedback and support; hiring employees who want incentives; and building an incentive-oriented organizational culture.  The idea that incentives are actually a source of intrinsic (not just extrinsic) motivation is not a surprise to anyone who has seen a salesperson, production worker, or CEO engrossed in calculations of their next performance bonus payout and developing tactics to maximize the payout. 
• Rewards have no negative effect on intrinsic motivation for boring, routine work because the tasks have little intrinsic motivation to reduce.  This is important because much of the work of our society would not be done if we did not offer extrinsic rewards for task performance.  In fact, incentives (but not salary alone) can increase intrinsic motivation in routine work.
• The negative effect of incentives on intrinsic motivation can be manufactured in the laboratory, where most of the studies in this literature were originally conducted, but the effect disappears in real-world conditions.  A review of 43 field studies found that incentives actually tend to increase intrinsic motivation.

Compensation professionals who are familiar with our topic may have wondered whether their work on incentives is an exercise in futility, and doomed to fail because incentives undermine intrinsic motivation. Fortunately, compensation professionals can rest easy.  Extrinsic rewards increase performance because they increase total motivation (extrinsic plus intrinsic).  Any negative effects of rewards on intrinsic motivation can be easily avoided by the sound implementation of incentive plans.

ENDNOTE: Readers interested in more information on this topic are encouraged to see the article by Ledford, Gerhart, and Fung in the current issue of the WorldatWork Journal (Q2 2013) entitled, “Negative Effects of Extrinsic Rewards on Intrinsic Motivation:  More Smoke than Fire.” (Access the article on the USC site here.) The article offers an overview of the extensive literature on this topic. 

Gerry Ledford is Senior Research Scientist at the Center for Effective Organizations, Marshall School of Business, University of Southern California.  Much of his professional work focuses on employee reward systems.  He returned to the Center for Effective Organizations in 2012; he was a key contributor there from 1982-1998.  From 1998 to 2003, he held leadership positions at Sibson Consulting. Since 2004, he has been President of Ledford Consulting Network LLC.  He received a Ph.D. and M.A. in Psychology from the University of Michigan.  Gerry has authored over 100 articles and ten books and he frequently speaks at professional events.

What Motivates Creative People?

Until now creativity has been viewed as important but not essential for the survival of a company.  Companies instead have focused on efficiency, productivity, and continuous improvement to lead them to success.

But priorities are dramatically changing. In a Global CEO Survey conducted by IBM, CEOs identified "creativity" as the most important factor for the successful company of the future. 

By “creativity” they mean truly innovative skills found in jobs like architects, data scientists, designers, etc. ---- skills believed to have true strategic value.   Any employee can be creative in his/her work, but the result is not likely to be a “show-stopper” for the company as would the work results of this “creative group”.

Creative employees are different—certainly in the workplace.   Most of them just don’t care about the same things as other employees.  Because they are different, managers have had difficulty knowing how to motivate them.  None of the usual practices that work with other employees seem to work with them.

Creative employees are intrinsically motivated.  They set extraordinarily high standards for themselves.  Research has shown that management can’t get them to work harder or perform better by saying “here’s some more money”.  When extrinsic rewards are being dangled in front of them like carrots on a stick, they feel externally controlled — which becomes a negative for motivation. It’s almost like the more you pay them to do what they love, the less they will love it.

Of course companies need to pay them “enough” to satisfy them. If they don’t, compensation becomes a sore point and distraction.  In addition, they might have a spouse who is less interested in creativity than in paying the mortgage and saving for the kids’ college.

But if management really wants outstanding creative performance, the key is intrinsic motivation– the work itself. 

This is consistent with what I have been told by a couple of my creative friends who have started up companies and now are venture capitalists.  It’s not the money that motivates them (even though they usually make tons of it).  It’s the challenge, the “aha” moments, the discoveries that lead to significant breakthroughs that are the “highs” creative people live for. It’s almost addictive, and it’s absolutely the driver behind their success.

Example:  The wife of one of these friends tells the story of one of her husband’s “aha” moments.   He was in the shower when he had an “aha” moment ---- bolted from the shower and ran naked and dripping wet through the house to his office pumping his arms and singing at the top of his voice.  His path took him through the family room where she was entertaining some friends.   He was totally oblivious --- caught up in the high.

So how can management use the work itself to motivate creative employees?

1)Provide them the right work environment ---- free from bureaucratic excesses, administrative work, unrealistic/changing deadlines, company politics and micromanagement.  
2) Don’t make status check calls and keep track of what’s done/left to do. Spend time with them and really listen to what they have done. Try to understand how they approach and solve problems and what has worked/hasn’t worked.
3) Give them an important problem to solve that the company urgently needs solved. Let them know (if true) that no one else has been able to crack it. This can be a real motivator.

Being told what to do and how to do it with no tolerance of failure, little expectation of recognition, and arbitrary deadlines, can kill motivation. But providing a positive atmosphere where failures are examined constructively, where management really listens and success is recognized in unique ways, can result in spectacular results.

It takes work.  But isn’t it worth it?   CEOs seem to think so. 

What has your experience been in trying to motivate “creatives”?  Any successes you can share?

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. 

Real-Life Experiment in Pay Transparency

Would you trust your co-workers with setting your job responsibilities? Would you let them decide whether to promote or demote you? How about determining your compensation? 

That's exactly what's going to happen on Fox's newest reality TV series, Toxic Office: Does Someone Have To Go?

According to a press release from Fox, the premise is simple: 

Frustrated bosses will hand over the reins of their companies to the employees, offering their respective staffs a chance to make changes in the workplace - even if it means letting co-workers go. 

In one of the previews, employees are gathered in a conference room watching a PowerPoint presentation detailing each employee, right down to salary:

The network says that the show empowers employees to solve their own problems. Reality TV issues aside, could such a setup in real life solve problems? Or would it create more problems? 

We talk a lot about creating transparent pay, but can it ever be a good idea to have complete disclosure, publishing every employee's salary company-wide?  

My concern is that emotion would come into play. Cliques, jealousy, and conflict are a fact of life in the workplace. Decisions might be made in response to a "can you believe he makes that much?" reaction, rather than considering the full picture.

There are numerous factors affecting compensation other than job title and seniority. Differing salary histories in previous employment, negotiations, and salary expectations play a role, as do market conditions, the importance of the position to the company, and individual performance. Could the typical employee get past the initial emotional response and make an objective decision based on a rational assessment of the full picture?

There may be a role for employee input for some types of compensation. For example, IGN Entertainment created a profit-sharing system where employees awarded each other "tokens". The more tokens an employee receives from his co-workers, the larger percentage of the profit she receives (Ann Bares provides the details at Compensation Force). But could this system work for base pay as well as it does for incentive pay?  

We'll have to tune in and see how all of this plays out, but my guess is that going beyond transparency and disclosing salaries to co-workers is likely to create more problems - the kind of table-flipping, name-calling drama that we've come to expect from reality tv - than it solves. 

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert quantitative analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics Inc., the host of The Proactive Employer radio show, and author of the upcoming book Compensating Your Employees Fairly: A Guide to Internal Pay Equity. Follow her on Twitter at @proactivemployr. 

Commissions for Everyone?!

What if you put every employee in your organization -- and I mean every last one -- on commission? 

Fishbowl is a private company in Orem, Utah with about 100 employees, whose cornerstone product is a popular inventory control solution for Quickbooks.  Fishbowl's revenues have increased by more than 60% year over year for several years, while its employee base has stayed relatively stable.  Average employee income increased by 19% in 2012.  What's behind this set of feats? According to CEO David K. Williams and President Mary Michelle Scott in their recent HBR blog, much of this success can be attributed to their placing every employee on commission.

How does that work?  From the article, it would appear that the plan is straightforward at its highest level -- beyond breakeven, two-thirds of additional revenue goes to commission pools for each department to share among its members and one-third goes to the company -- but quite complex in how individual awards are calculated.  Williams and Scott note that commission ratios vary from function to function (development versus finance versus sales, for example) and in many areas are based on other metrics more applicable to what those individuals can directly control.

The commission plan is different for every role and for every department. Ratios range from 10 percent salary and 90 percent commission for salespeople to 80 percent salary and 20 percent commission for programmers and engineers. This can make for a complicated structure at times. We're perpetually improving our ability to adjust and adapt.

We don't know and could certainly debate the specific mechanics of Fishbowl's plan, but its hard to overlook the fact that the company's leaders see some very tangible benefits from the approach, despite what they acknowledge are some technical, administrative and even legal challenges (such as compliance with FLSA overtime requirements).  These benefits include the following:

1. Having employees engaged in compensation decisions serves as an "invisible belt" to hold other key decisions -- such as staffing -- in check.  The developers, as an example, can consider the implications for their compensation in helping to decide whether the time is right to add another programmer or whether they can "crunch it up" for awhile longer, accomplishing work on their own and keeping the commission funds to themselves.

2. As any well-conceived broad based reward will, the plan helps drive collaboration.  Toward the end of each month, Williams and Scott note that they see individuals from every department offering resources and help to other divisions. "A developer or member of a support team may go to the sales department, for example, to say, 'I have an extra half hour. Is there anything I can do to help you finish a sale?'"

3. Not insignificantly, this approach helps the company manage expenses by keeping salaries low to market (by perhaps 20%, the authors guess), allowing compensation costs to flex with company income performance, yet ultimately delivering cash compensation that is 20%-50% over market norms.  Certainly not everyone will be able to adapt to the prospect of pay that can vary by as much as 50% every month and the authors admit that the approach has cost them some prospective hires.  They believe, however, that it is the more motivated and entrepreneurial people who choose to join the company and that is ultimately the best fit for the business.

Although the design and metrics may be fundamentally different, the spirit and intent of Fishbowl's plan mirrors that of traditional gainsharing programs, built for the purpose of "shared capitalism" where employees participate directly in -- and share the rewards of -- their employer's financial performance.  While gainsharing plans (pioneered and concentrated in manufacturing industries) have nearly dropped out of existence over the past 20 years, perhaps we are seeing their reincarnation among technology and emerging businesses, where founders are anxious to create new work paradigms built on involvement, transparency and the sharing of success.

That's what I think.  You?

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a wide range of client organizations.  Ann was recently named President Elect of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and has joined the Advisory Board of the Compensation & Benefits Review, the leading journal for those who design, implement, evaluate and communicate total rewards.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a bookhound and aspiring cook in her spare time.  Follow her on Twitter at @annbares. 

Creative Commons image "Cash" by seanmcmenemy

Top Performers Are Least Engaged in 42% of Companies - What You Can Do About It at Yours?

Have any of your employees “Gone Galt?” It’s a term I learned from the HR Capitalist, Kris Dunn. “Going Galt” means you follow the example of John Galt from Ayn Rand’s Atlas Shrugged. You’re sick of the lazy (ahem… the disengaged) taking advantage of your productivity, so you stop working so hard.

Employees going galt is terrible for your organization. These aren’t the low performers suddenly deciding to perform less well. No, these are your top performers, your high potentials, who realize there is no reason to continue to work so hard. Their exceptional efforts aren’t recognized and appreciated, so why bother?

Are you skeptical about this occurring? Research from Leadership IQ discussed in Forbes compared the employee engagement and performance results to each other, making it clear just how much of a reality this is.

“More than a third of companies are so dysfunctional, the best people don’t really care about what they’re doing and the worst people don’t know that they are doing a lousy job. Those are the findings of a new study by Leadership IQ, a twelve-year-old Washington, D.C. company that does employee engagement surveys and leadership training…

“Companies should be worried about these findings, says Murphy, because high performers tend to thrive on feeling involved and challenged. They also act as company ambassadors with clients, customers and potential hires. If they are bored or they feel under-appreciated, they will stop talking up their employer, mentally unplug from their work, start looking for opportunities elsewhere and eventually jump ship.

“As for low performers, companies want them either to become more productive or to disengage and find work elsewhere. Companies don’t want deluded low performers, who think they are contributing when they are really doing poorly, to stick around because they have fallen in love with their cushy jobs.”

More to the point, employee engagement surveys without analysis can tell a quite deceptive story. Leadership IQ reminds us of the importance of correlating engagement results with performance results because, quite frankly, we should be deeply concerned when our most engaged employees are our worst workers.

Can you blame your top performers for disengaging when they clearly see the worth of their efforts is the same as the sub-par work they see their under-performing colleagues delivering? I can think of little as demotivating as this. Intrinsic motivation is important, and this is one the fastest ways to destroy it.

That’s why I get concerned when people try to separate too fully intrinsic and extrinsic motivation – both are deeply intertwined. Restoring the balance in situations such as that described by the Leadership IQ research requires intentionally creating strategic recognition approaches to praise and acknowledge the top performers for their exceptional performance. You must differentiate recognition and rewards.

And don’t mistake the use of the term “differentiate” for how Jack Welch’s approach to differentiation has become misunderstood over the years. Remember, he said in Winning:

“When people differentiation is real, the top 20 percent of employees are showered with bonuses, stock options, praise, love, training, and a variety of rewards to their pocketbooks and souls. There can be no mistaking the stars at a company that differentiates. They are the best and are treated that way.

“The middle 70 percent are managed differently. This group of people is enormously valuable to any company; you simply cannot function without their skills, energy, and commitment. After all, they are the majority of your employees. But everyone in the middle 70 needs to be motivated, and made to feel as if they truly belong. You do not want to lose the vast majority of your middle 70 – you want to improve them.”

Recognition is strategically important. Differentiated recognition is even more so, to ensure the people at the top know they are the top, yet the people in the middle – the “Steady Eddies” who make it possible for your stars to shine – are recognized and rewarded appropriately, too.

Have any of your employees “gone galt?” Have you?

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.

Image credit: Sunshine State Sarah

ESPPs are a Dessert Topping and a Floor Wax

Employee Stock Purchase Plans (ESPPs) get a bad rap although they should be lauded in wonderment. The proof is in the number of different areas that claim full, or no, responsibility for these underutilized instruments. ESPPs are much like the old Saturday Night Live “commercial” for Shimmer (“It’s a Dessert Topping AND a Floor Wax”). Unlike Shimmer, the mythical SNL product, ESPPs are actually delicious, effective and available on your compensation store shelves today. If your company does not have an ESPP, or has not optimized the current plan, you should consider reading on.

ESPPs are a compensation tool and a benefit plan. They are a communication tool and a way to build ownership. They work well when managed by payroll, human resources or a dedicated stock administrator. Depending on the intent, design, communication and company stock price, they can also serve a myriad of purposes. How many compensation programs require employees to pay the company? How many benefit programs can directly align employee focus with the goals of shareholders? How many incentive programs allow participants to directly choose their level of engagement? How many equity compensation instruments have been expressly created for broad-based use?

I recently had someone tell me that they couldn’t see the purpose of committing $75 per paycheck to company sponsored health insurance, because there was no guarantee he would use it. While this same person may also not enroll in an ESPP, showing them the specific upside to their investment does not require them to imagine something bad happening to them. In fact, an investment in a generous ESPP and its subsequent returns may actually help cover the annual cost of their insurance. I first heard of this particular communication approach from a benefit professional who also managed their company’s ESPP. I have also heard a wide range of other creative reasons to join an ESPP from professionals managing these programs from other departments.

As a compensation tool, ESPPs are counterintuitive. The argument goes like this. Dear Employee: We pay you. You pay us some back. We use that money to make the company better. Later, we buy stock with your money and some of our money (the discount). You then make money by selling your stock, or by hanging on to it. (Note: You may also lose some or all of your money.) Let’s face it, it’s that last piece that makes these plans truly unique and causes some pause from both the company and employees.

I won’t go into a detailed risk analysis of ESPPs at this point, but when designed correctly the risk is fairly low and the reward is high enough to be compelling. The most recent plan design survey from the National Association of Stock Plan Professionals shows that plans with a 15% discount have an average of 41% participation. There are a wide range of potential features and limits you can craft for these plans. You can build a program than meets several, or only a couple, of key specific needs.

While we are giving 3% merit increases, we are also cutting other forms of equity compensation and competing in an aggressive talent market. We should all consider the potential of ESPPs. They are a dessert topping, a floor wax, a room deodorizer and powerful plant food. There are not many tools like this at our disposal. Does your company have an ESPP?  If not, why not?

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.