Compensation Cafe

The State of Bonus Programs * Increasing on All Fronts to Find, Keep and Encourage Talent

In my last post, I referenced academic research on the effect of bonuses on innovation in an organization. While interesting and informative, I prefer research and surveys from real-world work situations. Why the bias? Humans can be unpredictable and there are simply too many factors to attempt to control for in an academic setting.

To that end, today I share research from WorldatWork on bonus programs. The results reported are from a survey of WorldatWork members, including participants from an earlier survey on salary budget and others with compensation in their title. Findings reflect the turnaround in the economy, the reinvigoration of the war for talent and the attempts to find other ways to recognize excellence beyond diminishing merit increase budgets. Key excerpts from the survey are below.

“In this year’s iteration of WorldatWork’s ‘Survey of Bonus Programs and Practices’ all bonus programs have stopped their downward movement observed since the 2009 recession, with two of them (sign-on and retention) used at higher rates than in any other year of this survey. This may indicate that as the economy is turning around, the war for key talent may be heating up and getting and keeping the right talent is paramount, as can be seen in the sign-on bonus and retention bonus programs. In addition, with continually small incremental increases in merit budgets, spot bonuses may be a means by which to recognize talent for special excellence during the year.”

 Image Credit: WorldatWork

The War for Talent

I agree with the WorldatWork analysts (and numerous other industry researchers) – finding and keeping good people is once again a top-of-mind challenge for organizations across industries.

“Three of the bonus programs (referral, sign-on and retention) appear to be following similar trends correlating to a need by organizations to ensure they have the talent necessary to grow their businesses.”

But company leaders are missing an opportunity to feature their investment in employees as part of their culture when recruiting for new talent. This is a significant overlooked opportunity, in that candidates are looking for companies with an employee value proposition that shows the company is committed to helping them achieve their own goals for excellence throughout the year.

“Although most respondents indicated a positive effect of bonus programs on employee engagement, motivation and satisfaction, very few are consistently featuring any bonus programs when recruiting.”

Moving Beyond Compensation

Spot bonuses are particularly powerful for helping employees make this connection as they are, intrinsically, more frequent than an annual bonus and uniquely tied to the individual contribution of the person being recognized. That’s likely why organizations budget for these types of bonus programs more often than the others.

“While only approximately one-third budget for sign-on and retention bonuses, 41% budget for referral bonuses and 53% budget for spot bonuses.”

Of course, that doesn’t negate the importance of all four types of bonus programs, each designed to address different needs in the employee’s tenure with the organization. Bonuses can also give more flexibility than strict pay-for-performance merit increase structures or a limited compensation pool.

“29% of participating organizations are using all four types of bonus programs, an increase of 20% from 2010. This may be a sign of an increased strategy to use different means to recognize talent when other forms of cash compensation are restricted.”

Of the four types of bonuses referenced in the WorldatWork study, which do you use in your organization? Which do you see as more effective in achieving short- and long-term goals?

 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, Montreal and Boston. Follow Derek on Twitter at @DerekIrvine.

Relative TSR is a Bit Like Cough Medicine

A bedtime story for executive compensation professionals.

Little ExecComp wasn’t feeling well. Whatever ailed him had been lingering for a long time. While sometimes he felt great, other times he coughed so badly he feared he would be quarantined. His mom and dad, Mr. and Mrs. Board, had tried a long list of remedies including herbal equity baths, expensive cash showers and hot packs filled with perqs and deferred release solutions. Nothing seemed to work.

One night while watching late night TV, the Boards saw an advertisement from a guy with a loud voice and catchy accent. The announcer, a man named Dr. Actuary, PhD., claimed to have invented a wonder drug that would make hacking coughs go away. He presented happy customers; none of whom had a cough. He showed statistics, charts and results from scientific studies. Everything seemed to support his fantastical elixir.

He called his potion “RxTSR” and claimed it would cure ExecComp’s cough. In fact, it would make the growing boy the healthiest kid on the block and help him reach his ultimate potential. His testimonials made it clear that all of the coolest, best kids were taking RxTSR regularly. The Boards were excited. “We have finally found a solution to our problems”, they shouted.

Just to be sure, they called their doctor, Dr. ISS. Dr. ISS agreed that RxTSR was a wonder drug. In fact, she claimed that she prescribed it to nearly everyone. “Too much of a good thing is a great thing”, said Dr. ISS.

The Boards called Dr. Actuary and ordered a three-year supply of RxTSR. When they got it, they were surprised that it came with very few instructions. The bottle simply said, “Use as much as you think you need, whenever you think it is needed but, try not to use too much more than everyone else does.” The Boards didn't know how much or how often anyone else used, so they simply made their best guess.

At first little ExecComp seemed to be getting healthier. His cough started to fade and he seemed to be performing better. Figuring that if a little was good more would be better, the Boards gave ExecComp even more. Now he seemed a bit giddy. The solution seemed to make him feel better than good. He laughed more often and almost never coughed, but he also made some not too bright decisions. Interestingly, he seemed to start coughing whenever he wanted a bit more RxTSR.

The Boards noticed that Dr. ISS gave full support their approach. They also wanted to make ExecComp happy. So, they gave ExecComp bigger and bigger doses of RxTSR. They were surprised when ExecComp started performing worse while at the same time demanding more of the magic elixir. Even more troubling, ExecComp started showing symptoms of far worse problems! It turns out that RxTSR in small doses was helpful. RxTSR in larger doses worked almost like a hallucinogen and in very large doses RxTSR was simply poison.

While it took a few years, the Boards, Dr. ISS and Dr. Actuary, PhD finally learned that, like any wonder solution, RxTSR needed to be used in moderation and only with close oversight and constant communication regarding its effect. They also learned that many of their legacy solutions worked better when combined with RxTSR and that each one of ExecComp’s peers found a slightly different combination of solutions that worked best for them. Finally the cough went away and little ExecComp became truly healthy and was able to reach his potential. He made everyone around him prosperous and happy. And, they all lived happily ever after.

Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with corporate strategy and culture. Dan and fellow Compensation Café writers, Ann Bares and Margaret O’Hanlon will soon be releasing a new book on communicating compensation (shoot him a message for about early release.) Meet Dan in July 14 at the Boston / Connecticut NASPP All Day Conference or in July 15 in Denver for live presentations. Dan has co-authored of several books including “The Decision Makers Guide to Equity Compensation”, “If I’d Only Known That”, “GEOnomics 2011” and “Equity Alternatives.” Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Ordered to Calculate a Percentile from a Median Figure

Life for compensation specialists would be much easier if management stopped playing at being pay practice experts.  Witness a common dilemma faced by a hapless HR manager: 

We pay our Technical Staff at the 60th percentile of the market.  I have the survey’s min and max but must calculate the 60th%ile from the typical 50th%ile.

What is a total rewards professional to do, when commanded to make an impossible calculation?

Knowledge of the fundamental mathematical principles applicable to pay surveys might help avoid this problem in the future.  As explained in detail in professional discussions about percentiles, you must possess all the underlying observations to rank them in order to display the 60th%ile.  You can’t identify the data point where 60% of the elements fall below and 40% of the observations remain above it, unless you have all the underlying data point observation elements to stack up in a rank-ordered sequence. 

The survey provider must share all the data responses or should otherwise report where the 60th%ile point falls.  You can't calculate it from survey summaries that lack specific detailed facts.  Without each of those observation elements in each survey, it is impossible for you to pay at the 60th%ile of the market unless your survey REPORTS where that point lies.  Rather than guess where a different percentILE stands, it makes more sense to simply change your structure policy to pay a certain percentAGE above the mean average or median.  The 60th%ile might be 1% above it or 30% above it*.  You can't know exactly where it is without having all the observations in hand.  If top management bristles at a suggestion that their policy is deficient and should be changed, you could carefully explain that a reasonable estimate is the next best option. 

It might be possible to make credible guesses about where the 60^th%ile lies in a particular occupation’s ranked scale of values; but such projections can’t be accurate with any degree of precision and will vary by job, too.  Some clever comp pros make maximum use of the metrics they DO have, like the median (50th%ile) and the 75th percentile, for example.  Simply splitting the difference betwen those two will produce a "generously well above average" policy target without even trying to claim what percentile that guesstimate represents.  Using the midpoint between two known percentiles is both practical and defensible.

Here are real numbers.  Drawing from an extremely robust dataset encompassing the majority of workers in America, the 60^th%ile for a receptionist is less than 2% above the average and almost 4% above the median.  Comparable differentials for the 60^th%ile for an accountant are approximately 1% higher. Computing the midpoint between the median and the 75th%ile yields a number that stays very close to the 65th%ile. 

None of those comparisons are adjusted for industry, location or responsibility level; neither size nor profitablity are statistically predictable pay factors for those benchmark jobs.  The spreads cited above won’t necessarily apply to a small survey.  Any percentile break point for different jobs in your particular kind of enterprise in your principal location will probably be different, too.  Nevertheless, as long as you clearly define your assumptions (i.e. splitting the difference from known values) when making projections, you should be fairly safe from serious criticism.  Strong disagreements can be referred to math professors who can mediate the matter as experts or fight the statistical battle for you. 

The pay distribution intervals found in even the most robust survey observation samples are not consistent, constant or symmetrical and thus are very unresponsive to formulistic prediction.  So any guess will (not "might") produce errors.  When the correct answer is impossible because you lack the real data required for precise accuracy, all you can do is apply a SWAG. 

What do you think?

*From these analyses, paying 10% above the norm produces a number ranging from the 74^th percentile  to the 82^nd  percentile.  The rank relationships vary by job, by location and by comparison norm standard (average or median).

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. 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.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.

Creative Commons image "Numbers and Finance" by reynermedia, courtesy of seniorliving.org

Does Self-Help Help?

Doesn't it seem as though everywhere you turn these days you're faced with a bombardment of how-to advice from self-proclaimed “experts”?   Especially in Human Resources these people assure you that they understand your problems, and that they have the right solutions for you and your business.  All you need do is read a book, attend a webinar or buy their information-packed DVD.

Sounds like a diet pill, doesn’t it?  Simple and quick.

Promises of such quick fixes and overnight solutions cover every aspect of our business and personal lives.  Pick an issue and the answer is out there.  Someone can help us, and that someone is our “answer man.”  We only have to listen, watch or read whatever it is that they’re offering.   For a fee, of course.

You can’t escape the TV infomercials, the newspaper advertisements, magazine articles or even blogs and social media sites without an endless flow of subject matter gurus telling you that they have the solution for what ails you.

•        “Guaranteed to quadruple sales within twelve months”

•        “Maximizes HR effectiveness and value through the use of . . .”

•         “Keeping Leadership Talent Engaged”

•        “Designing Employee Policies for an International Workforce”

•        “The Five Causes of Low Morale – and how to avoid them”

•         "Our products, services and advice are certified, hospital-tested, government sponsored"

You get the point.

Now, here’s the but . . . .

If that’s the case, that the answer is out there – and for a price waiting for you - why do we continue to face the same problems over and over again?  Why are managers still making poor decisions, wasting money and creating employee morale screw-ups from dawn to dusk?  Why are the business headlines constantly reporting litigation over wrongful or illegal management behavior, or the dubious business decisions that send companies spiraling into financial trouble?

Isn’t anyone paying attention to the Answer Man?  Or is the advice simply a load of horse manure?  Are these experts really just spouting head-game theories and viewing business problems from an academic vs. practical viewpoint?  Are they rehashing old methodologies with new language and passing off their solutions as "new" thinking?

Whichever it is, these “I have the solution” messages never seem to stop.   Like a constant propaganda campaign radio-beamed across the border – the broadcast light is always on.  The buzz phrases may change from time to time, but our appetite for quick fixes doesn’t seem to ever diminish.

My theory or yours?

If the “experts” do have the answers - color me skeptical - we need to ask why their message is so often ignored.  Several scenarios are possible:

• Subject matter authorities often speak over our heads, using buzz phrases and $100 words

• Reading or listening to this stuff is hard work; the text is dry, boring and not often engaging

• Too much of the advice reads simple but is hard to implement

• Academics often lack credibility in the real world; they “just don’t get it”

• Ingrained biases and personal agendas often close down an open mind

Whatever the reason, the drumbeat of advice, whether new or traditional,  is not being absorbed and acted upon – because the problems are still there.

Therefore . . . .

I’m struck by the merry-go-round aspect of constant advice without real solutions.  We see a continuous need to enlighten people and businesses on how to be effective, but it’s a need that never seems to end.

Maybe the analogy to a diet holds some truth; consider how many books are out there on that subject – yet up to 30% of the population remains obese.

 There’s an old saying, that if you build a better mousetrap the world will make a path to your door.   So if common sense and up-to-date technical knowledge point the way to a better tomorrow, why do so many companies and their leaders stay in the dumb zone?

I’m thinking that the message is either too boiler plate generic, the audience isn’t paying attention, or perhaps we’re all being scammed by re-packaged “new” thinking.

Which is it?  Because the problems are still out there.

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, "Books in a Stack," by Austinevan

"It's a Fact that Employees Are Underpaid"

Forbes.com calls itself, "Information for the World's Business Leaders." A must-read for most serious business people, it has never been known as an advocate for social change.

Yet what was its most popular blog post today? An article in the "Entrepreneurs" section titled, "Employees who stay in companies longer than two years get paid 50% less."

Cameron Keng makes a well reasoned case for this claim. His analysis of compensation practices is  insightful. His conclusion? "It's a fact that employees are underpaid." His suggestion to his fellow employees?

Instead of focusing on things we can't control . . . focus on the things we can . . . I don't fault employers and businesses for the market because it's their right and duty to maximize their profits. But, as an individual, you're a CEO of one, and you have to maximize your profits.

During 2014, we've heard more and more open expression of the belief that employers are holding out on employees. I have encouraged our readers to recognize that this message is trending and may have a long tail. The debate is growing louder and more publicly prominent. That why I can envision it ultimately rising to the volume of the current hubbub on executive pay.

I'm sure you all have opinions about what's working or broken in employee pay. And I'm not saying that Mr. Keng is one of the new prophets. During my career, it's always been a reliable practice to increase your salary by jumping jobs. It's more that he was given a prominent place to make a very good and public case for his opinion. And employee pay is a topic we rarely, if ever, have had public discussions about.

We could talk more (in a very heated way, I'm sure) about the current state of employee pay, but the purpose of my article is practical.

1. Prepare your managers to talk with employees about their current pay. There is nothing harder to counter than a point of view that is fundamentally valid. Managers have to talk with employees whose salaries have been smothered over the last seven years. Your managers need your help. If you don't give it, be prepared for the fallout. Eventually, they will not want to help you.

2. Be a leader when it comes to merit budget discussions this year. Don't just follow the execs because it's safe thing to do. They actually may be looking for someone to break the ice. Say what needs to be said and invite a discussion.

When it comes to increases this year, why stick with "It's what our competitors are doing?" There's a weaker case for sole reliance on competitive practice this year than there ever has been in my (long) career. For 2015, the most powerful decision drivers should be how your company is doing and whether it is willing to look to the future when it pays employees.

Remember the 7 things that great employers do? (If not, check out my June 11 article.) #4 is that, "They never use a downturn as an excuse." Well, that boat may have sailed but #1 is that, "They have involved and curious leaders who want to improve." Give your leaders the benefit of the doubt. Invite them to the table and hash this out together. You may not be able to afford the merit budget you wish you could have, but at least your options would have been discussed openly.

3. If this all sounds too sketchy for you, check out my April 15 article, "Will a Word to the Wise Be Sufficient?" It's a more detailed discussion of these communication issues. I think it's time you took them seriously.

Margaret O'Hanlon, CCP 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 so ready to be released in the coming weeks that we have a cover and nine pages in layout. 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 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.

Think Globally, Act Locally --- Sure About That?

“When in Rome, do as the Romans do”. Meaning when in other countries follow local practice.  Does this make sense all the time?   What about ethics?  Should companies follow “situational” ethics in each country?

Ethics is a very complex issue and can be a tremendous “landmine” for American companies. Companies have nice, neat Code of Conduct policies --- but they’re usually very high level and don’t get down into the details. There have been big scandals. Apple/Foxconn and Nike are a couple that come to mind. And these scandals do great damage to company reputations.

After a wave of demonstrations and consumer boycotts, one American company, Nike, required that all employees as well as suppliers’ employees worldwide be at least 18 years old.  While this satisfied Nike’s shareholders and the general public, it caused problems in some foreign countries where hiring workers as young as age 14 is common practice.  Not hiring them creates a financial hardship for their families who rely on their wages for survival. 

Now let’s talk about compensation.  In very poor emerging countries like Cambodia, Bangladesh, Vietnam, Sri Lanka, workers make extremely low wages. Workers are paid amounts barely enough to survive on, even considering the lower cost of living.  It’s not just the garment industry anymore.   It’s occurring in other industries such as high tech and pharmaceuticals which have typically been among the higher paying industries.

Designing compensation packages for employees in these impoverished countries is a daunting task as there’s a staggering lack of data about wages.  Government data may be available, but it’s doubtful that it’s accurate.  Countries may have official minimum wage levels, but the lack of uniform regulations across industries and even within a country remains a huge problem.  And if there are laws, they are not always enforced.  Keep in mind that employees rarely progress beyond minimum wage even with experience.  Their employment is sort of like a revolving door --- they’re fired by one company and then hired by another company on a routine basis.  And each new employer starts them off at the same or lower wage.

There is one available survey provider that I know of --- Birches Group headquartered in the U.S. and managed by Warren Heaps.  This firm conducts compensation surveys in many low wage countries.  With effort and perseverance, pay practices can be developed for company employees.

But here’s the “kicker”.  The ethical issue comes into play when we look at what company suppliers pay their employees.  Unlike bribery (see FCPA) there’s no U.S law that holds American companies legally accountable for what suppliers pay.  But it can cause great damage.  The Apple case is a perfect example. Among other unethical labor issues, Apple’s contractor, Foxconn, paid extremely low wages.  When word got out, the press had a ball with it, Apple’s shareholders and customers were upset and Apple’s reputation suffered because of it. 

We can debate the finer nuances of global ethics “'til the cows come home” (Texas phrase). In the meantime I believe Compensation needs to step up and propose some safeguards regarding supplier worker pay.  Additional clauses could be included in supplier contracts (such as Levi Strauss).  And if at all possible either independent or company auditors could look at worker pay in any supplier audit they conduct.   Nike does this regularly now.

Top management needs to be made aware of potential supplier risks. They may believe it’s the supplier’s responsibility to make sure local wage laws are followed and their workers are paid fairly.  But they must realize that if abuses surface, the company’s reputation that will be in jeopardy.

Sometimes educating management is all Compensation professionals can do.  But we can do that much can’t we? 

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 has been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications. 

Your Compensation Philosophy: It's Not What You Say, It's What You Do

I have to smile when someone says: "We've never had a compensation philosophy."  The fact is, they've always had one, since the very first time the organization paid an employee.  They just haven't committed it to writing yet.  Or, perhaps, owned up to the truth of it.  But it's there.

Even better is this: "We've never communicated our compensation philosophy to employees."  You don't need to, they know what it is (or at least they think they do).  The question is ... do you?

Your compensation philosophy isn't what you say.  It's what you do. 

Like many a politician, it can be easy for us to get caught in the trap of falling for our own rhetoric.  We allow ourselves to believe that the act of saying something makes it true.  We lose sight of the messages that our organizations' actions are sending.  Your employees may or may not know the words in your compensation philosophy, but they are watching it in action every day and drawing their own conclusions.

Here's one of the lessons we'd better take from this fact.  Whether "creating" a compensation philosophy or reviewing an existing one, it's a smart move to start the process by taking a good look at what's really going on.  What is the reality of your compensation plans and practices?  And what is their reality as perceived by your managers and employees?

To answer the first, you'll need to do some traditional compensation benchmarking and analysis.  How competitive are your pay structures, plans and actual practices against the norms of the labor market(s) where you compete for talent?  Does your competitive reality match your competitive intent?  If not, better get a clear bead on where it falls short.

Next, let's get some data on perceptions.  Some of this may be captured in a regular employee survey effort.  Or it may be worthwhile to convene a few manager and/or employee focus group sessions (or engage an outside facilitator to do so on your behalf).  The purpose of this is to understand how managers and employees experience your compensation philosophy on the ground every day.  What do these groups believe are the top priorities of the current compensation program?  What should they be?  What do these groups believe are the organization's competitive goals for pay -- and how well are those goals being met?  What gets recognized and rewarded?  What should get recognized and rewarded?

A lot of work?  Yes it is.  But a reality check like this may be essential for your compensation philosophy to have any hope of being credible.

Actions speak louder than words, as they say, and we both know that your employees understand the difference.

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 range of client organizations.  Ann and fellow Compensation Café writers, Margaret O’Hanlon and Dan Walter will soon be releasing a new book on communicating compensation - stay posted! Ann serves as President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.

Image "Cinema Clapboard" courtesy of renjith krishnan / FreeDigitalPhotos.net

Want More Innovation? Offer Lower-Value Rewards

Generally, I’m leery of academic research of workplace scenarios. It can be difficult to mimic all the nuances and vagaries of people, how we interact and how we behave. But academic simulations can provide fodder for thoughtful consideration and comparison to your own organization and experience.

Consider this research reported in the Harvard Business Review blog and conducted by management professors from the University of Southern Denmark and the Frankfurt School of Finance and Management.

The Test

Fundamentally, the professors wanted to see if offering employees more high value rewards for innovation would generate a better innovation pipeline than offering low value awards. In their own words:

“Our goal was not to mimic the innovation process at any specific firm, but to develop a model that was as simple as possible without oversimplifying. The virtual organizations we designed consisted only of employees that could search for ideas and a top management that selected the best ideas and shared a part of their value with the inventor. Low-powered rewards typically shared 5% to 10%; high-powered shared roughly 30% or more.

“The model’s underlying assumptions are based on past empirical findings—for example, that employees respond positively to incentives but become discouraged by low odds of securing a reward or by being overlooked. We also made sure our model reproduces what we already know about the innovation performance of real companies.”

My own experience consulting with companies of all sizes and stripes bears this out. We think of it in terms of the “winners’ circle.” When all employees know only the top 10% of high performers will ever be eligible for recognition and associated rewards, the “mighty middle” – the 70% of employees in the middle of the performance bell curve who are consistent performers day after day – become discouraged and disengaged. Who can blame them? In such a structure, they often come to see themselves as “losers.”

The goal should be to properly calibrate your awards approach (more on this in a moment) so you can reach far more employees with recognition rewards, thereby creating a much larger winners’ circle.

The Findings

Giving large rewards exclusively works against a company’s intended goal, actually delivering the opposite of the desired results. The findings of this study on innovation bears this out:

“As our simulated employees responded to their firms’ offer to share a large amount of an idea’s value with them, they put more effort into the search for innovations, and ideas poured forth. The companies were quickly hampered by what we dubbed the ‘congested project pipeline’ effect: Because taking action would have required investing resources such as management attention, the firms were unable to act on most of the ideas that were generated.

“As employees competed for space in our simulations’ increasingly crowded idea pipelines, more and more came away empty-handed and gave up trying further. This demotivation reduced their effort and prevented them from putting in the time and energy needed to come up with breakthrough ideas.

“We found in our model that low-powered rewards such as 10% of the idea’s value produced a healthy number of ideas (the vast majority of them, course, being incremental ideas) without clogging the pipeline or crushing employees’ hopes.”

This is where calibration of reward value plays an important part. If the goal is encourage a culture of innovation, then several award levels that recognize contributions to idea generation, execution and ultimate result are more appropriate. Rewards (and amount of reward) depend as much on level of effort, impact and result as on contribution of ideas. This kind of structure not only encourages innovation idea generation, but also willing hands to bring the ideas to fruition and all that process entails.

How are rewards structured in your organization? Do they tend to more high-value awards given infrequently to few people or many lower-value awards given to multiple people more frequently?

 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, Montreal and Boston. Follow Derek on Twitter at @DerekIrvine.

You Get 2 Shares and You Get 4 Shares and So on and So on…

Geometric progression of pay from one pay grade or level to the next sounds pretty crazy. But, while doing research for a recent presentation on equity compensation, I found more than one source that stated that doubling the equity from one level to the next was a standard rule of thumb.

When we look at the expansion of executive pay versus broad-based pay, we tend to focus on the volatility of stock market as a driver of the spreads between the top and the bottom. Market volatility certainly has an impact, but it is our legacy approach to equity that is likely the biggest contributor to the inequity of equity.

Like any compensation element there are inherently positives and negatives to equity compensation. This makes equity great for some uses and poor for others. Stock options, restricted stock units and employee stock purchase plans are often demonized by shareholders, politicians and the media. Compensation professionals often misunderstand them. Their impact has been distorted due to an oddly, non-compensation approach to their use.

Let’s transfer the practices for equity into cash. Entry level 1 employee is paid $30,000, Level 2 is paid $60,000, Level 3 $120,000, manager $240,000, VP, $480,000, SVP, $960,000, EVP, $1,920,000 and CEO $3,840,000.  I have seen a lot of pay structures, but none that look like this! However, this is how many companies use equity compensation.

And, equity has an additional potential multiplier built in which is the stock price. If the value of each unit, share or option increases during the vesting period, this unsupportable progression is amplified. It isn't unheard of for values of each share to increase ten-fold or even hundred-fold during the life of an equity grant. In a volatile market (up and down movement), this is even more likely than during periods where prices are only going up.

How did we get to this place? Twenty years ago equity, mostly in the form of stock options, had “no value” at grant. Nearly every equity plan was managed outside of the compensation area. In fact, the majority of these plans are still managed or controlled by legal or finance departments. Add in the general lack of understanding by compensation professionals and an effort to “keep things simple” and you have a recipe for explosive differentiation.

Since the decision makers at the top are benefiting nicely from this structure and no one is spending much time and effort educating them on a better approach it is unlikely this will change. The graphic below shows the volatility of the stock market from 1913-2013 aligned with CEO pay ratios from 1960-2012 overlaid. Given the information above it should be no surprise that pay spreads have mimicked the volatility of the stock market. While I have seen no specific data to support it, I would hazard a guess that the spread between each level below CEO and the average employee is unequal in halving proportions.  This is due simply to our approach to using equity compensation.

Perhaps the real future revolution in equity compensation isn't better performance metrics and linkage, but a better approach to determining grants sizes. Maybe we can call this new, more balanced, approach the “rule of the opposable thumb.” Does your company have a great way to determine equity compensation amounts for each level of staff? 

Dan Walter is the President and CEO of Performensation a firm committed to aligning pay with corporate strategy and culture. Dan and fellow Compensation Café writers, Ann Bares and Margaret O’Hanlon will soon be releasing a new book on communicating compensation (shoot him a message for about early release.) Meet Dan in July 14 at the Boston / Connecticut NASPP All Day Conference or in July 15 in Denver for live presentations. Dan has co-authored of several books including “The Decision Makers Guide to Equity Compensation”, “If I’d Only Known That”, “GEOnomics 2011” and “Equity Alternatives.” Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

Beware Equal Increase Rates

Beware the temptation to blindly endorse recommendations to apply equal rates of increase.  Watch out for signs that the peanut-butter approach may be imposed on your organization.  All things are not universally equal, particularly when it comes to relative rates of change. 

As employers near the midpoint of the calendar year and begin to plan payroll budget increases for the future, this is an excellent time to remind everyone that change rates are relative and highly variable.  It should be clear that few changes are universally proportional.  Losing 5% of your weight doesn’t mean your shoe size also shrinks by 5%, too.  An 8% pay increase rate required in a red-hot labor market like the Bakken Range of North Dakota does not compel that same rate of increase to be applied in all other regions.  The market rates that lag in a depressed community with high unemployment levels might not reflect the appropriate situations elsewhere.  Action needed in one place does not automatically mean that same action must be duplicated in every location. 

The relative rate of change needed to respond to any new reality should be based on the absolute differences between where you are and where you need to be for individual jobs in specific locations in your relevant industry.  Leading the market with some jobs justifies a lower relative increase rate to your higher bases, while lagging the market argues for a higher delta to close the bigger shortfalls in the pay of those positions.  Compute your desired rates of increase from the gaps between actuals and targets rather than work backwards from what others have done!

Well, duh!  You might say that, if you are a regular habitue of the CompensationCafe where well-seasoned tradecraft experts share thoughts.  But the vast majority of the population does not have the knowledge and experience displayed here.  Those who blithely assume that professional reasoning will triumph over popular myth should remember that counting on clear logic to prevail all the time is a dangerous gamble.  Even top managers can display deficient understandings that may rebound to wreak havoc long into the future.  The bad pay decisions of yesterday already haunt your current payroll; and the mistakes of today will become the status quo legacies of tomorrow.  No law requires blunders to accumulate over time, however.  Recurring problems can be prevented by timely interventions.

Merely issuing a cautionary notice might not be enough.  Repeated warnings about the highly variable absolute rates of change by job and major differences by industry often don’t reach the right audience.  Decision-makers seeking quick and easy answers are prone to seize upon single metrics of change rather than embrace the enlightened recognition that change is complicated.  Yes, we realize that frontier trailblazers didn’t find their way through the mountain passes by focusing on soil details inspected under a magnifying glass, but the need for a wider perspective can be overlooked when a narrowly focused view is presented by a powerful executive.  Summarized results from small surveys of a limited sample of observations (especially if the sample is biased or the results are unweighted), can be terribly misleading.  What is supposed to happen in a restricted microcosm may be interesting as context, to the extent it is relevant, but it should not determine what is in the best interest of a unique organization. 

The message must be shared with the key decision makers.  If these warnings about oversimplifications save even one enterprise from a terrible mistake, then we who make compensation recommendations have done our jobs faithfully.

 E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. 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.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.