Compensation Cafe

Stop the $600 Annual Incentive!

As regular readers know, I am someone who does a ton of incentive compensation work. I believe in incentives and their ability to align people with the culture, strategy, and goals of a company. I know incentives work when properly designed and communicated. I also believe that managing people is more important than incentivizing them.

This is a quick article about well-meaning but misguided short-term incentive plan design. When business leaders are asked to identify critical metrics for success, we often get two types of answers. The first is a big-ticket item that aligns well with management. These metrics are important, but they may not always resonate with rank-and-file employees. The second answer is a laundry list of all the things that must be accomplished during the upcoming year. In between these answers is the real core of your incentive plan.

A few years ago I wrote about the Incentive Plan Rule of Three. This can be summarized as: “No more than three metrics (KPI), no more than three defined goal levels, no more than three incentive plans for any one individual.” This rule allows you to focus your incentive on what matters, but it also helps make those incentives meaningful.

Over the years I have seen many companies with “multi-metric” incentive plans. These plans usually have one big goal that covers 30-50% of the total incentive target and 4 or five smaller goals that break down the remainder of the incentive target. These may be great when target values are large, but they are just plain crazy for your mid-level and lower-level professionals and support staff.

Let’s do some math!

Imagine Sally makes $60,000 a year. You have created an incentive budget targeted at 10% of her pay. There are six metrics that drive the target value. The main metric covers 50% of the total, the other five metrics are evenly split at 10% each.

$60,000 * 10% = $6,000

50% of $6,000 = $3,000 (not terrible)

10% of the remaining 50% ($3,000) = $600 per “mini-metric”

This means that you are asking Sally to focus on something specific and work to attain a higher level of performance for about $2.75 per day, or $0.35 per hour. Sally must keep $0.35/hour. as related to a specific mini-metric top of mind for the next year and the hope that, after taxes, she has “won” the money to buy her kid a Lego set! To be perfectly clear. To be clear, Sally isn’t going to do that.

This is where managing beats incentivizing. The leader who chose this metric was probably right in defining it as important. But the return from the incentive plan will have no impact on the achievement of this goal. Clarifying this metric as a management goal for the leader and ensuring that they follow through on communicating and updating progress throughout the year will have far more impact. This is where compensation professionals have to educate. (Don’t “push back.”  Teach.)

With a bit of math and discussion about best practices, you can usually get leaders to reevaluate and narrow down the focus of the incentive plan and help everyone have a more incentivizing year.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.

Cafe Classic: Performance Pay for Gig Workers?

Gig platforms are everywhere now. If you need something done, whether it’s a simple microtask or a complete overhaul of your marketing strategy, chances are there’s a gig worker on a platform somewhere that can do it for you.

Gig workers aren’t just for small start-ups anymore. In a recent report from the University of Oxford’s Internet Institute, more and more Fortune 500 companies and multinational enterprises are incorporating platform sourcing into their business models. According to this report, platform sourcing is gaining in popularity because of (1) easy access to scalable sources of labor, skills and expertise, (2) reduced start-up and transactions costs, and (3) the elimination of conventional hiring barriers.

For many of us, the gig economy is something that’s indistinct and difficult to wrap our arms around. There isn’t a lot of reliable data about this growing piece of the workforce. Well... we think it’s growing, but we don’t know for sure. The last time the U.S. Bureau of Labor Statistics surveyed the contingent workforce was in 2005! (a new survey is in progress, but results won’t be available for a while…)

If you’re thinking about tapping into the pool of gig workers, you need to think about how you’re going to pay them. On Mechanical Turk, most microtasks are paid at a fixed rate; if you complete the task successfully, you earn a few cents. Over the course of a full day, Turkers can earn an average $6.00 to $12.00 per hour. Workers on other platforms, performing more complex tasks, can earn hundreds or even thousands of dollars per month.

Regardless of the type of task or platform used, compensation is typically output-based: the pay that gig workers receive is based on the success or failure of the gig. This is fine if the outcome of the gig can be categorized as “yes, you did it” or “no, you didn’t do it.” It doesn’t work so well for gigs where the quality of the output matters.

One of the unique features about the gig economy is that workers have discretion over how much they work. But just like the non-gig economy, workers also have discretion over how much effort they put into that work. As the tasks gig workers perform become more complex and mission-critical, employers need to consider that discretionary effort, just like they do for conventional employees.

There's some interesting new research-in-progress examining performance pay for gig workers (for example, Sebastian Butschek, Patrick Kampkötter and Dirk Sliwka, "Paying Gig Workers", unpublished) and I'm excited to see what this new avenue of research will reveal. In the meantime, here are some easy and practical suggestions for paying your gig workers based on performance:

• Early delivery bonus: If the timing of deliverables and/or hard deadlines are critical to your project, consider offering an early delivery bonus (assuming quality standards are satisfied). For time-sensitive tasks, a small early delivery bonus could be the little extra incentive your gig worker needs to make sure things are wrapped up on time.
• Cost control commission: Cost control is always important. But if cost savings are make-or-break to your project, consider offering your gig worker a percentage of the cost savings she generates for you. This little commission could motivate your gig worker to find alternative suppliers who provide the same quality inputs at a lower price and be a win-win for everyone. 
• Rubric-based quality bonus: Quality bonuses can be tricky. It's hard to know how good is good, and how much better than good really good is. Rubrics can be useful here. A rubric is nothing more than a document that articulates the expectations for an assignment by listing the criteria (what counts) and describing levels of quality from poor to excellent. If you can all agree on what constitutes "poor" through "excellent" quality, you can offer a 0 / check-minus / check / check-plus bonus scheme.
• Retention / repeat worker bonus: If you have a really good gig worker, you need to actively try to maintain that relationship. According to a study by JP Morgan, one in six online platform workers is new in any given month, and more than half of platform participants quit within a year. If you find someone who does a great job and is a great fit for your organization, you might want to incentivize her to continue to accept your future gigs.

There are numerous ways to incorporate performance pay into your compensation structure for gig workers; these are just a handful of ideas to get you thinking.

Performance pay is not going to be a component of your pay strategy for all of your “gigged” tasks. But for more complex tasks, those that are time sensitive, or those that require a little more than “standard” effort, you should consider the possibility of paying for performance. I'm sure you can find a gig worker to help you think it through...

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.

Cafe Classic: Trouble Getting Support for New Pay Plans?

EEditor's Note:  Maybe you’re asking the wrong questions.  Dan Walter explains in today's Classic.

I often hear statements like, “Our employees don’t value that. We asked them.” Overall, we have improved our efforts to engage our employees in the participation in new of pay programs, but perhaps we should be asking different questions.

Asking your employees if they want equity compensation or a new type of STI is kind of like asking a two-year old if they want a new kind of food.

The answer will almost always be no.

New food, like a new pay plan, is an unknown and therefore a risk. In a world with so many “knowns,” why risk it by trying something new? This is particularly the case when the new thing is different or hard to understand.

You need to explain the new thing before convincing them to try it.  Then you need to confirm that they like it.

Instead of asking people if they want to participate in a stock option plan, or telling them that they should want to be in the new annual incentive plan, think about starting the discussion with the conclusion or results.

Instead of, “Would you like to get stock options?”

Try, “Wouldn’t be great if you could be paid in a way that gives you more money as your hard work contributes to the company’s success?"

Or, “We’d like to find a way to have your pay more closely aligned with the growth of the CEO’s pay over the next few years. Let’s talk about some ways to do that.”

You just can’t expect people to inherently accept something new. You need to guide them into seeing potential solutions from new perspectives. You can start by demonstrating how the new solution is right before you ask them if they would like to try it. Every food my son has eaten (and he eats almost everything) was first consumed by an adult in front of him.

The same is true when discussing new pay with your executives or Board of Directors. You can’t just expect them to support a move from a legacy program to your new cool idea. Unlike you, they haven’t read the articles, taken the classes, and met with colleagues. They haven't been thinking about the solution and working out details in their heads for months. They may not have yet concluded that the current program isn't perfect, or that a new solution may be better.

Blindly asking if they will approve a switch from the current LTI metrics to something else won't work. Telling them that you "need" to change to RSUs from your current Stock Options is unlikely to get enthusiastic support. Try instead to show the goals or objectives the new plan is designed to achieve (go beyond the numbers and dig into the human capital goals). Then show where your legacy programs have strengths and weaknesses and how a new approach will provide better success.

Only then ask the question you need to have answered. "Can I get your support in completing a full recommendation for a new approach that may like this…?" That is when your real work begins, but that's fodder for another article. 

Of course, this doesn't work for every tool and every person (some kids are super picky), but you will find it will work for most. And, when it doesn’t, it provides new data on what you may want to consider before the next “ask.”

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.

Cafe Classic: The Three Gravitational Laws of Performance Pay

Editor's Note: Did you know that your performance pay programs are subject to the laws of gravity? Read on ... and Stephanie Thomas will explain!

One of the immutable truths of our universe is gravity. When you jump for joy, throw a ball, or drop your car keys, you experience gravity. If you own a cat, you probably observe gravity at work frequently; my cat pushes things off counters and tables all the time to ensure that gravity is still turned on and working properly. In short, the meaning of gravity in our day-to-day lives is "what goes up must come down."

You may not recognize the gravitational constant in its mathematical form:

G = 6.67408 X 10^-11m³kg^-1s^-2

But you certainly recognize it when you experience it, and you know that there's no getting away from gravity. 

As it turns out, gravity has implications for your performance pay programs. Whether it's the affordability of your program across business cycles, the efficacy of your program to build the value of your organization, or interest in your program (and in pay for performance in general), the gravitational adage of "what goes up must come down" couldn't be more true.

(1) Your ability to afford your performance pay program will go up and down. The expansionary and contractionary phases of the business cycle are as close to a "law" as you an get in economics. Both the length of time between expansion and contraction varies, as does the "height" of the high and the depth of the low. Sometimes we're able to sustain expansion for a relatively long period of time that results in soaring economic success. But it's not sustainable indefinitely; you will experience a downswing sooner or later. When designing your performance pay program, it's important to keep this in mind. It's easy to follow through on your performance pay promises when things are going well and the organization is financially prospering. When the downturn ultimately comes, you must ensure that you will still have the financial ability to follow through on those performance pay promises. Overpromising and underdelivering in austere times an be fatal for your pay for performance program and can threaten the very existence of your organization.

(2) The ability of your performance pay program to increase firm value will degrade over time. One of the main purposes of a performance pay program is to increase firm value. When a performance pay program is "new" it can be very effective. But over time it will lose some of its efficacy. Lazear & Gibbs describe this phenomenon as follows: "consider a measure that had previously not been used for calculating an employee's bonus. The firm believes that the measure is correlated usefully with firm value, so it decides to give the employee a bonus based on the measure. The employee now has an incentive to increase the measure's value, possibly in part through manipulative behavior. If there is manipulation, this will tend to reduce the measure's correlation with firm value - making it a less useful performance measure! The longer the employee has had a bonus based on the measure, and the greater the incentive placed on the measure, the more likely this phenomenon is to be a problem." The upshot of this is that performance pay programs are not evergreen. To maintain efficacy, they must be periodically revisited and reinvigorated. Left on its own, the efficacy of your performance pay program will fall.

(3) Interest in your program will ultimately go down. Currently, the vast majority of organizations have a variable pay plan. Twenty years ago, less than half of organizations had a variable pay plan (Hewitt Salary Increase Survey, 1990-2009). Performance pay has been in fashion for several years. But like the patchwork peasant skirts of the 1970s and the velour tracksuits of the 2000s, performance pay is likely going to fall out of fashion. When "the next big thing" arrives, everyone - your employees, your senior management, and your competitors - will forget about the advantages of well designed, tried-and-true performance pay plans. Fashion works in cycles, so performance pay may come back in fashion at some point in the future. What will you do until it does? Don't put all of your eggs in the same rewards basket. Spread things out and use a total rewards approach.  

No matter how well designed your performance pay program is, it cannot escape the inevitability of gravitational pull. What goes up must come down. If you're not prepared, your entire compensation program could collapse into a singularity of infinite gravity, a.k.a., a black hole. And we all know that black holes suck. 

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals. 

Image courtesy of Squashimono via Flickr

Cafe Classic: Eternal Sunshine of the Spotless Mind

Editor's Note:  There are several versions of the famous quote "Those who don’t know history are destined to repeat it" and it is attributed to individuals ranging from British statesman Winston Churchill to Spanish philosopher George Santayana.   Regardless of its roots, this statement is as true in the sphere of reward programs as it is in any other, as Dan Walter explains in his Classic post.

In the world of pay, we are almost always looking forward to the upcoming year or more. We often operate with little or no reference to our histories. If we are going to measure our success, we should probably understand the path that got us here.

I often work with companies who can provide very little information on how and why they are in their current state. They can speak in broad generalities, but the details are hard, or impossible, to grasp. None of these people are dummies. To the contrary, most are smart professionals who work hard to make the best decisions every year. How well can you explain your past decisions and actions? 

What did your survey data look like three years ago? How did pay for each position align to it? Do you have these details and do you communicate them in any reasonable way?

How about your LTI plan? What were the specific "asks" and "expectations" five or six years ago How well did you meet these objectives and did you ask your employees or executives how effective the plan was in motivating them to those achievements?

Things in the past get fuzzier over time. This is especially true for tasks that require complex decision-making and involve discretion. We make hundreds of small decisions like this every time we benchmark compensation, determine incentive pay levels, set goals, and decide on merit increase minutiae. When we look back even a couple of years, the drivers of our decisions are often difficult to explain or defend. In a data driven world, our eternally spotless minds will prove to be an insurmountable obstacle.

A growing best practice is building regular reporting summaries at critical decision and measurement points. These summaries often include pictures or easy data visualization because our brains are best at remembering images. These summaries become a diary of our past. At their best, they also include the "why" of each decision. This approach to remembering history is seen in things like "Facebook memories" and old family videos but is very new to the world of total rewards.

Imagine if as you started planning each year you could quickly review the key decisions, failures, and successes that brought you to your current position over the past several years. While there are all kinds of tools that can help with this, a simple solution is a series of slideshows. 

Build a template for each program or process. Every decision cycle, usually annually, but more often for things like sales plans, create a quick set of charts representing your current state and desired state. Put together a bullet point of why you made key decisions. Then each following year, add new slides linked back the prior slides. As time progresses, you will easily be able to track whether you’ve been delivering real value (or not).

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.

 

Cafe Classic: Aligning Incentives, Performance Metrics and Strategic Objectives

Editor's Note:  What can an experiment involving singing, dancing and posing teach us about performance pay?  Plenty ... as this Classic from Stephanie Thomas reveals!

How clear is the line of sight between your performance pay programs, strategically linked performance metrics and the organizational strategy? Do your managers see these performance measures as they really are (imperfect proxies for larger, intangible strategic constructs), or do they focus on the performance measures themselves as the ultimate goals?

Let's say that one of Company X's strategic objectives is to maintain its market share. This strategic objective is translated into tactical goals, one of which is retaining current customers. Assessing managers' performance in supporting the overall strategic objective of maintaining market share can be done different ways, but let's assume that Company X focuses solely on the tactical goal of retaining current customers and evaluates managers' performance through a customer satisfaction survey. Managers will receive bonuses tied directly to their survey scores.

Will Company X's managers see through the survey scores, understanding that the overall strategic objective is maintenance of market share, and ensure all their decisions are consistent with this objective? Or will managers act exclusively to maximize survey scores and paychecks, losing sight of the overall strategic objective of the firm? 

If managers focus solely on the metric, they exhibit what is known as surrogation. Choi, Hecht and Tayler describe surrogation as the situation arising when managers "fail to fully appreciate the fact that [performance] measures are merely representations of the true constructs of interest, ultimately acting as if the imperfect measures are the constructs of interest"("Lost In Translation: The Effects of Incentive Compensation on Strategy Surrogation",The Accounting Review, Vol. 87, No 4, pp. 1135-1163). Surrogation can hinder managers' ability to make decisions and take actions that are consistent with organizational strategy. 

Unfortunately, using performance pay linked to a strategically linked performance metric increases managers' propensity to exhibit surrogation. The way in which performance pay affects performance is complex and there are a variety of mechanisms in play. However, a substantial amount of research suggests that incentive pay has attention-directing effects that influence an employee's experience with performance measures. In their paper, the authors explore these attention-directing affects and address the question of whether using multiple compensated performance metrics, rather than one compensated metric, will reduce the problem of surrogation and help keep the organizational objective clearly in managers' view.

The authors design an interesting laboratory experiment to examine these hypotheses. Graduate students at highly ranked U.S. business schools were asked to create a virtual character in the computer game Spore according to the following instructions: design a creature that can socialize with other life forms such that it will become the dominant species on the planet. 

Within the game, four "traits" influence a creature's ability to socialize: sing, dance, charm and pose. Participants were informed that all four traits were equally important in a creature's ability to socialize, and were asked to keep this in mind when designing creatures.

All participants received compensation based on a post-experimental assessment of their creature's ability to achieve global domination via socialization. The top performer received $20, the second-best performer received $18, and so on. In addition, a bonus was awarded based on specific performance metrics. One group of participants (single-measure-compensation participants) received a bonus based on the creature's ability to sing: they received an additional $2 per level of "sing ability." For example, a creature with a sing ability of 4 would generate an $8 bonus. The other group (multiple-measure-compensation participants) received a bonus based on the creature's ability to sing, dance and charm" they received an addition $1 per level of sing ability, dance ability and charm ability. For example, a creature with level 3 sing, dance and charm abilities would generate a $9 bonus.

The results of this experiment are not surprising. The single-measure-compensation participants constructed creatures with higher levels of the sing ability, at the expense of the other, equally important, socialization abilities. Their creatures were less successful in achieving the overall objective of domination via socialization. This is exactly what we would expect if the participants were engaging in surrogation. Surrogation among the multiple-measure-compensation participants was statistically significantly less than among the single-measure-compensation participants, and their creatures were more successful at achieving domination through socialization.

At the end of the day, this experiment empirically confirms what many of us already know: people do what you pay them to do. When designing performance pay systems, make sure that the attention-directing effects of incentives are directing attention to the achievement of the overall strategic objectives of the organization, not just to singing, dancing and charming.

Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University. She teaches undergraduate and graduate courses on economic theory and labor economics in the College of Arts and Sciences and in Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals. 

Image courtesy of Electronic Arts

Cafe Classic: Can Quantum Mechanics Make Your Pay Programs Better?

Editor's Note:  One of our favorite things to do at the Cafe is to step outside the familiar confines of our jobs and look at the things we do through the lens of another field. 

Today we're going to reach out into the strange world of quantum mechanics for insights on pay program design and implementation.

Quantum mechanics, as briefly defined at LiveScience.com, is...

...the body of scientific laws that describe the wacky behavior of photons, electrons and the other particles that make up the universe. Quantum mechanics is the branch of physics relating to the very small. It results in what may appear to be some very strange conclusions about the physical world.

That, it turns out, is an understatement.  Quantum theory (which underlies the field of quantum mechanics), when it emerged a hundred years ago, turned our understanding of reality and the classic world of physics upside down.  Niels Bohr, one of the theory's pioneers, liked to say that "Anyone who is not shocked by quantum theory has not understood it."  A century after its birth, now being used daily in applications that range from MRI scanners to solar cells to DVDs, it is still considered a puzzle.

What can the murkiness that quantum physicists discovered at the heart of the atomic world possibly offer to us, who practice in human resources and compensation?  I think it is encapsulated briefly and beautifully by Italian theoretical physicist Carlo Rovelli, author of the bestsellers Seven Brief Lessons on Physics and Reality is Not What it Seems:

Reality is only interaction.

Quantum theory holds that things, at the atomic level, don't always exist.  They exist only when they are observed by or when they interact with someone or something else.  The controversial finding at the heart of quantum mechanics is that there is no objective reality independent of whoever happens to be reacting with whatever.  As Rovelli likes to put it, the things of the world can be better compared to a kiss - which only exists when it happens - than a stone.

You think of your new salary structure, that incentive plan you developed in collaboration with your cross-functional design team, as things that exist as their own independent and objective realities.  But what if that isn't true?  What if your pay plans only exist, only become real when managers and employees interact with them?  What if their reality is solely the experience that managers and employees have when they encounter the plan in their work lives.

The problem is that we often go about our jobs believing that our pay plans are like stones.  We create them, we set them neatly in their place, we write a memo or hold a communication session (maybe even several communication sessions!), and then we step back and wait for the magic to happen while we turn to our next initiative.  And we try to understand why they don't drive the changes and produce the impact we hoped for.

How would we do our jobs and plan our priorities if we considered the interaction that people have with our pay plans - rather than the plans themselves - as the product of our work?  What might we do differently if we focused our ideation, design and implementation efforts on the "kisses" - those moments when managers and employees observe and interact with our pay plans?  If we envisioned the result of our work as the net of interactions that builds over time around them instead of the content of the written plan materials?

Could this make our pay programs and our work better?

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Partner at Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys hiking, reading and hanging out with family in any spare time.

Cafe Classic: Before You Link Pay to ANYTHING...

Editor's Note: Sometimes the best advice on pay comes from outside our profession.  Today's Classic post serves as Exhibit A.

Rob Markey of Bain & Company's global Customer Strategy and Marketing practice wrote a great "series" of HBR posts awhile back on the perils of linking pay to customer feedback (The Dangers of Linking Pay to Customer Feedback and Before You Link Pay to Customer Feedback).  As any of us who've considered using customer feedback metrics in incentive design know, this can be a potential minefield.  Markey's cautionary advice on pay linkage is well written and worth our consideration beyond the boundaries of customer feedback metrics ... before we link ANYTHING to pay.

With that in mind, Iet's consider his five essentials - preconditions for trust and credibility - in the context of broader compensation design:

Essential #1: Truly reliable feedback and metrics.  If your metrics aren't trustworthy, if they vary widely from one time period or unit to another and you don't know why, your compensation system won't be trustworthy either.  This "essential" has obvious application to any metrics we might consider tying to pay.  Markey provides some great suggestions for digging into prospective metrics to assess their viability with questions like is the sample controlled and stable? and are response rates high enough to reduce responder bias?

Essential #2: A clear link to financial and strategic outcomes.  Your metrics must correlate with financial and strategic goals.  I've posted before about the importance of grounding incentive design in value creation.  Markey makes the same point here: Without a confirmed link between your selected incentive metrics and business outcomes, your incentive system won't last long.

Essential #3: Processes and tools for understanding root causes.  Markey uses the example of a company which began linking improvement in customer feedback scores to executive compensation before it had developed the discipline and processes for truly understanding those scores.  The company's managers - understandably - felt helpless and frustrated.  This is perhaps our most common mistake with incentive plan development, one that critics like Alfie Kohn and Dan Pink nail us on for good reason: throwing incentives at a problem before/without understanding or providing the tools to deal with its root causes.

Essential #4:  Organized learning.  The root cause discipline noted in #3 above must be supplemented with the means and the leadership support for learning and improvement.  Again, often an area where we are at fault where we try to implement incentives in lieu of learning and development(I've seen it tried and I'll bet you have, too).

Essential #5:  Repeated communication.  Why, Markey asks, do so many leadership teams spend countless hours devising the details of incentive systems and then under-communicate their intent?  Amen.  Although, as my Cafe colleague Margaret O'Hanlon and I have both noted in earlier posts (mine here, Margaret's there), effective communication in this age of information overload is more about creating patterns than repeating messages. 

Sometimes our best advice comes from outside the profession.

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Partner at Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys hiking, reading and hanging out with family in any spare time. 

Image courtesy of seo.com

Cafe Classic: Compensation Work and Having Skin in the Game

Editor's Note:  Is our profession, are our jobs truly designed for success in the age of continuous disruption?  What are your thoughts on this Classic question?

Some fascinating work is being done around navigating human capital risk and uncertainty.  I think it could raise some interesting questions about how compensation jobs and functions are defined and organized. 

Success for businesses increasingly hangs on their people and the structures they create to guide and support their work.  The problem, of course, is that industries and markets can shift quickly and unexpectedly.  Your company might respond with changes in pricing, product offerings, branding or its "go to market" approach -- but how quickly can it transform its workforce to deliver on these changes?

How quickly could you (compensation professional) get your head around the differences in skills, practices and behaviors needed?  How well could you pinpoint the gaps between what you've got going on today and what is needed tomorrow (or this afternoon)?  And how efficiently can you identify the obstacles that your current reward programs -- base pay delivery, incentives, benefit plans and programs -- will toss into the path of the workforce transformation that must now happen?

It's classic Innovator's Dilemma stuff.  And I'm thinking about it today relative to the way we structure compensation roles and work.  

There's a lot to be said for growing and refining your HR analytics capabilities so that they can tip you off to the make-up of and trends in your workforce, and help you identify and respond to the risks that might exist in the people part of your value proposition.  Hopefully we in the compensation profession, as the original data nerds in HR, are taking the necessary steps here.

But I think there's also the reality of how well our compensation jobs allow us to see and understand the day-to-day reality of the work people are doing.  The eyeball-to-eyeball, ear-to-ground reality.  Skin in the game.

To have skin in the game essentially means that you have some share in the costs and benefits your decisions and actions create for others.  Do we?  Should we?  Should our functions and roles be defined to create some sense of it?

How is the compensation function in your organization structured?  Do you -- like some -- have a centralized compensation function that is tucked away in "corporate" where you must rely on HR generalists and advisors to be your eyes and ears on the ground?  Or do you -- like others -- have compensation professionals embedded in the different business units where they have more direct contact and a front row seat to the action.  

Will this become a bigger deal as the pace of change continues to accelerate and navigating human capital uncertainty becomes both more challenging and more important?

Nassim Taleb -- the guru of risk and uncertainty whose books on the topic include The Black Swan and Anti-Fragile and of whom I am a big fan -- feels so strongly about the notion of skin in the game that it is the topic and title of his next, soon-to-be-published book.  I don't have the answer to the question I raise above, but as food for thought I'll leave you with this principle of skin-in-the-gameship courtesy of Mr. Taleb, who holds that skin in the game only happens in decentralized systems.

Principle:  It it always vastly easier to macro BS than to micro BS.

Ann Bares is the Founder and Editor of Compensation Café,  Author of Compensation Force and Partner at Altura Consulting Group LLC, where she provides compensation consulting and survey administration services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and enjoys hiking, reading and hanging out with family in any spare time. 

Creative Commons image "hands group" by Safe.Homes.Rape.Crisis.Coalition

Four Compensation Predictions for 2022

This is the thirteenth year I have written a post during the last week of the year. I seldom make predictions for an upcoming year because compensation generally evolves so slowly that any real changes take several years to come to fruition. As we head into 2022, I am going to break that tradition and make a few predictions. I think we have a unique opportunity in front of us and many compensation professionals will relish the challenge.

1. Base pay increases in many industries will be far higher than we have planned.
   if you have planned a 4% budget for 2022 and use a lag, or lead/lag, strategy, please expect to lag from very early in the year. The market is unlikely to cool. Executives are being held to high standards when it comes to growth. Investors have put a ton of money into the market. All of these will factor into increases that will continue to rapidly outpace what has become the 3% norm for the past decade and beyond.
2. Survey providers will be pressured, and perhaps forced, to address the inaccuracy of LTI data in surveys.
   This is especially true in private company data, but expect to see more demand for global granularity, award details like vesting and performance criteria, and better explanations of how values were determined. This is a weak point in the world of compensation and companies are rightfully impatient to see better data.
3. Survey providers will begin categorizing positions into “onsite”, “hybrid”, and “remote”. Survey data without this level of specificity is putting every competitive company at risk. Expect to see the first “pulse” or “spot” surveys on this topic before the end of Q3. Expect this to be a normal part of survey submissions before the end of 2022.
4. Expect to see more companies visibly break the Base/STI/LTI paradigm that has dominated compensation philosophies for 15 or 20 years. At some point, you cannot differentiate your offers with just a bit more base pay. Short-term incentives will likely become shorter to address that speed with which pay is changing. LTI programs are already changing. Leading-edge companies explored more new vesting schedules and LTI plan design elements in 2021 than in any year in recent memory. This information will become more well-known and inspire hordes of other companies to move away from the lock-step adherence to stock options with a 4-year vesting schedule or RSUs that are similarly designed. If the long-time programs worked as advertised our ability to attract people would be higher and our turnover would be lower. It’s time for a change.

I am sure we will see other changes, just like I am sure at least one of the above will prove to be completely wrong. 2022 is sure to be another interesting year. In 2020 we just did our best to react to a world that became almost instantly unfamiliar. In 2021 we weathered a push for hiring unlike any year in recent memory. In 2022, we will get our feet underneath us, gather up our balance and leap forward into a new approach to pay that may provide a foundation for the next 10 years. There is no reason to wait. The future is yours to create.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.

Cafe Classic: Compensation isn't Rocket Science... it's Harder!

Editor's Note:  In this Classic post, Jim Brennan shines a light on the challenges of rewards work and the surprising discovery that awaits many compensation pros who choose the field in an effort to escape the squishiness of other HR specialties and immerse themselves in quantitative certainty.  Not so much, eh?

Those who grew up during the Space Age are familiar with the adage, “this isn’t rocket science.”  The phrase is used to denigrate a task as not particularly complicated.  Well, those who labor in the area of Total Rewards soon learn that their challenges are a lot tougher than those experienced in rocket science.

The hard and fast rules of engineering and science don’t exist in human resource management or the total reward field.  Industrial/organizational psychology involves less precision, fewer immutable laws and a definite shortage of clear principles subject to exact definition and full control.  Any two rocket scientists can cross-check calculations, compare instrument test readings and reach complete agreement on the demonstrable facts of their project.  Any two professionals in the Total Rewards field looking at the same situation are highly unlikely to agree on much of anything.  The Heisenberg Uncertainty Principle that limits the precision of measurements in some technical issues involving the physical sciences can’t hold a candle to the variations encountered in the arcane semi-scientific and occasionally bizarre quasi-artistic area of human relations.

Compensation is harder than rocket science.  The facts of any compensation case are rarely as clear. The views and biases of the observer have stronger effects on inferences and conclusions.  Verification of input information is far more complex and problematic.  There are similarities, however, because compensation plan launches can also fizzle or blow up.

Outcome results from compensation systems are harder to forecast reliably because compensation deals with particularly unpredictable subjects.  Total Reward professionals operate on agents who behave according to the Harvard Law of Behavior.  Allegedly formulated by the graduate students of B.F. Skinner, it says, "Under carefully controlled experimental circumstances, an animal will behave as it damned well pleases."

Human behavior is very difficult to pin down, much less harness and direct by schemes to attract, retain and engage.  Engage seems a better term to use than “motivate,” since you can’t simply pump motivation into someone like gasoline (petrol, for our UK readers).  People already have their own motivations.  Engagement supplies the link between what we so hopefully dangle as a consequence of behavior and the response of the employee who embraces whatever tasty element of our smorgasbord most effectively appeals to them.  There is an obvious parallel to olfaction, where the ability to smell something seems to depend on the operative odor receptors that accept and sense material that fits into them like a lock and key system.  Without the sensor, you won’t get the signal.

Rules of human behavior are far more complex and variable than the rules of engineering and math.  No matter how hard we try to create consistent systems of uniform rules to impose on a workforce, they remain basically arbitrary and will not work with equal effectiveness on everyone.

Maybe this is why HR seems necessarily heuristic.  Much Total Rewards tradecraft is based on aversion theory, painfully evolved by avoiding what clearly does NOT work in your unique environment and eliminating all the myriad less desirable alternatives until a few options acceptable to top management are reached.

It has been said often, about HR and TR:  “This would be a great field if it weren’t for the people.”  Bottom line:  it is those very people with their quintessential combinations of variety and commonality that create the surprises and challenges of this tradecraft.  If it were simple, it would be boring. 

E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience in most industries.  After corporate HR posts and consulting CEO roles, he was Senior Associate of pay surveyor ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness in reasonable executive compensation court cases, Jim also serves on the Advisory Board of the Compensation and Benefits Review.

Image courtesy of isitrocketscience.com