The global economy is still recovering slowly from the recent financial crisis; which is now being compounded by the Eurozone debt issue. In the heat of the crisis, businesses were quick to shed staff, explore other avenues for cutting costs, revise production targets and other terms of employment such as work hours. However, as the world economy continues to rebound, businesses are faced with the challenge of retaining shareholders' confidence by delivering stellar performance at optimum cost. It appears paradoxical that employers need to retain the talents, which they must keep motivated and engaged in order to deliver business results; albeit at the most efficient cost. The challenge is getting more work done with less cost.
While the cut in salaries or budget reduction may help in lowering / managing employee costs, the challenge of motivating and retaining key talents remains a puzzle. This is clearly a catch-22 situation that employers find themselves in. Besides the need to motivate the entire workforce to deliver optimal performance, there is also the daunting challenge of retaining key talents (top performers) who are most susceptible to being poached at this time (Harvard Business Review, May 2010).
Increasingly, forward-thinking organisations are considering the principle of Pay for Performance to motivate and retain their best talents, as well as eliminate mediocrity and an entitlement culture. Employers globally are currently embracing a paradigm shift from the traditional general pay increases to placing higher priority on rewarding performance results.
Pay-for-Performance (also called Variable Pay or Pay-at-Risk) refers to compensation plans that tie a portion of an employee's pay to the achievement of certain agreed individual, team and/or organizational results. It is typically characterized by four principles:
- Higher levels of performance lead to higher rewards, and vice versa;
- Variation in employee performance must be measurable and measured;
- Employees understand how performance directly impacts rewards and have confidence in the performance management system; and
- Rewards are unequally but fairly distributed across the employee population.
Globally, companies are introducing Variable Pay schemes into their pay plans to achieve an efficient link between pay and performance. Variable Pay is contingent upon discretion, performance or results achieved and includes Incentive schemes, Recognition plans and Bonuses. The most commonly used plans are the short and long term incentive schemes, such as profit sharing, performance sharing, individual performance scheme, stock options, stock awards, etc.
A key advantage of a Variable Pay scheme is that it is not likely to become an entitlement, as it places pay at risk in each performance period. Hence, employees need to sustain performance to receive rewards into the future. The ultimate goal is to improve organization performance. There must therefore be a clear link between the desired behaviours, business performance and rewards. To achieve this, a variable Pay scheme should:
- Reinforce desired performance and behaviours, as well as reduce excessive risk taking.
- Align the individual goals and objectives to the overall organization goals
- Support the performance culture by adequately differentiating between the top and average performers in terms of reward for results achieved
- Create a clear line of sight for employees such that they perceive how their contributions lead to an improvement in the results being measured.
Trends in Pay for Performance
Generally, businesses are turning more towards Variable Pay schemes, as the world economy recovers from the recession. Organisations are designing new schemes and reinvigorating existing ones to achieve a stronger linkage between pay and performance. Many are also increasing performance thresholds for employees to earn bonuses and incentives. Although bonus schemes are under greater scrutiny, there is also a potential for increased payout opportunities.
A Towers Watson's survey of companies in the U.S. found that most companies are making changes to both their annual and long-term incentive plans. In 2010, compared to 2009, there was 49% increase in annual incentive funding and 33% increase in Long term incentive funding. Also, 28% of the respondents are raising performance goals for annual performance incentive and 18% for long term performance incentive.
In Europe, the Institute for Employment Studies found that performance-related pay is an increasing element of pay setting at company level in many countries, coupled with a general trend towards individualisation of pay setting. Pay tends to be more individualised in the case of employees with skills that are in demand. Also, bonus payments – either linked to individual performance or the performance of the company – are an increasingly important part of the remuneration package. For example, in Germany, bonus payments related to business performance are in place in about 35 per cent of companies surveyed.
In Asia, The Randstad World of Work Salary and Benefits Research indicates that even as many companies understand the need for tight budgets at this time and most employees (84%) are expecting a return to "normal" bonus levels. What is changing is the nature and timing of bonus payments.
Being a part of the global village, the Nigerian economy, is fast catching up with global practices and trends. Some factors are already setting the tone for the need to increase the linkage between employee remuneration and business results. The Securities and Exchange Commission has recently released a code of corporate governance for listed and public companies. The Code requires a proportion of the compensation of senior management and Executives to be tied to business performance. Also, shareholders, due to the losses suffered especially in the banking sector, are more sensitive to ostentatious compensation packages and are demanding a say on compensation for senior management and executives. Most organizations are therefore restructuring their compensation plan to include variable pay or revisiting existing schemes to ensure they remain effective. It is important that organisations get their pay for performance programs right. The performance measures need to be clearly defined and should be subject to periodic reviews to ensure that employees do not 'game' the scheme. There must be no gap in the administrative process that may create potential risk from a compliance perspective. The current economic terrain places much emphasis on accountability and change.
It is important that organisations get their pay for performance programs right. The performance measures need to be clearly defined and should be subject to periodic reviews to ensure that employees do not 'game' the scheme. There must be no gap in the administrative process that may create potential risk from a compliance perspective.
The current economic terrain places much emphasis on accountability and change.
Therefore, as a strategic business partner, today's HR Manager cannot afford to be ignorant of leading-edge compensation practices that promote accountability and performance. Get on board for the change of a lifetime and reposition your organization for a competitive advantage!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.