Bonuses are back, according to research conducted by the Hay Group. But with a pragmatic nod to today’s austere business environment, employers are taking a hard look at why they’re dishing out variable pay, what they want it to accomplish and how they decide who gets how much.
The Hay Group found that 39% of companies have increased or plan to increase the proportion of variable pay in their employees’ pay packets. However, with new bonus prospects comes a renewed focus on performance. Almost half of companies surveyed—47%—told the HR consulting firm they have increased or are planning to increase the performance thresholds employees need to reach to earn bonuses.
The most effective variable pay plans these days are closely tied to the particular company’s business strategy.
They’re strongly tied to bottom-line business results and return-on-investment goals.
They’re based on input from the highest levels, often the corporate board. And they rely on everyone understanding exactly what it takes to earn extra pay.
“The best reward programs are those that reflect the company’s particular business model and culture, rather than those which are simply copied from ‘best practice’ or industry standards,” said Thomas Haussmann, leader of Hay’s variable pay group.
“A variable pay strategy will not drive performance if the objectives and link to company strategy are not clear. As the research indicates, communication of pay schemes and their link to the business strategy must be clearly defined, and flow down from the very top of an organization in order for them to be successful.”
The top driver for changing variable pay programs was to better align programs with the business strategy (69%). Other reasons: to strengthen linkages between improved corporate performance and individual effort (39%), improve organizational or team performance (37%) and ensure market competitiveness (30%).
Pressure to tighten bonus criteria is coming from the top. In 53% of organizations that have changed their processes for awarding variable pay, the impetus came straight from the boardroom. The goal: to better measure their effectiveness and return on investment.
Forty-eight percent of companies say their boards are more involved in making decisions around variable pay than they were two years ago.
4 steps for implementing a variable pay program
Making variable pay work requires lots of interaction throughout the organization before, during and after implementation.
As the business unit most likely in charge of implementation, it’s up to HR to make sure that happens.
Four steps point the way:
1. Understand your strategy. What business goals will your bonus system help achieve? Here’s where HR must team with top management at the very highest levels—CEO, senior executives and quite possibly board members.
2. Align metrics with your strategic goals. Now you’re getting down in the trenches, working with line managers and their bosses to figure out what to measure to determine how well individual effort or innovation supports the organization’s business objectives.
3. Communicate clearly up and down the organization. HR should be the most effective broker of information about how the variable pay plan works. But HR can’t do it alone. Line managers have to reinforce it whenever they address employee performance. Mid-level managers must communicate progress up the organizational chart. And executives must assert support for the plan.
4. Monitor the program to ensure it’s working. This is an ongoing task. Every manager and executive is responsible for enforcing the match between metrics and strategy. In HR, it’s your job to collate that information.
If necessary, be prepared to intervene (with backup from top management) to ensure that managers use your performance management system and variable pay metrics properly.
Variable pay: What the best companies focus on
Each year, the Hay Group teams up with Fortune magazine to determine America’s most admired companies. When researchers ask about variable pay metrics, almost every company says it focuses on operational excellence, revenue growth and profitability.
But the most admired companies go further, rewarding such things as long-term thinking, teamwork, building human capital and customer loyalty.
