Astronology®: 2020 Compensation Budgeting Forecast Part 2: Incentives, Bonuses, and Variable Compensation

The design and implementation of variable compensation programs continue to grow throughout 2019 and it appears that this trend will continue into 2020. The large influx of millennials into the workforce are causing organizations to re-examine the mix of base to variable compensation in their total rewards programs. The following is a summary of trends and survey reports impacting variable pay decisions in 2020. The following is a review of the key issues impacting variable compensation strategies in the United States:

Salary.Com (www.salary.com) 2019-2020 U.S. and Canada National Salary Budget Survey:

Variable Pay in the U.S. as a Percentage of Base Pay

WorldatWork (www.worldatwork.org)

• WorldatWork found that 84 percent of surveyed organizations used variable pay as part of their compensation program in 2019.
• Among those doing so, 69 percent based rewards on a combination of organization/unit success and individual performance.

INC Magazine (https://www.inc.com/encyclopedia/variable-pay.html)

• The growing prevalence of variable pay alternatives in business compensation strategies has been attributed in part to a couple of other business trends.
  • Rapidly changing technologies have had an impact on the ways in which we do work in the 21st century. Along with these changes have come rapidly changing job descriptions and a need for people with flexible skill sets to man these positions.
  • Increased emphasis on quick reactions to changing competitive conditions have triggered a growth in movement toward employee empowerment. And as employees become more empowered, employers have had to find new ways to compensate them for their contributions to the overall enterprise.
  • To minimize today’s heightened business risk, businesses must reduce their investment in fixed costs and maximize the use of variable costs, which they incur only if they achieve certain results.
  • Nowhere is this situation seen more clearly than in the balance between fixed and variable pay, since employee compensation in many industries is a company’s single largest expense.

Aon (Hewitt Associates) https://www.aon.com/human-capital-consulting/default.jsp

• The Hewitt data showed that about half of companies with single-digit revenue growth believed that the cost of their variable pay programs outweighed the benefit.
• Companies with double-digit revenue growth, however, almost all reported positive outcomes from their variable pay programs. “The fact that many companies don’t [sic] benefit from variable pay plans is a significant issue, as they’re spending more than $54 million a year on this type of pay.”
• They found that companies achieving high-revenue growth have successful programs because they provide the appropriate amount of administrative, communication, and monetary support.
• These organizations know that if this type of pay plan is implemented correctly, it will reinforce a performance culture.”

Deloitte (https://www2.deloitte.com/content/dam/Deloitte/mx/Documents/about-deloitte/Talent2020_Employee-Perspective.pdf)
The top five retention incentives for millennial employees are:

• additional bonuses or financial incentives (44 percent)
• promotion/job advancement (42 percent)
• additional compensation (41 percent)
• flexible work arrangements (26 percent)
• support and recognition from supervisors or managers (25 percent)

VisionLink (https://blog.vladvisors.com/blog/why-do-so-many-incentive-plans-fail)
Why incentive Plans Fail:

1. They seek to change or control behavior. Rewards should be attached to the outcomes associated with the job’s purpose, not for simply fulfilling certain actions or activities.
2. They rob employees of their creative input. Creativity grows out of intrinsic motivators not by offering extrinsic “carrots” for getting the job done.
3. They are short-term instead of “big picture” oriented. Variable pay plans should be balanced between rewarding short and long-term results.
4. They aren’t tied to overall company results and they lack line of sight. too much emphasis is placed on rewarding individual performance.
5. They are either too discretionary or too quantitative. Compensation plans that are tied to performance need to be clear, simple, relevant and achievable to be effective.

Astron Solutions’ Observations and Recommendations
The dilemma facing organizations today is the battle between increasing base pay levels in a tight labor market along with the influence of legislated minimum wages, and the need to control compensation costs by linking rewards to specific outcomes leading to a stronger ROI for each compensation dollar spent. Added pressure is coming from the differences in the needs of the generations – boomers wanting enhanced base pay levels and millennials wanting instant variable rewards. We are also beginning to see an increase in variable plan failure as many organizations rushed in and implemented “generic” variable pay plans that have backfired. Knowing that this is the world we are operating in today Astron can offer recommendations in an attempt to please the many employee “masters” we are serving.

1. First the organization must commit to developing clear performance goals tied to specific outcomes.
2. Second, the Incentive payment must be directly tied to performance criteria achievement with no “discretionary” exceptions.
3. Third, the plan should be self-funding tied directly to specific financial, organization-wide outcomes.
4. The organization must make commitment that they will provide information at least monthly to employees, specifically, monthly and quarterly outcome-based review sessions.
5. The organization should understand that incentives and variable pay plans may not be suited for all areas or all employees in the organization and be prepared to implement only in areas that will have the desired impact (increased engagement/retention) needed by the organization.

In our next issue of Astronology®, we’ll explore trends in non-profit executive compensation. In the meantime, however, we’d love to hear your thoughts on incentive compensation! Please share your comments in the feedback section below.

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