As Astron’s clients begin their 2019 compensation program budgeting, we are often asked whether or not the practice of providing variable compensation will grow, shrink, or remain about the same as in 2018. The answer is “yes,” but it depends on the competitive needs of the organization!
Astron Solutions has seen many of its clients, both profit and not-for-profit, rethinking the use of variable compensation. These clients are focusing variable compensation programs more on “mission critical” positions – those roles that are critical to the primary function and success of the organization – rather than equally throughout the organization. With a rise in base pay increases (see our Part 1 article from August 21, 2018 for more information), many organizations also are concerned that they may not have the financial resources to support both aggressive base pay and variable compensation budgets.
Recently, the Society for Human Resource Management (SHRM) published the results of a study that explores current and 2019 variable compensation trends. https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/2019-incentive-variable-pay-practices.aspx. The following is a review of the key points made by SHRM in this study.
SHRM’s study considered the findings in the WorldatWork 2018-2019 Salary Budget Survey (www.worldatwork.org). According to WorldatWork, 85% of U.S. employers gave out performance-based bonuses. When asked if their programs will continue into 2019, 100% responded in the affirmative. In addition, WorldatWork projects 2019 budget levels for variable pay (as a percent of base pay) are as follows:
- Non-Exempt Hourly: 5.2%
- Non-Exempt Salaried: 6.1%
- Exempt Salaried: 12.6%
- Officers / Executives: 38.2%
According to WorldatWork, “this prevalent use of variable pay, or pay at risk, is expected to continue in 2019 as the most successful organizations are always looking to maximize return on their rewards investment dollars.”
Willis Towers Watson
SHRM goes on to share data from the Willis Towers Watson General Industry Salary Budget Survey-U.S. (www.willistowerswatson.com). Willis Towers Watson projects that variable pay budgets will remain steady, to slightly “decreasing” for 2019. Projected 2019 budget levels for variable pay (as a percent of base pay) are as follows:
- Non-Exempt Hourly: 5.7%
- Non-Exempt Salaried: 7.1%
- Exempt Salaried: 11.7%
- Management (Excluding Executives): 21.3%
- Officers / Executives: 43.8%
According to Willis Towers Watson, “organizations are facing increased pressure entering next year to devise a focused strategy and plan on how to allocate their precious compensation dollars or risk losing some of their best talent.”
In its final review, SHRM focused on how organizations determine the measures of short-term incentive pay, with a reference to the Empsight 2018 Policies, Practices & Merit survey report (http://www.empsight.com). The following statistics reflect a percent of organizations reporting –Fortune 500 companies in the firm’s client database with 73% having revenues above $5 billion.
- Individual Factors:
- Individual Performance Ratings: 57.1%
- Individual Objectives: 38.1%
- No individual component: 25%
- Organizational Factors:
- Operational Performance: 51.4%
- Customer Satisfaction: 24.7%
- Safety Performance: 22.4%
- Financial Factors:
- Revenue: 40%
- Operating Income: 35.3%
- Earnings per Share: 25.3%
Astron Solutions’ Observations and Recommendations
It is clear that successful and high performing organizations intend to continue the use of variable pay as part of their mix of 2019 total rewards offerings. However, Astron Solutions continues to find that a majority of clients struggle with attempting to maintain a centralized, “one-size-fits-all” variable compensation program. The challenge for these systems is the lack of the critical “line of sight” required to have the incentive be meaningful to those participating in the program. The theme of decentralized total rewards will continue into 2019, especially as organizations continue to hire more and more Millennials. Millennials clearly respond to rewards based on outcomes over which they have control, as well as to rewards that are provided more frequently than once a year.
As we move into 2019, Astron Solutions recommends the following strategy in terms of auditing and developing more effective variable compensation programs:
- Today’s workforce, being driven by Millennials, requires timely feedback on performance and outcomes, with that feedback tied to rewards and recommendations. Astron Solutions recommends a return to the classic concept “Management by Objectives,” or MBO. Under an MBO system, employees are provided annual objectives with quarterly built-in feedback reviews. While the major reward is tied to year end results, each quarterly feedback review / result can be tied to some form of reward as well.
- The focus of “all employee” incentive programs should be on “mission critical” outcomes directly tied to the organization’s mission, vision, and strategic operating plan. This will allow for all employee education on where the organization is heading, and will force leadership to better define each employee’s role in helping the organization be successful. As with the MBO system referred to above, these programs are most successful when there are more frequent touchpoints, such as a quarterly review tied to some form of rewards for the entire organization, based on performance to that point.
- Consideration should be given to the growing concept of “Gamification,” in which electronic gaming concepts are used in developing reward and recognition programs. This provides employers with the ability to provide instant rewards based on how an employee, a unit, a department, a division, or even the entire organization achieves critical outcomes throughout the year. Gamification also allows for public recognition of success in supporting the organization, and facilitates quick reinforcement of desired behaviors.
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.