As with our review of 2022 compensation budgeting in the last Astronology®, predictions on how variable compensation will unfold are challenging. The challenge comes from the continued talent shortages as well as the continuation of remote work options. We explore the impact of these challenges on the continued use of variable compensation in the 2022 total rewards mix.
Variable Pay Projections
Let’s take a look at WorldatWork’s perspective on variable pay heading into 2022 (Salary Budget Survey 2021-2022):
Eighty-five percent of organizations reported using variable pay in 2021, a 1% increase in the use of these programs. A combination of awards based on both organization / unit success and individual performance continues to be the most prevalent type of variable pay program. Depending on employee category, 81% to 89% of employees received variable pay for 2020. Compared to 2020, organization-wide awards are on the rise, while individual awards declined in 2020. In 2020, the projected percent paid left a gap on average when compared to the percentage budgeted for variable pay programs in most employee groups. This year, we are seeing the opposite occur, where organizations are projecting greater payouts than the average amount budgeted. Next year’s projected variable pay budgets closely mirror those budgeted in 2021.
Annual performance bonuses this year, based on 2020 performance, were awarded by 91 percent of responding companies, up from 76 percent of companies that awarded them last year.
- For management and professional employees, bonuses averaged 16 percent of salary.
- For support staff, bonuses averaged 8 percent of salary.
- For production and manual-labor employees, bonuses averaged 5.5 percent of salary.
While keeping WorldatWork’s findings in mind, Astron Solutions recommends that the target incentive in any variable pay plan be at least 10% of current base pay in order to be effective.
Spot Bonus Programs
2021 also saw a marked increase in “spot bonus” programs as a way to combine short-term employee retention and performance objectives. Driven by the need of Millennials to have continuous recognition, many organizations have moved to more formal spot bonus programs. This is especially true for the employee’s first year after being hired, to recognize new employees who have made a commitment to the organization and have achieved short-term milestones in their early career.
Leigh University has taken this concept and incorporated it into their total rewards strategy for all employees. Here is a summary of their program:
- Extraordinary achievement tied to a major goal. It’s worth crowing about, and that’s just what a Spot Bonus Award does. Spot Bonuses provide recognition for employees who take their game to a whole new level.
- The monetary value of a Spot Bonus Award varies based on the achievement. In general, the range is $300 to $3,000, which may include a departmental contribution.
- What does Lehigh consider Spot Bonus Award-worthy?
- Performance substantially beyond expectation on a specific assignment, task, or goal
- Contributions that have a significant impact on department or university objectives
- Extraordinary efforts above and beyond the normal responsibilities of the position.
- In general, the achievement should be a discrete series of actions over a finite period of time. This helps to identify the action as a special situation that rises significantly above the norm.
- Who can receive a Spot Bonus Award?
- All exempt and nonexempt classified Lehigh staff and research staff members (excluding student and wage employees, leased employees, and affiliated organizations) are eligible. All nominees must have received a performance review in the past year.
- Spot Bonuses are only awarded to individuals. Teams are not eligible. Senior level administrators serving in non-classified positions are not eligible.
- Who can nominate someone for a Spot Bonus Award?
- Anyone in the supervisory chain of command of an employee may start the nomination process for an award.
- How does it work?
- A supervisor who wishes to nominate one of his or her employees should use the nomination form.
Astron Solutions is finding more and more of our clients moving in this direction. Spot bonuses provide a competitive edge in attracting staff as well as in enhancing employee engagement, which is key to retaining much needed employees.
Another trend is the adoption of long-term cash incentives tied to short-term cash incentives. Many organizations are looking to retain key staff and management over the next three to five years, as the organizations respond the rapid increase in demand for their products and / or services. Critical staff are now in the position of being tempted to leave, as organizations are becoming more aggressive in their recruiting of key staff from competitors.
The concept is that, as with a short-term incentive plan, three to five key strategic objectives are set based on what the organization needs to accomplish over a three to five year period. A percentage of any short-term incentive award is deferred in each of the three to five years into a long-term incentive account. At the end of the long-term incentive period the objectives are measured, and the payout occurs. The key in the long-term incentive is that the participating staff member must have been employed throughout the long-term incentive period. Otherwise, all the money accrued for the long term-incentive is forfeited. For example:
Short Term Goal Sharing Plan (Target at 30% of Base Pay, or $30,000)
A (20% of Total)
B (20% of Total)
C (60% of Total)
In this example the employee earned:
- Objective A achieved at target: $4,500
- Objective B achieved at optimum: $6,000
- Objective C achieved at target: $13,500
- Total Earned Incentive: $24,000
For the long-term incentive, 30% of the dollars earned in the annual short-term program are deferred. In this example, that’s $7,200. Assuming the same amount is earned for a three year period, the total amount deferred for the long-term incentive would be $21,600. The distribution of the long-term incentive would mirror the short-term model:
A (20% of Total)
B (20% of Total)
C (60% of Total)
These long-term incentive programs should be designed with simplicity, with a focus on “measuring what matters” in the organization in both the short- and long-terms.
Astron Solutions continues to see increased activity in the development of short- and long-term incentives. More and more, our non-profit clients are introducing incentive compensation as a major part of their total rewards strategy. Variable compensation allows them to recognize and retain key contributors while controlling base pay costs. Base pay for performance programs, while still popular, have a major flaw. They reward only past performance and are not a strong predictor of future performance. Variable compensations programs, on the other hand, require participants to re-earn their rewards year after year, leading to employee and organizational forward-focused success.