Getting ahead in the reward game

Citation

Zingheim, P.K. and Schuster, J.R. (2001), "Getting ahead in the reward game", Strategy & Leadership, Vol. 29 No. 6. https://doi.org/10.1108/sl.2001.26129fab.001

Getting ahead in the reward game

Patricia K. Zingheim and Jay R. Schuster

The year 2001 has turned out to be interesting for incentive, bonus and variable pay challenges and opportunities. We started the year having built talent capabilities to match the extended business cycle upturn. The USA will finish the year having made significant workforce reductions. Now many companies are a bit flatter, streamlined, de-layered and leaner. We see shades of "reengineering" and "downsizing" of the 1990s – only this time it comes after a period of unprecedented growth in shareholder value, workforce strength and employee trust-building. This cornucopia has been followed by volatile reductions in stock values, reduced incentive rewards, and loss of jobs that were tough to fill only months earlier.

Let us look specifically at performance-based incentives. Many stock options are underwater. Annual cash incentives will not pay off as hoped – right after we put more stock and stock options in the hands of people at all organizational levels. The economic slow-down came on the heels of making annual cash incentives available to more people than ever before. It looks like a disaster in the making – just when organizations were beginning to use more creative compensation solutions to link people with business goals in a meaningful fashion, the changing economic scene re-landscaped rewards. But most companies cannot go back to the reward solutions that characterized the last decade. These pay systems added little to creating a positive business atmosphere in which people are rewarded for adding value.

Prescription for incentives

Is your company stuck with underwater options and incentive plans that didn't pay off as expected? If the answer is yes, this means that your stock is not performing as hoped. It also means that you are missing the financial goals that generate dollars for employee incentives. So it is bad news for two key stakeholders – employees and shareholders.

Here are some critical tips for incentives going into 2002. It is time to get your incentive design engine into gear, so you have time to do what is necessary to pull yourself out of a jam.

Communications

Start the incentive repair process by broadly communicating about what went wrong in 2001 – missed goals, why and how they were missed, what the company will do about it in 2002. And tell them that a new incentive solution is in the offing. It's time to re-state the business case for incentives: why your company has them, how they add value to the business, and what you expect them to do for 2002.

Measurement

Measures are important for 2002. How will the company judge itself in the coming year? If the company missed its goals in 2001, what are you going to do to achieve the 2002 goals? Are new metrics necessary? Could we add measures that are closer to the employee? The company needs to achieve its results and rebuild its credibility for incentives.

Upside opportunity

What is it worth to get the company going again? Are you willing to pay any incentives lost in 2001 for much improved 2002 performance? This may well be worthwhile to energize incentive participants to help you generate the outcomes you need. How about granting more options, if the company meets its performance goals? While re-pricing options is probably out, new options may be possible to help people understand that the company will be on the right track again soon.

Reasonable thresholds

It is not good to miss incentive pay-outs two years in a row. Even if incentives failed for the right reasons, pressure on base pay will increase, if total cash (base pay and incentives) falls much below what competition offers for similar jobs. The performance hurdle at which incentives first pay rewards might be adjusted to get people back into the incentive compensation game again. It is much cheaper to pay a small incentive than to grant a base pay adjustment. It is not easy to get base pay adjustments back if performance slumps again.

Achievable targets

What are your company's performance expectations for 2002? Remember, you got derailed in 2001. If the reason why incentives did not pay off in 2001 was poor setting of target goals, it is critical that the target be achievable for 2002. Goals can be a stretch, but it is also important to explain why the goals are what they are and how they will be achieved. Achieving a business plan cannot just be wishful thinking – people who have incentives based on goals need to have a reasonable expectation of being successful.

Sponsorship

Leadership needs to be out front showing the way. Incentives need sponsors whose own financial incentives assure others that leaders have some skin in the game. People at the top need to be the primary champions of the incentives.

Continuous communication

The message must be sent again and again until it is clear, understood and accepted. It is critical to keep the information coming – not only when the incentive plan is kicked off, but at least quarterly during the year. The primary reason for incentives is to communicate key goals and directions, which means maintaining a two-way information flow – gathering information from incentive participants and responding with information that makes it possible to achieve goals and earn incentive awards.

The objective is to continue to make incentives work effectively. It is not easy to make incentives work. It is much easier just to pay everyone a base salary and ignore issues of performance. But a company is entitled to receive value from the dollars it expends on rewarding results.

Diagnosing your incentives

An incentive plan that does not pay awards or a stock option plan that does not generate value for the company or option recipients is a system with a possible problem. This is what happened in 2001. But other problems may arise that suggest that a "tune-up" or "overhaul" may be needed. The following symptoms provide clues that revisions in your incentive plan may be necessary.

Autopayment

After a time, some incentives payments become "the way it is done here." They are not yet entitlements, but repeatedly generate awards with no strategic re-thinking. Goals are not reviewed annually, alignment with business direction is unchecked, and payments continue with little understanding of the business roots on which incentives are based. Thus, the company does not receive benefits from the dollars expended.

Measurement shrinkage

Focusing on past performance merely shows you where your company has been, not where it must go. Companies that merely try to outperform their last documented performance sometimes lose out, because competitors are doing better. It is necessary to look beyond your own company's performance to customers and competitors to see what measurements and performance standards to consider.

Entitlement

People can be conditioned to expect an award every year, either as a result of goals that are too easy or because of exceptions that excuse performance and grant an award anyway. Incentives are seen the same as base pay – something people get year after year without concern for results – and changes are viewed by participants as "take-aways."

Eroding shared goals

Most companies are driven by goals that are shared by a number of people. Few individuals acting alone can impact the performance of a company of any size. Yet, many individual incentive solutions exist, where measures help erode a sense of collaboration and team commitment. Such situations create internal competition for resources and awards at the expense of overall organizational performance.

Hierarchy

In many companies, impact on company performance simply is not hierarchical or top-down. Some key performers are not managers, and many managers are not key performers. Incentives are often designed so that the opportunity for awards increases from the person lower in the organization to those higher in the organization. This practice rewards moving to an administrative management position to become eligible for a larger incentive. It is best to determine incentive opportunity by considering role impact – some non-management jobs may actually be more important from an incentive standpoint than management jobs.

Copycat designs

When IBM was at the height of mainframe performance, the IBM sales incentive plan was copied by many companies – whether or not it fit the business and selling case. When IBM's performance sagged, many managers immediately moved on to copy the incentive solution of a successful company. Benchmarking has sometimes transplanted incentive approaches from a company where these approaches may have fit to a company where the fit was not right.

Complexity

Too many measures, too many goals, too many rules, and too hard to understand creates "too many notes, Mr Mozart," as the film Amadeus suggested. Complex incentive solutions create confusion and misunderstanding. Complexity creates lack of clarity and direction – a death wish on incentives and the business case for using them.

How many of these dysfunctions exist in your incentive plan? From time to time, most companies will experience more than one.

Conclusions

Incentives are important communication tools for all companies. We continue to predict the expanded use of incentives in the future. There have been a number of bumps in the road on the way to workable incentives but, until incentives were moved below management levels, these bumps did not become widely visible. As incentives have become more broadly used, they have become more important. Business leaders, therefore, must act now to build more life into incentives for the coming year.