Variable pay has its ups and downs

Employers should not jump into rewards program without understanding caveats
By Esther Huberman
|Canadian HR Reporter|Last Updated: 05/06/2011

Employers should not jump into an incentive or rewards program without first understanding certain limitations and caveats and any potential financial impact, according to Steven Osiel, vice-president of total rewards at Pal Benefits in Toronto.

“Each organization must be aware that improved performance alone does not always result in a desired outcome. For example, any of the following challenge a company’s success, irrespective of employee performance: an economic downturn, competitor challenges, manufacturing changes and social evolution.”

For example, a salesperson may be rewarded for reaching a particular sales goal. But what if the raw ingredients required to build the company product increase in price? Or what if products are returned because of reduced customer demand?

Employees may also wish to surpass goals — but not by too much, for fear reaching established goals means management raises the bar next year, making future success increasingly difficult to achieve.

There are further challenges:

•a delay factor between decisions and results

•difficulties in evaluating individual performances separate from a team’s

•difficulties in evaluation due to rapidly changing work goals

•possible biases around gender, friendship, age or race that can taint an evaluation.

In worst-case scenarios, an incentive plan can actually be detrimental. Encouraging competition by choosing to pay workers more, especially if it means they don’t help co-workers, can detract from a sharing culture. Even worse are sabotage or attempts to manipulate the system.

The most obvious benefit of an effective incentive program (whether for pay or other rewards) is focusing employee performance on key company objectives. It’s safe to assume a company with top performers has an advantage over its competitors.

That alone is a grand advantage but an incentive program with cash rewards can also help alleviate employee insecurity in the event of an economic downturn because employees will earn more when times are good. On the flip side, an incentive program may alleviate an employer’s insecurity — if the company does not perform as desired, it shares some of the risk with employees.

Good incentive programs are also great equalizers because they reward employees for performance and achievement of company goals while minimizing subjective elements that can manifest in an employee’s performance review.

Further, these kinds of programs are critical to employee attraction and retention. When companies have to compete for the best talent against others with bonuses or other opportunities, competitors have no choice but to establish incentives to attract and keep quality employees.

Incentive programs can also reduce, to a point, the need for supervision in challenging circumstances (as with field staff or senior managers) by generating greater self-management. And they can nurture a culture of common goals (both profits and information), increased co-operation and integrated work processes.

Esther Huberman is a communications consultant at Pal Benefits in Toronto. She can be reached at ehuberman@palbenefits.com.

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