Who gets what depends on what gets done

Salary forecasts for 2001 show continued trend to variable pay programs as employers look to hold onto employees without increasing fixed costs
By David Brown
|Canadian HR Reporter|Last Updated: 06/18/2002

Base salary increases for next year will look a lot like those handed out this year; surveys suggest it’s likely to be in the area of 3.5 per cent.

While moderate wage increases may be good news for employers, they represent the easy part of the compensation equation.

The importance of base salary in structuring compensation packages has been steadily decreasing in recent years while variable pay takes on an increasingly larger role.

Most businesses have already introduced some form of variable pay program — and they did so several years ago. In its annual salary survey for 2001, Watson Wyatt found that fully 77 per cent of Canadian companies offer some kind of bonus or incentive plan. WorldatWork, (formerly the Canadian Compensation Association) figures closer to 72 per cent use some form of variable pay. But the message that’s emerging from forecasts for 2001 is that not only will those programs increase in number, they will also be expanded to include employees at lower levels.

“Reward levels are likely to level off somewhat, they already have in the United States,” said Peter Saulnier, a senior consultant with Watson Wyatt’s Human Capital Group. “But look for pay-for-performance to continue to grow, primarily as far as its prevalence. More organizations are going to implement pay-for-performance and more employees are going to be eligible.”

According to the Watson Wyatt research, some 65 per cent of companies already offer incentive pay below the middle management level and Saulnier said that number will continue to increase. WorldatWork found that of those businesses that don’t yet offer variable pay, more than 21 per cent plan to implement it in 2001. So while pay for performance programs were once only extended to execs and senior level management, those days are quickly disappearing.

Businesses that simply hand out base salary increases will find themselves falling behind if they hope to hold onto staff.

“If the market as a whole is providing some kind of pay-for-performance and you’re not, that puts you at a disadvantage,” said Saulnier.

Companies that think all they have to do is give employees that basic increase risk falling way behind, agreed Nadine Winter of N. Winter Consulting. Paying competitive pay is like giving employees a computer or a phone, or heating and air conditioning — there’s nothing special about it, she said. The attitude among employees now is that they should be paid for their competencies and getting that 3.5 per cent increase is no favour. Employees want and know they can get more than that. “If you’re not paying some form of variable pay you’re way out of step,” she said.

A true incentive plan is self-funding, said Winter. Employees have the opportunity to make more money but the program should be structured in such a way that the company also benefits through improved performance. “It’s so simple it’s mind-boggling,” she said. But while it may be simple in theory, the practice is usually another story.

Variable pay programs have always been difficult to implement even in limited circumstances at the senior level; now HR departments have to structure programs for more people at different levels and start educating greater numbers of employees about how the programs operate.

“It’s a lot of work to do it right,” said Dawna Townsend of William M. Mercer’s executive compensation practice. Generating buy-in at all levels is tough, as is getting the necessary feedback and establishing the appropriate metrics. But there is little point in using variable pay as a cornerstone of compensation strategies if they are not done right and a lot of experts say that on the whole, variable pay programs are not being implemented effectively.

If three-quarters of Canadian companies are now offering employees some sort of pay for performance, not nearly as many are doing it effectively, said Saulnier.

“Many of the plans they may call formal are probably not sufficiently rigorous in order to be motivational,” said Saulnier. Here again it comes back to implementation. “You can have the best designed plan in the world but if people don’t buy into it you’re sunk from day one,” he said. Ideally the program should appear to be owned by the line managers and not HR.

People feel a closer connection that way. And employees shouldn’t have to wait until the end of their year to know if they qualified for their variable pay component. “You want to have results communicated throughout the year.”

This is how the company is doing, these are the targets, this is what employees have to do to get there.

In order for the program to be motivational, employees must understand specifically what they must do to get the reward; believe that they are capable of meeting that objective; and the reward must be of sufficient value to make the effort worthwhile.

Companies also need to become more creative when it comes to structuring compensation packages and should focus on creating total rewards packages including compensation streams beyond base pay, said Townsend. Even old-economy firms, unable to attract employees with “get-rich-quick” stock offers, can take advantage of bullish stock markets by implementing what she calls co-investment plans whereby a group of employees come together, contribute to a pool of capital which is then matched to some extent by the employer. The capital is then used essentially as venture capital to invest in other opportunities.

“It gives them an investment opportunity that they wouldn’t otherwise have,” said Townsend.

Some other findings from the WorldatWork survey of 2,671 U.S. and 197 Canadian firms.

•In 2000, actual increases exceeded projections by 0.2 per cent for hourly non-union employees as well as salaried and management employees. For executives, forecasts were exceeded by 0.8 per cent.

•More than 93 per cent of employees received a base salary increase in 2000, up from 88.9 per cent in 1999. Most of the increases were market or business related, just 7.8 per cent were a result of incentive plans.

•For companies that do offer variable pay, five per cent of the payroll budget was reserved for that purpose for hourly non-union employees in 2000; 5.5 per cent for non-management salaried and 10.1 per cent for management.

•While base salary increases are projected to be about 4.5 per cent in the U.S., Canadian companies lead the U.S. when it comes to offering variable pay. Just 61 per cent of U.S. firms use variable pay programs, while 72 per cent of Canadian companies include them in their compensation strategies.

•Seventy-two per cent of U.S. firms reported having difficulty attracting and retaining employees for key posts, with the most mentioned classification being IT. Just 57 per cent of Canadian firms reported the same problems.

•Asked what actions they had taken to respond to staffing problems, 49.2 per cent of Canadian respondents said they had given market adjustments; 40.4 per cent said they had improved the work environment; 29.5 per cent offered hiring bonuses; 25.1 per cent were paying above market; 15.3 per cent introduced stock programs; 11.5 per cent offered individual spot bonuses; and 5.5 per cent offered sabbaticals. Just 13.1 per cent said they didn’t take any action to retain employees.

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