The StrategicPay Blog is very happy to have Paul Hebert of I-2-I and the Incentive Intelligence Blog as a guest blogger.  Paul is a leading expert on the application of incentive and motivational programs to various compensation and rewards programs.  To contact Paul, click here for more information.  Thank you Paul!

Even if you have Pay For Performance You Still Need Non-cash Incentive Programs

Pay for performance (P4P) is hot right now.  Companies struggling to rein in compensation expenses are looking at P4P as a solution.  Pay a base salary, and pay additional monies for performance over and above some benchmark.  That is an incentive.  It is the basic "do this- get that" structure.

But, if you have a P4P system in place do you need other "non-cash incentives?" 

My answer is yes.  Not 'cuz I sell incentive programs and associated awards (I don't – I sell advice on how to design the best influence programs.) 

You need additional non-cash incentive programs to guide the behaviors that lead to the "performance" part of P4P.

A Couple of Goals A Couple of Bucks

From my point of view, P4P typically focuses on a few goals that when achieved will increase the person's compensation.  However, most jobs encompass a huge variety of tasks.  Too much emphasis on one or two goals and the majority of other important tasks may suffer from the focus on the achievement of the cash-reinforced tasks.  Too much emphasis on a few performance goals can lead to some wide ranging effects.

The Atom Bomb

The best metaphor/analogy (I can never decide which is the right use) for this is…

P4P is like asking a pilot to bomb a weapons factory.  They load the plane, take off and go to the target.  They get over the target and at just the right moment they open the bomb doors and drop the bomb.  Hopefully it will be close enough that the power of the bomb used will take out the target.  It doesn't have to be right on target because the bomb's blast radius is big enough to hit the factory even if it lands a block away or 10 miles away –depending on the power of the bomb. 

An atom bomb has a pretty big blast radius so I don't need to be very exact if I want to take out the factory.  Think of some of the bonuses on Wall Street as atom bombs.

That's kind of how your P4P works if you allow too much to ride on one big incentive opportunity.  You can give folks a target to hit – and a big bonus (blast radius) – and they will do whatever is necessary to drop their bomb.  Unfortunately, because the blast radius is very large you risk a lot of collateral damage - unintended consequences.

A Smart Bomb

Contrast that with a laser-guided bomb.  It is physically smaller, with a much smaller blast radius.  But it is very accurate.

Even if you have Pay For Performance You Still Need Non-cash Incentive Programs

To make a smart bomb effective you need some system to adjust the flight of the bomb as it falls to ensure it hits the target.  Guided bombs have very complicated electronics and the ability to change their trajectory.  That's what makes them accurate.  But that's also what makes them expensive. 

Smart bombs trade the cost of collateral damage for the cost of accuracy.

You could try to convert your P4P atom bomb program into a P4P smart bomb program by guiding behavior toward a goal using a bunch of smaller cash awards that target specific behaviors based on individual skills.  But trying to keep up with very specific goals would mean adjusting compensation plans so frequently no one would ever understand how they were getting paid.

Remember, we're dealing with compensation – the stuff people use to pay for condos, cars and college.  Messing with compensation is serious business.  Most people need to plan and have some sort of understanding of what their next check will look like.  Not many employees can live the life of commission-only sales person who consciously takes on the risk of widely variable pay to achieve an overall higher level of compensation.

So in the P4P world you can either have a few very broad goals that can result in unintended consequences (as most plans do), or try to create many, many small goals that change frequently and create confusion and apathy.

Neither scenario is good.

Non-Cash Incentives

Non-cash incentives allow you to guide behavior without the same expense and confusion. 

Non-cash incentives guide behavior but because they are not linked to compensation, (or shouldn't be) you don't have to adjust compensation plans, worry about confusion or discrimination.  And - you get another benefit – non-cash awards typically have a higher "perceived value."  Non-cash awards tap into the part of the persons brain that imagines them using and having the item/trip – not just the dollar value of it.  It changes their relationship with the reward.  This can help decrease your overall cost.

Using non-cash awards as the guidance system on your P4P program will allow you to impact behaviors that drive results, reduce costs, reduce comp plan changes, clarify goals and allow you to adjust direction more often.

In other words, non-cash awards allow you to create a "smart bomb" and reduce the blast radius, increase the accuracy and avoid a lot of pitfalls associated with changing compensation structures.

Take a cue from our own military – what are they using more of today – atom bombs or smart bombs?

Good riddance to 2009! It's onto 2010 and beyond...

For many of us, the second half of 2008 and most of 2009 was like a bad bad dream that was all too real: massive layoffs/job losses (over 6 million) and skimpy (or no) pay increases for those that survived the crunch; terrible business conditions and plummeting sales and profits (if you were lucky enough to have profits!); tapped out consumers and losses on real estate and retirement holdings, to name a just few fond memories of the past 18 months.

Indeed, let's move on. Here's a brief summary of the current outlook for 2010 for us HR and compensation professionals, with links to additional information.

Employment and Hiring

The most recent national employment data is encouraging, and indicates we are in a bottoming phase, if not getting ready for a slight rebound in early 2010 (don't expect a barn-burner turnaround anytime soon).  Job losses in November 2009 were only 11,000 nationally, which is by far the lowest total in well over a year. The U.S. unemployment rate dropped from 10.2% to 10.0%, and 36 states reported slight to moderate drops in their unemployment rates for November as well.

The recently released Manpower Employment Outlook Survey also reveals some encouraging trends and data.  While 12% of employers expect a decrease in employment in the 1st quarter of 2010, an equal percentage expect an increase.  While this may seem less than inspiring news, when the data is seasonally adjusted for typical seasonal employment patterns, there is a net 6% increase in expected hiring over historical employment trends for the 1st quarter.

When compared to a year ago, employers in the Western U.S. are the most confident, but all areas show improved employment outlooks. Using the seasonally adjusted data, all regions anticipate moderate quarter-over-quarter increases in employment levels.

Bottom line, the outlook is from flat to improving in the first quarter, depending on who you ask, but compared to the past 18 months, this is a huge improvement, and should provide encouragement to job seekers and businesses alike.

For more information on the labor market, see my recent post at the Compensation Cafe.

Base Pay Compensation Trends

While merit budgets for 2010 will be near to historical lows (2.5% to 3.0% in most studies we've reviewed), at least there will be pay increase budgets for the vast majority of employers, unlike late in 2008 and in 2009. (See earlier posts from this blog for more specific information).

2009 merit budgets (most commonly implemented in late 2008 or in the first quarter of 2009) were slashed or eliminated by large numbers of employers.  Depending on the study, 25% or more of employers had 0% pay increase budgets for 2009, and many actually cut pay.  Well over three-quarters of all employers reduced their original planned merit budgets for 2009, but we do not think we will see anything close this type of wholesale budget-slashing in 2010.  Recently completed studies (Mercer, Hewitt, Culpepper, etc.) suggest only about 10% of employers are planning 0% budgets or pay reductions for 2010, and we expect these percentages to drop further, assuming the nascent recovery continues.

Incentive Compensation Trends

Incentive compensation/variable pay budgets (but not necessarily payouts) are holding strong, despite the weak economy and labor markets.  Variable pay is getting more and more ingrained into the foundation of compensation plans in the U.S. (and internationally too, just more  slowly than here). Hewitt, who does a major survey of variable pay trends each year, reports that variable pay budgets dropped a very modest 0.2% (from 12% of payroll to 11.8%) in their latest research on the topic.

Despite this minor drop, the long-term trend toward increased variable pay budgets remains intact.

Executive Compensation in 2010

Executive compensation is the fastest moving target in the world of compensation.  From rapidly evolving reporting and disclosure requirements, to increased government intervention in executive pay, to shareholder activism concerning perceived excesses in executive compensation, it's been a wild past few years for anyone who follows this topic, and the pace of change isn't likely to slow down anytime soon.

The changes are so numerous (and in some instance convoluted) that we won't even attempt to describe them here, but here are a few thoughts as to where we are likely heading:

• New and increased executive compensation disclosure requirements for public companies (see "A Holiday Present from the SEC - New Proxy Disclosure Rules!"  from our friend William Parsons at CompWiser).
• Greater intervention/intrusion by the Federal Government into the executive compensation arena in general (already a very heavily regulated area).
• A greater focus on pay/performance linkages and increased transparency for executive compensation plans.
• An expectaion from various stakeholders (shareholders, unions, shareholder advisory groups, etc.) to see reduced excesses in executive compensation (expensive perquisites, tax gross-ups, huge "parachute" payouts, etc.).  This is already starting to happen, but this one has a ways to go still.

Longer-Term Compensation and Related Trends

• Continued historically low merit budgets. Don't expect a surge back to more normalized merit budgets, even after the labor market gets back to a more healthy supply/demand balance. Some are predicting a long period of historically low merit budgets, and we largely agree, as we see a greater willingness of companies to invest in variable pay than increasing their fixed costs via base pay increases.
• An on-going upward bias towards increasing variable pay budgets, in lieu of larger merit budget pools.
• Pay for performance (real pay for performance) will continue to increase in prevalence and intensity, and will become the the new "merit pay."  Only this time, it will be delivered via various incentive vehicles, rather than via a slight up-tick the annual base pay increase. Follow our friend Paul Hebert at Incentive Intelligence for daily lessons on all things incentive and motivation related.
• Taking better care of people psychologically (not just financially) will become more in vogue, and for good reason: most people desire more feedback and appreciation, and respond positively to it. Increased communication and various forms of recognition can help to build and maintain a healthier workplace. To get you thinking more about recognition and related concepts, see "12 Gifts for Cash-Short, Recession-Weary Workplaces" and "All I Want for Christmas" plus two recent recognition postings here at the StrategicPay Blog from our friend Theresa Chambers at Recognition Works.

Well that's about it for now.  Hopefully you haven't fallen asleep while reading this. We at the StrategicPay Series will continue to keep you informed of the latest information, thoughts and research in 2010.

Until then, here is wishing everyone a happy and safe New Years, and great start to 2010!!