A recently published study by Buck Consultants suggests the recession and its aftermath have changed the compensation and rewards landscape, and some adjustments are needed to "revive and inspire" today's workforce.

After a period of severe dislocation in compensation practices (wage freezes and/or cuts, mass layoffs, small or non-existent merit increase budgets), organizations appear to be adjusting to a new set of norms.  While many practices will look similar, some elements are going to be taking on more or less prominence in the post-recession economy.

Since the beginning of 2010, there has been a significant reduction in special cost-cutting actions, including pay or hiring freezes, temporary layoffs or furloughs, pay cuts, and suspension of company matches to defined contribution plans.  According to Buck, as of January 2010, nearly two-thirds (64%) of organizations reported having implemented a pay freeze within the prior 18 months, a figure that dropped to less than half (48%) by August 2010. Buck Consultants' most recent study, Reviving and Inspiring the Workforce: 2011 Compensation Trends Survey, shows a further sharp decline in pay freezes to 9%, which is more in line with historical patterns.

Typical pay increase budgets also have shifted gradually over time, from a long-standing 4% to the current norm of around 3%.  Several recent studies have shown this same general trend.  While increase budgets have rebounded from recessionary lows, they are likely to remain close to 3% for the foreseeable future, assuming no significant changes, barring dramatic changes in inflation and/or the labor market, neither of which appear on the near-term horizon. It's not that organizations are unwilling to spend more, it's that they want to make sure it is worth doing so without committing to additional fixed costs in the form of higher payrolls.

Pay for Performance Dominates
With pay increase budgets stabilizing, an even greater emphasis is being placed on pay-for-performance programs in order to motivate workforces and attract and retain top talent. Organizations are finding that with fewer merit increase dollars available, setting appropriate variable pay budgets and selecting strategically-aligned plan metrics is more critical than ever.  At the same time, greater performance expectations are being placed on employees as organizations continue to look for ways to innovate and grow while containing labor costs.

Of course, effective rewards programs are about more than just money. In Buck's Reviving and Inspiring the Workforce survey, the top strategy for retaining top performers is to provide new career development opportunities (41%), followed by three compensation-related strategies: market pay adjustments (30%), larger base pay increases (24%) and larger bonus opportunities (21%). These findings reveal the importance of rewarding top performers, both thoughtfully in terms of what the employee values, and responsibly in terms of what is fiscally viable.

Continued Dependence on Variable Pay
Over the past three years, annual bonuses have varied widely depending on performance, as should be expected. With limited ability to make fixed-dollar increases during the past several years, variable pay programs came to the rescue for many organizations. What has remained consistent during this period are the budgets of most annual bonus programs, even though payouts varied widely during the the downturn and subsequent recovery. After all, there are no guarantees when it comes to variable pay, since they should be designed not only to encourage and reward desired performance when it occurs, but also to reflect financial realities.

According to Buck's most recent survey (February 2011), 31% of organizations have paid or expect to pay bonuses that are within plus or minus 5% of last year's amounts. An even larger number, 44%, expect bonus payments to exceed last year's amounts by at least 5%. One-quarter (25%) expect bonus payments to trail last year's amounts by 5% or more.

When looking at bonus payments versus targets, 44% of organizations report they have paid or expect to pay bonuses that are within plus or minus 5% of target. About one-quarter (27%) expect bonus payments to exceed targets by at least 5%, while 29% expect bonus payments to fall short of targets by 5% or more.

Attraction and Retention Trends
For some time now, organizations have been carefully watching for an uptick in turnover rates, which would begin to substantiate reports that employees are seeking new opportunities as job openings surface. While these indicators have yet to reveal sustained movement in the job market, evidence shows that organizations are maintaining or implementing programs that will enable them to attract and retain employees as the competition for talent grows and intensifies.

Approximately two-thirds (63%) of organizations report using hiring bonuses, while 41% report using or planning to implement retention bonuses. Two-thirds (66%) report an existing employee referral bonus program, where employees are typically eligible to earn multiple bonuses. Such bonuses can have the dual benefit of attracting a strong performer while helping retain the recommending employee.

Among organizations with referral bonus programs, 79% rate their programs as "equally effective" or "more effective" than other recruiting methods. Similarly, 53% of these organizations rate their employee referral bonus programs as "quite valuable" or "extremely valuable" when considering both effectiveness and cost.

While reward practices typically follow the ebb and flow of the economy and labor market, it appears that some new norms are taking hold (even if they have been trending in this direction for years): fewer dollars available for fixed dollar base pay increases, stable to improving variable pay budgets and payouts, a greater emphasis on non-monetary reward strategies, and renewed efforts to attract and retain talent.

Welcome to the "new" normal.  It's time to leave the COLAs and juicy merit budgets behind and move toward ways to retain and motivate high performers and to attract new high-potential workers!

Corporate performance and CEO pay are poorly correlated, according to executive compensation expert Graef Crystal.

Crystal recently completed a study for Bloomberg News on the relationship between shareholder returns and CEO pay, and found that no matter how the data was sliced, the relationship was a poor one.  In other words, the relationship between what shareholders earn on their investments in a company and and what CEO earns is not a very good one.

By viewing the interactive graph at this link,  one can see that the link between pay and stock performance is a tenuous one. The data is based on over 2009 data from 271 large public companies that have already reported their financial results and their executive compensation.  2009 was a very good year for the most stocks, but a generally poor one for most businesses, so we should expect some divergences.

In periodic posts in the coming months we will look closer at this topic, as it's a "hot" one that won't seem to go away.

Upcoming StrategicPay Series Workshop:

Don't miss our upcoming intensive  1/2 day workshop "Utilizing Market Data and Conducting a Competitive Pay Analysis" on June 10th.  See here for more information.

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?