When Doug David joined Rosetta Stone Inc. in 2013 as the director of sales, he discovered the previous director had built an elaborate and extremely complex variable compensation program that was entirely contained on Microsoft Excel spreadsheets. “It was very sophisticated,” David said. “But no one else knew how to read it.”
That lack of transparency wasn’t just an issue for David. The sales team had no way to track their compensation in real time, so it didn’t really offer them any tangible incentives. They never had any sense of whether they were close to their targets or what they needed to do to push to the next level, he said. “Once a month, he just sent the spreadsheet to the sales team to validate their numbers, and they didn’t see it again until the next month.”
He also found that the spreadsheet model failed to meet Sarbanes-Oxley Act requirements for audits, which put the global language training software company at risk for compliance issues.
That’s a mistake a lot of companies make, said Scott Olsen, U.S. leader of HR service for PricewaterhouseCoopers. “Governance isn’t sexy, but it’s an important part of comp and benefits programs,” he said. When companies don’t implement effective governance, they put themselves at risk.
So one of David’s first tasks at Rosetta Stone was to get rid of the spreadsheets and implement new incentive compensation sales management software, called Xactly. Having a software-based system gave the sales team much clearer insight into their goals, and it gave David the flexibility to make changes and create multiple plans for different roles, regions and product categories. “It made my job easier, and it’s much more flexible for our users,” he said.
Creating transparency, oversight and flexibility is critical for every compensation and benefits program, said Elissa Tucker, research program manager of the American Productivity & Quality Center, or APQC. “You can have the best plan in place, but if it is not motivating employees, it’s not working.”
HR’s Toughest Task
Building an effective compensation and benefits program isn’t easy. In fact, many industry experts say it is one of the most challenging things HR has to implement.
“One of the biggest issues is that it is both complicated and high-stakes,” said John Bremen, managing director of talent and rewards at Towers Watson & Co. He noted that, in most companies, compensation and benefits represent the largest single annual expenditure. “A typical company with 20,000 employees will spend $2 [billion] to $3 billion per year on comp and benefits. That’s huge.”
Don’t Overthink It.Sometimes a bonus plan can be too complicated, or lack of communication can cause employees to think an otherwise competitive program is unfair, the APQC’s Elissa Tucker said. “Identifying those pain points by talking to employees will give you a road map for change.”
Don’t Overdo It. The goal of incentives is to motivate people, but if you try to offer incentives for too many behaviors or outcomes, people can’t prioritize. “The magic number for incentives is three,” said Xactly Corp. CEO Christopher Cabrera. “After that, the level of performance can go down because the incentive program becomes too complicated.”
What’s Your Vendor Plan? The technologies and vendors you choose will depend on your size, global footprint, plan design and existing systems. Some companies work with multiple vendors to administer different aspects of their compensation and benefits programs, though that adds complexity, said Towers Watson’s John Bremen. “If you can find one vendor to manage as much as possible, it will likely provide the best cost advantage and eliminate the need for you to be your own general contractor.”
And with the growth of pay-for-performance and variable incentives, finding the right balance of cost, motivation and legal compliance can feel like an insurmountable task.
“It used to be that the workforce was homegrown and you could have one comp and benefits program for everyone,” Bremen said. “Now, with the global workforce, different generations of workers and different types of employees, you need to be much more tailored to accommodate a diverse audience.”
Yet, many companies fail to employ the rigor and differentiation these programs require to effectively motivate all of their employees. Instead they leave compensation and benefits decisions up to gut feelings, and how much money is in the bank when someone is hired. That is not only a poor use of funds, but also it puts the company at risk for compliance failures, financial losses, litigation and unhappy employees, Tucker said. That’s not only wasteful, but also it can be a disincentive for employees who feel underpaid and undervalued.
What High-Performing Organizations Do
The most effective organizations have clearly defined job families and individual positions, and they employ pay-for-performance, differentiated incentives and career management strategies that are tied directly to productivity goals and business performance, Bremen said. It can be a complicated program to build and manage, but the payoff is clear.
Towers Watson’s 2013-14 Talent Management and Rewards survey shows organizations that have an integrated approach to total rewards strategy are five times more likely to report that employees are highly engaged and twice as likely to report achieving financial performance compared with their peers.
Unfortunately, Bremen said, differentiating is not as widely practiced as it should be, especially for employees with critical skill sets. As a result, the positive effect of incentive programs on employees is disappointingly low.
A 2013 report from Mercer shows similar results. While 9 in 10 organizations said they have a “pay-for-performance philosophy,” just 4 in 10 actually track and measure alignment between performance ratings and compensation decisions.
Pay-for-performance programs can be very motivational, but only if they are managed effectively, said Lori Holsinger, a Mercer analyst. You need to decide what pay for performance means for your organization, what performance will receive merit increases, and how you will reward employees. Otherwise, it won’t be effective, she said. “It requires a lot of work, and you have to be diligent.”
Case Study: Makeover at Acme
In 2011, Acme Scenic & Display in Portland, Oregon, was coming off a three-year pay freeze. Bruce Farnsworth, the company’s chief operating officer, wanted to implement a new round of raises, but the company had no formal method for offering employees incentives through salary or benefits programs. “It had always been a haphazard process,” he said. So he attended a workshop on how to use external industry data and internal employee information to create a formal compensation and benefits framework, and he started rebuilding his program.
He spent eight months creating job classes and categories; he then wrote a job description for every position. He used PayScale Inc., a salary profile database company, to find equivalent jobs in related industries, and set three-tiered salary ranges based on those numbers. “It forced us to do grading and identify equivalencies in jobs,” he said.
He rolled the program out in 2012, and saw immediate results.
Having a formal structure for raises allowed Farnsworth to predict his compensation and benefits budget more accurately based on the time and percentage of anticipated salary increases for employees. He also let all employees know how the new program worked, and where they fell in the pay range, so there was consistency across the organization.
“That communication piece was so important,” Farnsworth said. It helped dispel arguments from some employees that they were being underpaid, and it let everyone see where they were in their salary range and what they needed to do to improve. “People can now see their growth over time, and what they can accomplish if they push themselves.”
Get a Number. The first step to building a balanced compensation and benefits program is understanding your budget and workforce management goals for the year. “Think about what you have to work with and what you want to achieve,” said Elissa Tucker of the APQC.
Don’t Work in Isolation. Whether you are creating a new program or updating the one you have, involve finance and legal from the outset to ensure the structure and administration of the program is both legal and affordable, said Scott Olsen of PricewaterhouseCoopers. “They are going to get involved eventually, and if you wait until the end, it can lead to a lot of unnecessary rework.”
Gather Internal Data About Your Current Program. Benefits usage data, employee satisfaction surveys, exit interviews and focus group discussions are all useful places to find out whether employees value your compensation and benefits programs, and what they would like to see changed. You should also ask whether they think the program is easy to use, fair and if there is enough communication about the plan.
Review External Research. To ensure your compensation and benefits program is competitive, study market data and compensation surveys for your industry, region and key job titles. “Review reports at least yearly to identify new trends,” Tucker said. “And more often for hard-to-fill roles.”
Build a Career Framework. Having clearly defined jobs and job families for every department will give you a foundation to fairly compensate and promote employees, said Mercer’s Holsinger. Each job should include a job scope, required experience and expected performance or outcomes. Then create levels within each job and job family to determine what level of compensation an employee should receive. “This creates consistency and fairness across the organization.”
Choose an Incentive Program and Stick to It. Whether you offer pay-for-performance, bonuses or other incremental incentive programs, they have to be consistent, and employees need to understand how they work. Otherwise it can cause strife and dissatisfaction among employees.
Think Global. Remember to factor in cost of living, compensation trends and global employment laws for overseas employees, said Rosetta Stone’s David. Many countries have employment laws related to paid time off, percentage of income that can come from bonuses and requirements for profit-sharing — all of which can affect the legality and competitiveness of your offering. “Do the research because there are a lot of variables to consider,” he said.
How to Lower Costs and Increase Value.
If you take the time to find out what employees want most from a compensation and benefits program, you can generate more value for fewer dollars. And if you don’t, the opposite can happen, said Scott Olsen of PricewaterhouseCoopers. For example, studies show most people are willing to trade an annual bonus for 75 cents on the dollar in salary.
Divvy It Up. Based on your budget, goals, research and career framework, define salary ranges, bonuses and benefits for each job category and job level.
Offer Incentives. One of the most effective tools for motivating employees is an annual incentive program, according to a Towers Watson report. This can help employers re-energize top performers while managing costs. “Differentiating pivotal workforce segments enables employers to lower base pay increases, incentive payouts for low performers … and re-allocate full and appropriate compensation to high performers.”
The Stock-Option Dilemma. Stock options can be a valuable incentive or a waste of money depending on how you present them. If all employees are granted stocks, they will take them regardless of whether they value them, said Scott Olsen of PricewaterhouseCoopers. If you offer limited shares in exchange for salary, the employees who value stock options will take advantage of the program, and those who don’t won’t — but they will still appreciate having the option. “One program costs more and has less value, while the other costs less and has more value.”
Take Advantage of Technology. A 2013 Mercer study shows that more than half of respondents use some form of compensation technology. “Technology can afford key benefits, such as ready access to accurate data and actionable insight to all stakeholders,” the report said. Compensation and benefit software can also provide ease of use to HR and managers as they hire new employees or promote from within, and support more efficient audits for internal and external governance processes.
Ideally your compensation and benefits technology will be integrated with your existing human resources information system, Olsen said.
Communicate. “Communication is a huge piece of the comp and benefits program, but it often gets forgotten,” Tucker said. That can put all of your hard work to waste.
HR needs to communicate frequently and consistently with employees about how the compensation and benefits program works, how it compares to market standards and what they can do to take advantage of it. “Consistency of message is key,” Olsen said. When employees understand the value and can see how their behavior affects their incentives, it becomes more motivating.
Summarize Results for Leadership. The C-suite doesn’t need to get deeply involved with compensation and benefits administration unless there are problems or big changes afoot, Olsen said. Instead, tie compensation and benefits reporting to broader workforce management meetings, sharing results in conjunction with performance management outcomes, employee satisfaction surveys and future workforce planning initiatives.
Review Internal and Market Data. At least once a year, re-evaluate your program based on employee feedback, satisfaction surveys, turnover rates and external market research to ensure your program remains competitive and it is driving the right behavior. “A program may look great on paper, but you have to monitor it in the field to see how people respond,” Tucker said.
Leave It Alone. Don’t make changes unless something is actually broken. When you constantly tweak your program, people become suspicious and assume they are getting the short end of the stick, Olsen said. If you must make adjustments, change one element at a time, and map its effects on the entire program before you implement it. “You’ve got to look through a broad lens, because a lot of codependencies exist.”
Plan, Do, Review
• Determine your budget and what business strategies you would like to offer incentives in for benefits and compensation.
• Gather internal and external research on what employees want and what’s competitive for your industry.
• Build a career framework that clearly lays out how different jobs and levels of experience will be compensated to create consistency in your compensation program.
• Use technology to gain transparency, ease of use and compliance.
• Limit the number of outcomes for which you offer incentives to maximize performance.
• Communicate with employees about the program and how it works. Let them know how they can take advantage of it, and what they can do to improve their performance.
• Revisit internal and external data about the program to identify any pain points and ensure your offerings are still competitive.
• Tie compensation and benefits reporting to broader workforce planning reports.
• Don’t make changes to the program unless they are absolutely necessary.