PIHRA Scope - Fall 2008 - (Page 16) ENGAGING TALENT continued from page 15 exceeded but not when goals are missed. Chart 1 shows key reasons for variable pay. relationship with the key financial and cost measures that define the organization’s ROI. Engage employees in how they can influence incentive measures and improve results so employees feel they can impact measures used as the incentive funding source that defines affordability to the organization. ROI funding measures ensure the ratio of incentive dollars paid to organizational results makes economic sense and indeed vary incentive compensation costs based on the organization’s ability to pay and business results. The measures for funding variable pay can include one or more performance measures, such as operating income, net margin or other goal performance that positively influences the organization’s bottom line. Chart 2 shows an example of an incentive formula that provides a conclusive ROI on pay costs. The result is that goal achievement and performance improvement pay for incentive awards. This connects employees to organizational success and defines how they add value by closer-in measures and goals. CHART 1: REASONS FOR VARIABLE PAY Performance Variable pay provides the best opportunity leverage in terms of HR return on investment of any workforce initiative Cost Variable pay varies cost based on performance management where base pay and benefits “keep on giving” during both good and challenging economic times Variable pay continues to expand, being applied to more employees in more organizations all the time. Variable pay opportunities are increasing. Organizations are developing new variable pay metrics—for example, fast-growth technology companies are now using measures of customer satisfaction, workforce innovation, and management’s engagement of the workforce as proven links between organizational bottom-line results and a clear line-of-sight to employees. KEY VARIABLE PAY GUIDELINES A few guidelines can enable success from implementing variable pay: Update performance metrics and goals at least annually to vary award payments based on needed performance results and to avoid entitlement. Create an understandable employee line-of-sight between close-in metrics the individual can influence and their CHART 2: EXAMPLE OF INCENTIVE FUNDING PROVIDING THE ORGANIZATION WITH A RETURN ON INVESTMENT Funding First, a measure of profit, operating income, net margin, etc., must be achieved to provide funds to be allocated based on achievement of individual/ team measures. Individual/Team Measures Funds are distributed to individuals and teams once the plan has funded based on closer employee lineof-sight measures that reward individual/team contributions to the funding measure. Award Once plan is funded and individual/team measures are achieved, awards are granted. This assures that awards are granted based on dollars available and provide a return on investment. CONCLUSION Variable pay or incentives work in challenging costmanagement times because they not only reward achieving key performance measures but are also cost effective when they fund based on key measures that make economic sense to the organization. Variable pay provides a rallying cry to the organization’s workforce about how they add value and communicates broadly and meaningfully what creates business success. ■ Patricia K. Zingheim, Ph.D., and Jay R. Schuster, Ph.D., are partners in Schuster-Zingheim and Associates, Inc., a compensation and total rewards consulting firm founded in 1985 in Los Angeles. They received WorldatWork’s highest award, the 2006 Keystone Award, for contributions to the total rewards profession’s body of knowledge. They are the authors of the books, HighPerformance Pay, Pay People Right!, and The New Pay. Their website is www.paypeopleright.com. 367087_ChapmanUniveristy.indd 1 16 PIHRAScope Fall 2008 1/28/08 10:09:33 PM http://www.chapman.edu/it http://www.paypeopleright.com
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