The top driver for changing variable pay programs was to better align programs with the business strategy (61% globally, 69% U.S.). In the U.S., other top drivers were to create better line of sight between corporate and individual performance (39%), to improve organizational or team performance (37%) and to ensure market competitiveness (30%).
As a response to increasing pressures from boards, more than half (53%) of U.S. companies have already made or plan to make changes to the evaluation process of their variable pay programs in order to better measure their effectiveness and return on investment. Forty-eight percent of companies say that their boards are more involved in making decisions around variable pay than they were two years ago.
“During this time of change it is important that organizations are fully aware of the consequences that raising performance thresholds can have on employee engagement,” said Tom McMullen, Hay Group’s North American Reward Practice Leader. “Many employees have picked up accountabilities from colleagues who have been downsized and have seen limited or no pay increases over the past two years. If the variable portion of their compensation is now more difficult to earn, they may become further disengaged, just when companies most need them on board.”
Financial Focus
More than half (56%) of companies are placing an increased emphasis on financial metrics such as revenue or profit in their variable pay programs. Another 21% plan to increase the emphasis on operational improvements such as efficiency and productivity measures.
“A significant legacy of the economic downtown has been a concentration on the bottom line and a trend away from “soft” metrics, such as employee satisfaction, to hard, financial metrics,” added McMullen. “An emphasis on financial metrics can encourage employees to be focused on short-term financial gain without proper consideration of the risks to long-term sustainability, company brand or broader social concerns. The most successful reward strategies encourage an effective balance of short-term and long-term goals, and recognize the need for a balance between financial, operational and human capital measures.”
The Challenge
The study found that while 80% of U.S. companies agree that variable pay reinforces performance within the organization, only 55% believe that their variable pay programs are clearly understood by their employees. Recognizing this disconnect, 53% of U.S. companies have already changed or plan to change the way they communicate variable pay programs to their employees.
“Variable pay programs can only work if they are understood by employees and managers. More often than not, a simple straightforward program aligned with business priorities is much more effective than a sophisticated program that is difficult to understand,” added McMullen. “We see many organizations seeking to distill program communications down to easy to understand core messages.”
