Research published today by global management consulting firm Hay Group reveals that 26% of U.S. companies have already increased or plan to increase the proportion of variable pay in their employees’ pay programs. This compares to only 12% of organizations globally that have decreased or plan to decrease the proportion of variable pay. The shift also brings a renewed focus on performance, with 66% of U.S. companies (and 71% globally) reporting they have already changed or plan to change the performance metrics in their variable pay programs. Approximately 40% of the organizations in the U.S. and nearly half (47%) of companies globally have already increased or are planning to increase performance thresholds in plans as well.
Why the Change?
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.”
About the Research
Responding to strong interest in variable pay from our clients, this research was conducted to identify key trends and current practices in variable pay programs. In May 2010, we surveyed just over 1,300 companies from across 80 countries on their variable pay policies and their plans for variable pay strategy in the future. We also used detailed data from our PayNet databases to analyze country by country the amounts (as % of base salary) companies planned to pay in bonuses to their managers against what they actually paid. PayNet, Hay Group’s online reward information portal, provides instant access to the most timely, reliable and comprehensive reward and benefits data covering 12 million incumbents, more than 14,500 organizations and all major industries. The PayNet data used relates to bonuses paid in 2009 and is based on the Hay Group standard middle management level employee, which is generally equivalent to a middle- to senior-level manager in a department or function of a large multinational company. In a smaller economy, it is more likely to be equivalent to a department or functional head.
*Based on statistics from Hay Group Insight’s global normative database and client business metrics.
About Hay Group
Hay Group is a global management consulting firm that works with leaders to transform strategy into reality. We develop talent, organize people to be more effective and motivate them to perform at their best. Our focus is on making change happen and helping people and organizations realize their potential. We have over 2,600 employees working in 86 offices in 48 countries. Our clients are from the private, public and not-for-profit sectors, across every major industry, and represent diverse business challenges. For over 60 years, we have been renowned for the quality of our research and the intellectual rigor of our work. We transform research into actionable insights. We give our clients breakthrough perspectives on their organization, and we do it in the most efficient way to achieve the desired results. For more information please contact your local office through www.haygroup.com.
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