What’s Next? Projecting the Future of Variable PayWhat’s Next? Projecting the Future of Variable Pay Ken Abosch, Hewitt Associates LLC ... · 2010-12-6

What’s Next? Projecting the Future of Variable PayKen Abosch, Hewitt Associates LLC

2009 Total Rewards Conference & Exhibition2

Roadmap for Today’s DiscussionEvolution of Variable Pay

Projecting the Future

Variable Pay Maxims


Parameters for Today’s Discussion

Roles below the executive level

Excludes sales professional roles

Annual cash incentives/bonuses

Performance-based awards (not holiday bonuses)


“Those who cannot remember the past are condemned to repeat it.”

George Santayana

Evolution of Variable Pay


Evolution of Variable Pay: 1930’s–1940’s


Evolution of Variable Pay: 1930’s–1940’sCorporate

VPs and Directors

Individual performance plans

MBO-based goals

Modest targets

Budgeted funding

Plants/Field Operations

Plant/Field Top Management


MBO-based goals

Modest targets

Budgeted funding

1st-Level Managers/Salaried

Gainsharing/productivity plans

Minimal targets





VPs and Directors


MBO-based goals

Modest targets

Budgeted funding

Directors and Managers

Cash profit sharing

Company-wide metrics

Minimal targets

Formulaic funding




MBO-based goals

Modest targets

Budgeted funding

1st-Level Managers/Salaried/Hourly Nonunion

Gainsharing/productivity plans

Cash profit sharing

Minimal targets





VPs and Directors


Cash profit sharing

Business incentives


Cash profit sharing

Business incentives

Team awards

Salaried/Select Hourly Nonunion

Cash profit sharing

Team awards




Cash profit sharing


Cash profit sharing

Some use of gainsharing




Evolution of Variable Pay: 1990’s–2000’sVPs and Directors

Business incentivesIndividual performance plansProfit sharing shifts to 401(k) profit sharing

Directors and ManagersBusiness incentivesIndividual performance plans

Salaried/Increased Hourly NonunionBusiness incentivesIndividual performance plansProfit sharing shifts to 401(k) profit sharing

Plant/Field Top ManagementBusiness incentivesSome use of individual performance plans

1st-Level Managers/Salaried/Hourly NonunionBusiness incentivesTeam awards

Corporate Plants/Field Operations


Variable Pay Trends—Prevalence of Variable Pay

A—Salaried/LeadershipB—Hourly

1930’s 1950’s 1970’s 1990’s 2000’s

A

B

100%

50%

0%

A—ManufacturingB—Services

1930’s 1950’s 1970’s 1990’s 2000’s

A

B

100%

50%

0%

A—Large CompaniesB—Small Companies

1930’s 1950’s 1970’s 1990’s 2000’s

A

B

100%

50%

0%


Variable Pay Trends—Prevalence of Variable Pay Type

A—Cash Profit SharingB—GainsharingC—Individual PerformanceD—EquityE—Business IncentivesF—Special RecognitionG—Team Awards

1930’s 1950’s 1970’s 1990’s 2000’s

AB

GD

C

F

E

100%

50%

0%


Variable Pay Trends (Mid-Level Professionals)

Low Eligibility High Eligibility

Organizational Focus Line of Sight

Low Participation High Participation

Symbolic Award Material Award

A 1930’s–1940’s B 1950’s–1960’s C 1970’s–1980’s D 1990’s–2000’s

A

A

A

A

B

B

B

B

C

C

C

C

D

D

D

D


Variable Pay Trends (Mid-Level Professionals)

Discretionary Funding Budgeted Funding

Discretionary Allocation Prescriptive Allocation

Few Plans Multiple Plans

Reward Incentive

A 1930’s–1940’s B 1950’s–1960’s C 1970’s–1980’s D 1990’s–2000’s

A

A

A

A

B

B

B

B

C

C

C

C

D

D

D

D


Reflecting on Our Experiences With Variable PayPositives

Inclusion

Focus

Repositioning of fixed vs. variable costs

Gravitating to greater plan alignment

More at stake

Individual performance

Negatives

Weak alignment

Winners and losers

Entitlement

Skeptism

Line of sight

Complexity

One size fits all

Lack of transparency


“May the dreams of your past be thereality of your future.”

Anonymous


Projecting the Future


Projecting the Future: Next 10–20 Years


Projecting the Future: Next 10–20 YearsCorporate

VPs and Directors

Business incentives


Business incentives

Special recognition

Salaried/Hourly Nonunion

Business incentives

Special recognition



Business incentives


Business incentives

Special recognition


Projecting the Future: Discussion Categories

Plan type

Objectives

Eligibility

Funding

AllocationMeasures

Payouts

Communication


Projecting the Future: Plan Type

Business incentives will be dominate plan typeContains quantitative and qualitative measures

Supports multi-tiered results focusCorporate VPs Corporate Managers Corporate Salaried/Hourly Corporate 75% Corporate 50% Corporate 25% Business Unit — Business Unit — Business Unit — Location — Location — Location — Individual 25% Individual 50% Individual 75%

Plants/Field Top Management Plants/Field Managers Plants/Field Salaried/Hourly Corporate 30% Corporate 20% Corporate 10% Business Unit 50% Business Unit 40% Business Unit 40% Location — Location 20% Location 25% Individual 20% Individual 20% Individual 25%


Projecting the Future: Plan Type

Increased use of special recognition awards

Increased use of special purpose plansPatents

Royalties

Special project completion

Certifications

Competency acquisition/application

Retention


Projecting the Future: Objectives

Rewards drive behaviors that yield desired results

Metric alignment from top to bottom

Manage expenses by emphasizing variable costs vs. fixed costs

Direct linkage to business results (poor results = no payout)



OrganizationOrganization EmployeeEmployee

ShareholderShareholder

Better pay for performance

Better cost control—shift from fixed to variable expenses

Focus employees’ on desired behaviors

Market competitivenessCompanies with lower fixed costs (e.g., with variable pay) are more attractive investments

Employees aligned with shareholder interests

Additional earnings opportunity

Greater control over rewards

Clarification of expectations

Market competitiveness

Variable Pay Value Proposition



Organizations will focus more efforts on:

Selecting performance metrics that have line of sight for all participants

Aligning performance goal with the performance expectations for the organizational unit one level higher

Cascading performance goals down to the individual

Aligning and Cascading of Performance Goals

Department/Facility Goals

CorporateGoals

Business UnitGoals

Business UnitGoals

Department/Facility Goals

IndividualGoals

IndividualGoals


Projecting the Future: EligibilityNearly 100% of organizations will offer broad-based variable payAll nonunion employees will be eligibleIncreasing participation by union employeesNontraditional “employee” categories will be eligible

ContractorsPart-time employeesContingent workers“Free agents”

All industry categories including Education, Not-for-Profit, Health Care, and Government will be includedSignificant global participation


Projecting the Future: Eligibility

0%10%20%30%40%50%60%70%80%90%

100%

Europe Asia Pacific Latin America United States

2005 2006 2007Sources: Workspan—Broad-Based Variable Pay Goes Global, May 2008Hewitt Total Compensation Measurement™ (TCM™) 2005–2007

2020


Projecting the Future: FundingPlan “Trigger” will be in force in all plansMore planful targetingTarget level funding will be budgeted for, and accrued throughout the yearFunding levels will be based on formulaic assumptions regarding expected resultsReserve funding concept will be used to cover top performers/high potentials independent of business outcomesAmount of funding will increase to offset salary increases as vehicle for pay for performanceFunding assumptions will be more role based and less level based


Projecting the Future: Funding

2.0%

16.0%

3.0%

12.0%

Percent of Payroll

4.2% 5.5%

1990 2010 2020

Source: Hewitt U.S. Salary Increase Survey 1990–2009

Base Salary Increase Budget

Variable Pay Budget


Projecting the Future: FundingOrganization spending on variable pay is expected to grow

Actual and Projected Variable Pay Spending for Salaried Exempt Employees

11.8%

15.4%

10.6%

13.7%14.5%

5.7% 5.9%6.4%7.6%7.5%7.6% 8.0%

9.7%9.3%

10.8%

8.8%

4.2%

10.5%9.5%

3.8%

11.4%11.2% 10.8%

13.2%14.1%

15.0%

15.8%16.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Proj.

2010

Est.20

11 Est.

2012

Est.20

13 Est.

2014

Est.20

15 Est.

2016

Est.20

17 Est.

Per

cent

of P

ayro

ll

Source: Hewitt U.S. Salary Increase Survey 1990–2009


Projecting the Future: Funding

Payout

FinancialPerformance

Service Companies

FinancialPerformance

Payout

Manufacturing Companies

Target Calibration to Business Circumstances

Level of Performance

Profit

Expenses

Revenues

Time


Projecting the Future: Allocation

Payouts reflect formulaic results and individual contributions

Managers will have more direct involvement in payout decisions

More “plans with teeth” to break entitlement mindsetMore dynamic upside/downside payouts for high/low achievement

Increased use of nontraditional measures


Projecting the Future: AllocationSalary Increase Criteria

Results

How you do it

What you could do

Competitiveness

Competencies

Development

Cumulative performance

Variable Pay

Results

Finite performance window


Projecting the Future: Allocation

AdditiveModel

Measure A Measure B Measure C

+ + =

EarnedAward

Multiplicative Model


X =

EarnedAward

X


+ X =

EarnedAward

Modifier

Factoring Individual Results Into the Allocation Decision


Base Salary Decision Tool

Base Pay is Low in Range

Employee shows significant potential

This is the employee's relative position in their particular pay grade.

Rate the employee's potential to contribute to the organization over the long term (2-3 years).

Base Pay is High in Range

Adjusted Merit Recommendation:

Name:Business Unit:Performance Rating:Position in Range (CompaRatio):Current Base Salary $100,000

Employee Worksheet - Salary

Relative Position in Range

Skills are readily available in the Marketplace

Rate the employee's consistency of performance over the past two years. If the employee is a high performer, has performance over the past two years been consistent? Or, if the employee is an average performer, is the employee's performance trailing off?

Does the employee posess a skill set that is difficult to recruit for or hard to find in the talent marketplace? Will the employee's specific skills be used for any specific upcoming projects or initiatives?

Employee does not show much potential

Inconsistent performance year-over-year

Consistent performance year-over-year

Long-term Potential Consistent Performance

Skills are hard to find in the marketplace

Specific Skill Set

Pete RepeatCorporate AccountingMeets Expectations100

2.2%


Variable Pay Decision ToolE m p lo yee W o rksh eet - V ariab le P ay

$4 ,000$6 ,000

$4 ,000$4 ,500

C u rren t B ase S a la ry $100 ,000

T a rg e t Ac tu a lAw ard S u m m ary

In d iv id u a l Aw ard :T o ta l:

$10 ,000$20 ,000

$12 ,000$20 ,500

50%

C o rp o rate Aw ard :B u s in ess U n it Aw ard :

W eig h t fo r C o p o ra te G o a l Ach iev em en t 20%W eig h t fo r B U G o a l Ach iev em en t: 30%

In d ivid u a l G o a l #1

T he bonus poo l is de te rm ined by g roup such tha t a re la tive com parison o f ind iv idua l pe rfo rm ance shou ld be a de te rm in ing fac to r in the fina l va riab le pay aw ard

M in im um A che ivem ent (80% P ayou t)

Low A che ivem en t R e la tive to P eers

H igh A che ivem ent R e la tive to P eers

In d iv id u a l G o a l #2 In d ivid u a l G o a l Ach ie vem e n t R e la tive to G ro u p

A ch ievem en t S am e as P ee rs

M in im um A che ivem en t (80% P ayou t)

E xceeded E xpec ta tions (150% P ayou t)

W eig h t fo r In d iv id u a l P o rtio n :

N am e:B u s in ess U n it:P erfo rm an ce R atin g :

T arg e t Aw ard :

P ete R ep eatC o rp o ra te Acco u n tin gM eets E xp ec ta tio n s

20%

T he leve l o f ach ievem en t the em p loyee as reached fo r G oa l #1

T he leve l o f ach ievem ent the em p loyee as reached fo r G oa l #2

E xceeded E xpec ta tions (150% P ayou t)

T a rge t A ch ieved (100% P ayou t)

T arge t A ch ieved (100% P ayou t)


Projecting the Future: Measures

Significant emphasis on line-of-sight measures

Dynamic measures change as business circumstances vary

Use of performance period concept

Increased use of qualitative metricsGreater connectivity to ROI requirements

Fewer metrics


Projecting the Future: Measures

Corporate

Business Unit 1

Business Unit 2

Business Unit 3

Business Unit 4

Region1

Region2

Business Unit Function Individual Leaders 50% 25% 25% Managers Individual Contributors 10% 50% 40%


Projecting the Future: Payouts

Frequency of payouts will coincide with business results/cycles

Greater upside and downside in payout matrices

Potential expansion to multi-year plansAchieve desired performance internal focus

Increased retention vehicle

Support savings efforts for employees

Significant impact of individual performance on payouts


Projecting the Future: PayoutsVariable Payout Approaches

Q1 Q2 Q3 Q4 Goal 1 3% 3% 3% 3%

Example 2 (20% Target)

Goal 2 8% 20%

Q1 Q2 Q3 Q4 Payout 3% 3% 3% 5%

Example 1 (20% Target)

Reserve 2% 2% 2% 6% 20%


Projecting the Future: PayoutsVariable Payout Mechanisms

Year 1 Year 2 Year 3 Year 4 Year 5 Customer Satisfaction Revenue Revenue Growth Market Cap

STI1STI2

STI3

MTI1

MTI2

LTI1

LTI2


Executives Management Entry

Professionals Support Short-Term Incentives Mid-Term Incentives Long-Term Incentives Special Recognition

Projecting the Future: PayoutsMix of Payout Vehicles

Fully Eligible

Partially Eligible

Not Eligible


Projecting the Future: Communication

Timely, detailed communication up front on plan metrics, expectations, award levelsUpdates on performance provided throughout the performance periodIncreased emphasis on business educationDynamic choices in media/formats

PodcastsWeb videoModelersText alerts


Projecting the Future: Communication

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

Actual Budget/Strong Exceptional Very Strong

Fina

ncia

l Res

ults


Variable Pay Maxims


Maxims for Variable Pay

Variable pay will become the new pay for performance

If you are not offering variable pay, you are paying too much

One size fits no oneIt is better to reward the right things than to measure the wrong things

The company with the best managers wins

Tell it like it is


What’s Next? Projecting the Future of Variable PayKen Abosch, Hewitt Associates LLC847.442.3580Booth #909

Documents

What’s Next? Projecting the Future of Variable PayWhat’s Next? Projecting the Future of Variable Pay Ken Abosch, Hewitt Associates LLC ... · 2010-12-6