Most business leaders know that some portion of their pay construct should be in the form of incentives, but are left struggling to find answers to these kinds of questions: How much of someone’s pay should be variable? And who should have incentive pay as part of their mix? How much of the incentive should be short-term and how much should be based on long-term performance? What type of incentive(s) should it be. If these are questions you struggle with, you will not want to miss this.
2. 22
Balancing Guaranteed vs. Variable Pay
What is the right mix of pay
between salaries and
incentives?
It can be a juggling act
Too much focus on salaries
carries a high company cost
with no promise of
performance
Too much focus on
incentives may be perceived
as too risky for employees
3. 33
Balancing Guaranteed vs. Variable Pay
Incentive plans too commonly fail
How should incentives be aligned to your employee
demographics to generate a higher return on
investment?
How do you maximize your rewards philosophy?
4. Salary
Performance
Incentives
Sales
Incentives
Growth
Incentives
Core Health
& Welfare
Plans
Executive
Benefit
Plans
Qualified
Retirement
Plans
Nonqualified
Retirement
Plans
Salaries
Competitive with market standards?
Tied to strong performance management process (merit)?
Managed within a flexible but effective structure?
Performance Incentives
Tied to productivity gains?
Clear, achievable and meaningful?
Self-financing?
Sales Incentives
Challenging yet achievable?
Reinforcing the right behaviors?
Differentiating your offering?
Growth Incentives
Linked to a compelling future?
Supporting an ownership mentality?
Securing premier talent?
Core Benefits
Responsive to today’s employee marketplace?
Allocating resources where most needed?
Evaluated to eliminate unnecessary expense?
Executive Benefits
Flexible enough to address varying circumstances?
Communicating a unique relationship?
Reducing employee tax expense?
Qualified Retirement Plans
Giving employees an opportunity to optimize retirement values?
Operated with comprehensive fiduciary accountability?
Avoiding conflicts and minimizing expenses?
Nonqualified Retirement Plans
Optimizing tax-deferral opportunities?
Aligning long-term interests of employees with shareholders?
Structured to receive best possible P&L impact?
An Aligned
Compensation
Strategy
5. 55
What is Your Pay Mix?
Most companies aim to pay “at market”
What is “at market” pay?
If everyone paid the exact same way would that give you a
competitive advantage in hiring and retaining talent?
What is it about your pay programs that make you
unique?
What might be right for you may not be right for others
6. 66
Lets assume an Accountant should be paid between
$45,000 and $47,500
How much of that should be salary and how much should
be variable should be decided internally
Are either of these company less “competitive” than any
other?
Professional
Accountant
Base
Salary Incentives
Total
Cash
Comp
Option A 44,000 1,000 45,000
Option B 42,500 4,000 46,500
Option C 40,000 7,500 47,500
Sample Pay Mix
7. 77
Sample Pay Mix
Option A - Conservative
Has an advantage around base salary
Has higher fixed costs
Option B - Moderate
Middle ground for both salaries and
incentives
Option C - Variable
Has a competitive advantage around
incentives and Total Cash Comp
Risk when no incentives paid
Professional
Accountant
Base
Salary Incentives
Total
Cash
Comp
Option A 44,000 1,000 45,000
Professional
Accountant
Base
Salary Incentives
Total
Cash
Comp
Option B 42,500 4,000 46,500
Professional
Accountant
Base
Salary Incentives
Total
Cash
Comp
Option C 40,000 7,500 47,500
8. 88
Conservative Pay Profile
Profile Base Pay
Short-Term
Incentives
Long-Term
Incentives Core Benefits Profile
Conservative High Moderate Low Moderate Moderate
Provides a high degree of employee security at the expense of variable pay
High base salaries and Moderate incentives
Generally offers moderate level of core benefits
Cash friendly stable organization
Generally attractive to a younger employee population
Can inhibit the hiring of “high performers”
Rewards performance through merit/promotion
May have difficulty recruiting executive or key employees
9. 99
Moderate Pay Profile
Profile Base Pay
Short-Term
Incentives
Long-Term
Incentives Core Benefits Retirement
Moderate Moderate Moderate Moderate Moderate Moderate
Provides a middle of the road approach to pay
Base salaries at middle of market
Some upside incentive potential
Performance rewarded moderately
Attracts a diverse employee population
Rewards performance through multiple facets
Tries to provide a balanced approach without any distinguishing element of pay
10. 1010
Variable Pay Profile
Profile Base Pay
Short-Term
Incentives
Long-Term
Incentives Core Benefits Retirement
Variable Low High High Moderate Moderate
Provides a high degree of upside earning potential with higher level of risk
Base salaries at low end of the market
Rewards tied directly to business performance
Entrepreneurial mindset – less cash friendly
Attracts high performers, frightens risk averse
Rewards performance through incentive pay
Promotes high level of value sharing
Attracts entrepreneurial leadership through long-term awards
11. 1111
Pay Mix
Considerations
Demographics
Younger/Nonexempt employees value predictable pay
Prefer higher salaries and lower total cash compensation
Entrepreneurial/Mature employees want upside pay potential
Will accept lower salaries with higher total cash
opportunity
Usually seek both short and long-term incentives
Diverse employee populations may require different focus on
pay at different levels
Usually accommodated within compensation
structure/salary ranges
12. 1212
Owner/Shareholder attitudes on pay
Public vs. Privately held companies tend to have different pay
mixes
Privately held companies tend to place more pay in variable
programs
Public companies have the capital to pay higher salaries
Public companies may offer equity to offset salary or
incentive pay
Public companies can be limited to additional
shareholder/fiduciary concerns around pay
Nonexempt organizations also share restrictions around pay
mix
Pay Mix
Considerations
13. 1313
Pay Mix
Considerations
Capital
High salaries provide ease in hiring talent but carry heavy
fixed costs
During poor performance years, high salaries can be a
heavy burden
High incentives offers a way of self-funding compensation
based on company performance
When performance objectives are not hit and no incentives
are paid, this philosophy carries a big turnover risk
Ultimately, your pay mix needs to correspond to your
business plan
14. 1414
How is Your Investment Allocated?
What does your total pay mix look like? Does
it link employees to your business plan?
Why is your compensation budget
allocated the way it is today?
Is your total compensation allocation
producing unintended consequences
(spiraling compensation expenses,
turnover, inability to attract talent, etc.)?
Is there a more cost efficient way to
manage your compensation dollars while
aligning more tightly with your business
objectives?
The mix of incentives is usually the
easiest place to start correcting your mix
15. 1515
Create a Compensation Philosophy
Best practice is to frame up your philosophy into a written
statement
All elements of rewards should be identified (Salaries, incentives,
State where pay is targeted
We pay salaries __________
a) At the top of market
b) At the middle of the market
c) Within market, however we do not lead the market
Our incentives are ________
a) At the top of market
b) At the middle of the market
c) Within market, however we do not lead the market
16. 1616
Why a written statement?
1. Becomes a common narrative
2. Can be shared with existing employees as well as new
recruits
3. Gets managers on the same page
4. Identifies your competitive advantage
5. Creates a consistent framework for rewards
6. Your philosophy statement becomes your
Constitutional Rewards Charter
17. 1717
Align Pay to the Philosophy
Salary ranges and incentive targets are
commonly set and maintained using market
data:
ERI
PayScale
Towers Watson
Mercer
Industry surveys
Ensure you have access to
some market data
18. 1818
Using Market Data
Market data can help create salary ranges
Market data should be interpreted via your
philosophy
Conservative, Moderate, Variable
25th 50th 75th
Mercer - Accountant Sr 49,837 57,498 63,141
Market Data
19. 1919
Market Data + Philosophy
Conservative – High Salary
Moderate – Mid Salary
Variable – Low Salary
25th 50th 75th
Mercer - Accountant Sr 49,837 57,498 63,141
Market Data
25th 50th 75th
Mercer - Accountant Sr 49,837 57,498 63,141
Market Data
25th 50th 75th
Mercer - Accountant Sr 49,837 57,498 63,141
Market Data
21. 2121
Who Are You Hiring?
Baby Boomers – Born between 1946 -1964
Generation X – Born between 1965 - 1979
Millennials – Born in the 1980’s and 1990’s
Demographic identities are extremely influenced by the
world they grew up in
Disclaimer: I will be intentionally painting employee demographics with one
overly-broad brush. These statements will not hold true for all individuals in these
three general classifications. This overgeneralization is intended to provide
directional guidance on pay for these subgroups.
23. 2323
Baby Boomers
Raised by World War II Survivors
Parents worked in manufacturing, agriculture, or retail
jobs
Encouraged to attend Universities (premium)
Focused on having fewer/longer term roles within
organizations
Dominate senior leadership roles
Understand the increased cost of health care
Typically eyeing retirement
Many retired early and have rejoined the job force
25. 2525
Generation X
MTV generation/Latchkey generation
Two parents in the workforce
First to have access to home computers
College/university was strongly encouraged
Incorrectly labeled as “slackers” by preceding
generations
Strong entrepreneurship mindset
More likely to be 1099 than other gens
Married Later/Fewer kids
Took a few jobs to get comfortable
Professional and Mid-Manager jobs
27. 2727
Millennials
Grew up with technology in the house (home
computers, internet, cell phones)
Values teamwork, ingenuity, and creativity
Was told that college/university was a necessity
Many struggled to get jobs after graduation
Many prevailing myths
Not all living in Mom’s basement
Starting to have families
More likely to stay in the same job as previously
assumed
Values individuality and being recognition
28. 2828
Pay Strategy
Profile Base Pay
Short-Term
Incentives
Long-Term
Incentives Core Benefits Profile
Conservative
Millennial High Moderate Low Moderate Moderate
Profile Base Pay
Short-Term
Incentives
Long-Term
Incentives Core Benefits Retirement
Moderate
Gen X Moderate Moderate Moderate Moderate Moderate
Profile Base Pay
Short-Term
Incentives
Long-Term
Incentives Core Benefits Retirement
Variable
Boomer Low High High Moderate Moderate
29. 2929
Theoretical Solution
Structure your rewards around your
Compensation Philosophy
Example:
“My business is a regional call center
hiring predominately college students
and recent college grads.” (Millennials)
“We are a professional investment
management firm hiring mostly
experienced licensed financial
planners.” (Gen X)
“I’m looking to hire extremely
experienced legal professionals.”
(Boomers)
30. 3030
In reality…
Rarely, is your workplace
demographic so pure
Your senior leadership team
is probably in a different
demographic than your
staff accountant
As a result, their financial
goals are probably very
different
Maintaining one
Compensation Philosophy
can be challenging
32. 3232
Common Trend
Profile Base Pay
Short-Term
Incentives
Long-Term
Incentives Core Benefits Profile
Conservative
Millennial High Moderate Low Moderate Moderate
Profile Base Pay
Short-Term
Incentives
Long-Term
Incentives Core Benefits Retirement
Moderate
Gen X Moderate Moderate Moderate Moderate Moderate
Profile Base Pay
Short-Term
Incentives
Long-Term
Incentives Core Benefits Retirement
Variable
Boomer Low High High Moderate Moderate
33. 3333
Why Incentives?
All demographics appreciate incentives
Millennials – Partnership
Gen X – Entrepreneurial minded
Boomers – Hoarding cash for retirement
Most incentive plans do not deliver on a
level that all demographics can appreciate
and relate to
34. 3434
Market Compensation
Trends
Incentive programs are more
common than ever
2014 World at Work study
showed that 99% of publicly
traded companies have
incentive plans
Between 2011 and 2013 private
companies with incentives
plans have grown from 95% to
97% prevalence
35. 3535
Incentives Are A Good Bet
Good for organization to put emphasis on incentive pay
Performance Requirements
Not Guaranteed
Provides alignment with big picture objectives
When properly structured incentives create a partnership
mentality
36. 3636
Why Do
Incentive Plans Fail?
Traditional Incentive plans
They seek to change/set behaviors
They rob employees of their creative input
They reward for completion of small tasks instead of
achieving big picture results
They aren’t tied to overall companyresults/lack line of sight
They are either too discretionary or too quantitative
BOTTOM LINE:
Traditional Incentive plans are philosophically broken.
They are not perceived as empowering a partnership mentality
37. 3737
Merriam-Webster Definitions
Bonus – An extra amount of money that is given
to an employee
Commission – An amount of money paid to an
employee for selling something
Incentive –Something that incites
to determination or action
38. 3838
Traditional View of Incentives
“If I put a carrot in front of
you, you will do
what I want you to do”
At its heart, when structured
inappropriately, incentive
plans are perceived as
manipulative
Employees agree to be
manipulated for money
39. 3939
A Better Approach
“We are part of a team. If
we all work together we
will generate greater
success. That success will
be shared with everyone in
our incentive plan.”
When structured
appropriately, incentive
programs should be
perceived a partnership.
40. 4040
Partnership
Millennials do not value the traditional “employee”
and “employer” relationship
Perceived as a subservience model
“Do what I say and I will pay you”
All demographics prefer a sense
of “Partnership,” working together
towards a common goal
Partners rewarded differently than employees
41. 4141
Simplified Plan Design
Simplifying incentive plan design
Incentive plans have historically
been very metric driven
Potentially creates conflict of
interest
Should I do what’s in the
Company’s best interest or should
I just worry about performing
my goals?
Should I be paid because the
company succeeded or because I
accomplished a list or tasks?
42. 4242
Basic Structure
Plan funds at different levels based on achievement
of company goals
The incentive pool is then disproportionately shared
with employees
Higher level employees
receive a higher portion of
the incentive pool
Employee performance can
“modify” the payout
43. 4343
Advantages
Easy to understand
All employees are tasked with achieving high
level goals
No micromanaging
No conflict of interest
Simple to administer
44. 4444
Silent Communications
What does your salary
philosophy communicate?
Employee Value
What do incentives
communicate?
Performance
Don’t assume your
employees understand this
45. 4545
Employee Awareness
How much do your employees know about pay?
How much do you want them to know about pay?
For a long time, employers benefited from
keeping pay practices behind closed doors
46. 4646
Automobile Awareness
How much do you know about your car?
How much should you know about cars?
For a long time, mechanics benefited from
keeping automobile maintenance behind closed
doors
47. 4747
Do You Trust Your Mechanic?
Why do people not trust their mechanics?
Because until recently you have had to take their word
Why should your employees trust you around pay?
Compensation is just as important to your employees
as transmission fluid
How do you instill trust in your
compensation practices:
Transparency
48. 4848
Communications
Communicate your
rewards philosophy
(Compensation
Philosophy Statement)
Communicate your
incentive plan
goals/metrics regularly
Communicate actual
rewards (Total
Compensation
Statement)
49. 4949
Perception is Key
2015 PayScale Study
• The main predictor of both “satisfaction” and “intent to leave
is whether employees feel they are paid fairly.
• Even when people’s compensation was in line with their value
in the job market, two-thirds believed they were underpaid. Of
that huge group, about 60% reported low job satisfaction, and
said they plan to look for a new job within six months.
• By contrast, the researchers found that, even at companies
that pay below-market wages, if employees know why they’re
paid less than they could probably earn elsewhere, 82% say
they’re “satisfied” with their jobs and plan to stick around.
- Fortune Magazine,October 10, 2015,
“How PayTransparency Can Keep People from Quitting”
50. 5050
Return on Investment
Pay is not a cost
Pay is an investment
Every good investment should have an equal or
greater return
Proper alignment of salary and incentive programs
ensures that you have a desired return
1) Create a Philosophy
2) Align to Market
3) Communicate
51. 5151
Balancing Salaries and Incentives
Salaries and incentives are
the cornerstone of your pay
programs
Not an exact science
Identifying your key
compensation philosophy,
aligning pay accordingly, and
communicating effectively is
only way to win this
balancing act.