Powering up incentives for the fast-moving economy

Citation

Zingheim, P.K. and Schuster, J.R. (2001), "Powering up incentives for the fast-moving economy", Strategy & Leadership, Vol. 29 No. 1. https://doi.org/10.1108/sl.2001.26129aab.001

Powering up incentives for the fast-moving economy

Powering up incentives for the fast-moving economy

Patricia K. Zingheim and Jay R. SchusterPatricia Zingheim and Jay Schuster are partners in Schuster-Zingheim and Associates, Inc., a Los Angeles-based pay and rewards consulting firm (www.paypeopleright.com). They are the authors of a new book, Pay People Right! Breakthrough Reward Strategies to Create Great Companies (Jossey-Bass, 2000). # Patricia K. Zingheim and Jay R. Schuster.

When your people open their paychecks each week, what signals are they getting from you? If your company is still paying its workforce based on obsolete pay solutions, you could be squelching work performance, decreasing motivation, and flattening the bottom line. Are you really paying for performance, or for something else? The new hyper-fast economy demands new reward solutions. Here are some tips on how to bring home the performance bacon.

A new look at pay

Pay isn't the only factor that motivates, but it's a very powerful way for a company to communicate its values, direction, performance expectations, standards of quality, and customer satisfaction. Pay must be aligned with the business so it can effectively deliver the proper messages. In our fast-moving economy, rewards are the critical factor in enhancing workforce performance.

This new business strategy of providing total rewards – which include all compensation, a positive workplace, individual growth opportunities, and a compelling future – stimulates and communicates company excellence to the workforce. A company's total reward strategy and its reasons for changing its pay plan should be unique to that company's specific situation.

For instance, a company that produces toys at low cost may provide lower base pay to keep fixed costs low, offer variable pay that optimizes cost and quality, and use ample recognition to celebrate successes. On the other hand, a high-tech, start-up company planning an initial public offering may emphasize variable pay through stock options in order to invest its cash in product development. In an IPO, speed to market with a unique product or service is critical, so there is less emphasis in total rewards on fixed base pay and benefits.

A company's organizational design also affects how a total reward strategy should work. A highly centralized company may need to provide similar types of reward across business units and variable pay linked to overall company performance. By contrast, a virtual organization, in which there are few boundaries between the company, suppliers, and customers, may be able to offer more flexible rewards.

Regardless of size or type of business, however, all companies developing a new total reward system should follow six principles:

1. 1.

   Create a positive and natural reward experience so employees will understand, accept, support, and commit to the new reward system. It is important to involve the workforce in the reward design process through focus groups or design teams. Companies such as Monsanto and General Electric have incorporated this principle and have successfully won the support of their workforce.

2. 2.

   Align rewards with business goals to create a win-win partnership for both the company and its workforce. The company must provide clear direction to the workforce on how growth and profit benefit everyone. People's rewards must be linked to team, site, business unit, group, or company goals and results.

3. 3.

   Extend people's line of sight by making their pay the connection to key measures of business success, such as company financial performance and customer satisfaction. People want to know what the company expects of them and how they fit in the overall plan for company success. Asking them to focus only on goals that are a few feet in front of them creates a dislodged workforce, because they won't understand the company's overall objectives.

4. 4.

   Integrate rewards by taking an overall perspective of total rewards, such as base pay, variable pay, benefits, an exciting and challenging work environment, the opportunity to work with excellent colleagues and leaders, individual growth opportunities, and other forms of reward the company may use. People work for more than money. It is essential to integrate all the rewards so that people understand the role they play in making the business a success and how they will share in that success.

5. 5.

   Reward individual, ongoing value with base pay. To determine an individual's value, take three things into consideration: the skills and competencies the individual has that the company needs, the individual's sustained performance or track record over time, and the individual's value in the labor market. Ongoing value differs from current or yearly performance, because it takes into account the individual's performance trend over time relative to current base pay. Current or annual performance and results are better addressed through variable pay, because awards can be meaningful in size and do not become an annuity for a single year's performance. A one-size-fits-all pay solution simply doesn't work.

6. 6.

   Reward results with variable pay (cash incentives or stock options). Variable pay is the key pay communications tool for linking employees to customer goals, extending their line of sight to include company needs and values, and sharing in the success of the enterprise. Variable pay, which is earned year by year and can take the form of cash and equity, can reward a combination of individual and collaborative results and focus on a host of financial and/or strategic measures and goals. Variable pay is not just for executives, managers, and salespeople. It can be used as a key tool for the entire workforce. IBM and General Mills are among the many companies that reward all employees with variable pay for achieving results.

Spotlight on incentives

Incentives are even more important in a quick-moving economy. While many companies have incentive programs, the results of these programs are starting to lag. Here are some tips to help power up your rewards:

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  Put everyone on incentives or variable pay. Get the entire workforce in the performance results game. Everyone should be a stakeholder in company success. Build ownership from top to bottom so company success is broadly shared.

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  Tie all incentives to business results. Make sure people understand how results make the enterprise succeed and grow. Cascade financial, customer, operational, people, and future-focused goals. Avoid basing incentives on activities and duties, and show the workforce it is important to business outcomes.

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  Use incentives for what people do best – emphasize measurable outcomes. Where possible, use shared goals that encourage collaboration and cooperation. Most enterprise successes result from people working together to accomplish critical success measures. Few individual goals can make an important business difference. Create a mentality of shared destiny – "We are in this together."

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  Set stretch, yet achievable, goals. People must have a reasonable opportunity to earn awards. Missing unreasonably difficult goals destroys the power of incentives. Achieving stretch goals – but not slam-dunk goals – is a positive force for change and celebration.

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  Select a few goals for incentives (three is best, but no more than five). Focus on the most important priorities – do not dilute the power of incentives. Many alternative goals exist. Choose the few that make the greatest performance difference. Often incentives that are provided deeply in an organization do not involve a large enough award to be divided among a lot of measures. It is better to achieve two or three key goals than to miss ten.

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  Provide meaningful, upside opportunity for exceeding goals. Encourage people to go beyond goal achievement by increasing the award for exceeding goals.

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  Calibrate incentives to ensure a win-win outcome for both the organization and its people. Create a balance that allows the organization to gain in performance improvement and people to feel they receive a fair award for their effort.

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  Keep communications and information levels high. Show progress toward goals and what is still needed in terms of performance. The primary role of incentives is to communicate, educate, and create excitement – this requires company leaders to communicate continually. They must be out in front together, delivering the message of achievement.

The fast-moving economy is challenging, and it requires agility. New pay solutions are part of the response for smart companies. Total rewards are essential to making your company attractive to the best people and critical to getting everyone to make a performance difference. How do your pay solutions stack up? Is it time to "take the temperature" of the power and effectiveness of your enterprise's rewards?