Find innovative approaches for tackling compensation
If your organization is tinkering with its compensation programs, you’re not alone. According to a recent WorldatWork survey of more than 1,000 U.S. companies, more than half report changing the 2009 projected salary budget increases in light of the current economic situation.
Not surprisingly, more than 90 percent of those making changes are lowering salary increase budgets, and it’s expected that the budgets will fall an average of 1.6 percentage points to 2.3 percent. The report also found that 10 percent of the surveyed organizations will freeze pay in 2009.
Yet revamping compensation strategies in tough economic times can be a double-edged sword. Attempts to reduce the financial impact of compensation programs often run counter to retaining key contributors and talent.
So, what is an employer to do? According to Michael Maciekowich, co-founder and national director of compensation consultant Astron Solutions LLC in New York City, these trying times call for innovative compensation strategies.
The end of merit programs?
Traditional merit programs have been a staple of the American workplace for decades. Their purpose, in part, is to link compensation adjustments to performance. However, performance appraisal methods have not historically relied on accurate metrics. Many organizations find there often is little correlation between employees’ annual performance raises and their actual contributions to the organization.
Paired with budget cuts that do not allow much room for annual raises and bonuses, the shortcomings of traditional merit programs are prompting many employers to seek alternatives.
Career ladder programs
Recently, there has been a resurgence of career path programs, which give employees the opportunity to advance to new positions with higher base salaries or hourly rates. The opportunity for advancement motivates employees to acquire new knowledge and skills. An effective career ladder program enables organizations to plan for and develop the knowledge and abilities its work force needs now and in the future. It helps organizations to retain highly competent employees and to focus recruitment efforts on entry-level positions.
Cash incentive plans
According to Maciekowich, when organizations want to achieve an immediate goal, such as increased sales for the next quarter, short-term incentive programs can work wonders. As the name implies, these programs usually are limited limited to a few months or a year. In some cases, employers find the plans work so well that the strategy evolves into long-term practices.
Advanced Interconnect Manufacturing (AIM), a Rochester-based manufacturer of wire harnesses, cables, and electro-mechanical assemblies, established an incentive plan three years ago. According to Tom Hess, sales engineer and former owner and president of AIM, the plan’s purpose was to help employees understand how their actions contribute to the company’s bottom line, as well as to reward them for their dedication.
AIM’s management had tried profit-sharing plans in the past, but the plans were too complicated to follow and did not produce the desired results. Management went back to the drawing board and created a simple, straightforward plan built around three goals: profitability, improved product quality and an increase in on-time delivery percentages.
Under the new incentive plan, AIM employees collectively receive 15 percent of the company’s net profit before taxes in the form of a monthly bonus check. As part of the plan, employees have the opportunity to earn an additional 10 percent of the net profit before taxes: five percent for reaching an on-time delivery goal, and another five percent for achieving the company’s quality goals.
While implementing the plan, Hess and other top executives spent considerable time communicating the financial incentive for employees. They explained that meeting the delivery and quality goals would improve the company’s bottom line and strengthen each employee’s earning potential.
Since implementing the plan, employee interest and involvement has skyrocketed. Employees are more engaged in the company’s biweekly operations meetings, and workers now self-police practices to maintain a high level of performance.
When AIM was acquired by Cincinnati-based Floturn Inc. in March, its new president, Ron Kosmider, was impressed by the plan’s effect on employees.
“We found a well-run company with a motivated workforce,” says Kosmider, who is also president of Printer Components in Rochester. “AIM’s profit-sharing plan fits in perfectly with Floturn’s culture of employee ownership, and the customers are the ones who benefit in the long term.”
AIM’s profit-sharing plan has helped the company thrive in today’s challenging economy. On-time delivery has increased from an average of 70 percent to more than 97 percent, and quality has improved threefold, leading to happier customers and higher profits. Furthermore, Floturn is an employee stock ownership company and will eventually convert AIM to this model, which will give employees even more incentive to stay motivated and meet the company’s goals.
Well-defined goals
As the case of AIM shows, incentive plans need a clear purpose. It’s important to define the ultimate goal. Is it to increase customer satisfaction? Improve return on investment? Employers must measure what matters most to the company, division, or work group in question.
Maciekowich suggests that for incentive programs to succeed, the reward must be eye-catching enough to change employee behavior. A bonus of two or three percentage points will not work; organizations need to be willing to award bonuses of at least 10 percent to those who meet the goal, with even higher percentages for those who exceed it, as seen at AIM. The goal, therefore, should be challenging to reach and something that makes a significance difference to the organization.
To retain and motivate employees during tough times, many organizations are forgoing traditional compensation strategies for more unique approaches. These companies are basing compensation decisions on employee contribution and achievement and encouraging retention by rewarding their “stars.” By reviving career path strategies and introducing short- and long-term cash incentives, these companies are weathering the economic downturn and sometimes even thriving in the midst of it.
