Bonuses are on the comeback trail and while there is evidence of new disciplines around variable pay policy, concerns remain that too many companies are getting it wrong, according to just-released global research report.
A survey of over 1300 companies in over 80 countries, including New Zealand, by international management consultancy Hay Group has found 39 percent of companies have or plan to increase the proportion of variable pay in employees’ pay packets and 26 percent are bringing more of their employees into variable pay schemes.
But it’s not business as usual. The research also found that boards and senior management are taking greater role in decision making on variable pay and nearly two thirds of companies were changing their variable pay programmes to better align with their business strategy.
“Bonuses may be back, but they look different – strongly tied to the bottom line, with more challenging targets and greater focus on return on investment,” the Hay Group report says.
“The volatility in the global economy over the past two years has led companies to re-examine the measures they use to assess performance, to reduce the risk of disproportionate or undeserved bonuses. There is new discipline around the subject, with companies conscious that variable pay must be closely aligned to corporate strategy and communicated well if it is to
be effective.”
However, while the focus on strategy is encouraging, there are indications that many companies may not be getting it right, Hay Group says. Areas of particular concern are:
Risky programmes: Overall, few companies are concerned about risk and compliance. “It is possible that companies are addressing risk through the alignment with business strategy. We would welcome this to some extent as there is real danger that an over-reaction to risk could stifle innovative reward strategy. However, we remain concerned that many companies have yet to come to terms with the level of risk that they carry in variable pay programme – financial, operational and reputational – and have simply put the question aside.”
Implementation issues: common problem is that programmes link reward to strategy, but are poorly implemented. Variable pay will not drive performance if the connection between employee actions and company strategy is not clearly understood by the programme participants. Problems arise with overly complex or poorly communicated programmes or lack of buy-in or performance management skills from line managers.
Short-term financial focus: The focus on financial metrics indicates that many companies have still failed to grasp the link between sustainable performance and non-financial measures of performance. narrow focus on financial return has the potential to skew behaviour towards ‘revenue/sales/cost savings’ by whatever means necessary. This also presents problems for employee activities that are not directly related to the bottom line, such as support and non-sales functions. It tends to disengage the majority of employees, who are motivated by more than financial success and who want to be part of an enterprise or goal that they can believe in.
Drivers of Change to Variable Pay Programmes
Better alignment with business strategy61%
Improve company or team performance40%
Create better alignment between corporate and individual performance 36%
Ensure market competitiveness 29%
Reinforce specific business priorities 25%
Improve individual performance 25%
Improve employee engagement 21%
Ensure retention 15%
Better balance of fixed and variable costs 11%
Ease with which the programme can be communicated and understood 7%
Satisfy external stakeholders’ demands (investors, media, community) 6%
Comply with regulations or governance requirements 6%
Reduce risk 5%
Other 3%
Source: Hay Group
