Rubino, who is founder and president of Rubino Consulting Services in Pound Ridge, New York, offered his suggestions at the 64th SHRM Annual Conference and Exhibition, held recently in Atlanta, Georgia.
Rubino asked his audience of HR managers how many of them had merit increase base salary systems. Most hands went up. Then he asked, How many are thrilled with the results? No hands went up.
Of course, Rubino says, cash isn’t the only motivator; employees are also motivated by work/life balance, development opportunities, and so on. But first, you have to get your cash pay program working. It’s the basis of your total rewards program.
Pretending to Pay for Performance
Many companies are only pretending to pay for performance, Rubino says. With a 2% or 3% budget for merit increases, you’re not motivating anyone except the CFO.
To make matters worse, you are pitting employees against each other, and you’re suffering from the compounding effects of base pay increases.
(Rubino notes that Einstein said compounding is the most powerful force in the universe.)
Think about what you are doing with your merit increases, says Rubino. You are telling a good employee that he or she did great work. Then you’re offering a 3 or 4 percent increase, over 25 bi-weekly payments, that’s heavily taxed. It’s just not very motivating, he says.
What’s the better approach? Reward those who perform well with larger, lumpsum payments.
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Alignment Is Key
Another important factor, says Rubino, is being sure that your pay system is in alignment with your corporate goals and philosophy. Typical of what Rubino sees is a situation in which the whole corporate emphasis is on the team. It’s all about teamwork. And then there’s a merit pay system that rewards individuals. That’s disalignment, and your best and brightest won’t tolerate it, he says. Soon enough you’ll be left with those mediocre employees who can’t leave.
The Great Matrix
Most merit systems depend on the matrix that compares position in range with performance level. But what happens when many employees are excellent and are low in the range? Sorry, manager, you have to decide which ones are more excellent than the others.
And then there’s the very valuable employee who’s at the top of the range. Sorry, Joe, no raise for you in spite of your excellent performance.
The matrix just doesn’t work to motivate employees, Rubino says.
How About Profit-Sharing?
What about profit-sharing as an incentive? It’s not an incentive plan, Rubino says. There’s no line of sight for employees. They can’t see how their individual contribution makes a difference. Same with equity plans, he says. No line of sight. It may be a good way to introduce pay for performance to the organization, however.
Here are Rubino’s ten criteria for success with Pay for Performance.
1. A Successful Plan Is Aligned With Organizational Culture/Values
- The organization’s culture and values must support a variable/incentive framework: instilling a “Sales Mentality”
- Senior management must allow the variable program to work
- Should “Pay By Example” at the top of the organization
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2. A Successful Plan Is Fair to Employees
- Program must be internally equitable and externally competitive
- Performance criteria must be discernible, valid and understandable
- Program must deliver what is promised on time and fairly
3. A Successful Plan Is Fair to the Organization
- Program should work towards self-funding
- Organization should be relatively profitable when the program is initiated
- Plan design should guard against “windfall” payments
In tomorrow’s Advisor, the rest of Rubino’s tips, plus an introduction to a new, reasonably priced, total training resource.
A little known practice instituted by GM in their new Saturn division was broadbanding. However, they combined it with another pratice that is more effective than any other compensation practice namely an agreement with the UAW that was based on pay predicated on the ‘acquisition of knowledge.’ In other words, they installed broad pay ranges for their plant workers tied to the acquistion of knowledge. When an employee learned new skills/competencies they were entitled to a pay increase. I have never heard of another organization who has done this except overseas. I traveled to Singapore and Japan and visited a small computer manufacturing company where they used the same concept. Employees were promoted and given pay increases when they learned new skills. They also wore badges that denoted their skill level. Most companies continue to be interested in growing their own employees and spending huge amounts of money on training and development so why not tie it to pay for the acquisition of knowledge?