In yesterday’s Advisor, we discussed why merit programs don’t work according to consultant John Rubino. Today, his take on variable and step-based pay systems.
John A. Rubino, who is the founder and president of Rubino Consulting
Services in Pound Ridge, New York, offered his tips at a recent BLR®-sponsored webinar.
Rubino’s Variable Pay Program ‘Framework’
| PERFORMANCE WEIGHTINGS | |||||
| Tier | Target Opportunity | Range
0 to 150% of Target |
Corp. | Dept. | Indiv. |
| 1 – Officers | 35.0% | 0 – 52.5% | 70% | 20% | 10% |
| 2 – Directors | 25.0% | 0 – 37.5% | 40% | 50% | 10% |
| 3 – Managers | 15.0% | 0 – 22.5% | 30% | 50% | 20% |
| 4 – Profess. | 10.0% | 0 – 15.0% | 20% | 20% | 60% |
| 5 – Support | 8.0% | 0 – 12.0% | 10% | 20% | 70% |
The target opportunity of performance is what the person would receive as a percent of his or her base salary if all goals are achieved.
Rubino suggests 8 percent as the minimum, and he doesn’t like to go below 5 percent. That’s not substantial enough for him. However, amounts do have to be based on market data and what you can afford, he adds.
The range of potential awards includes a 150 percent upside and, of course, a downside of zero.
Then there is a weighting of three types: corporate (we all share in corporate performance), departmental, and individual. As can be seen from the table, the officer level is 70 percent based on corporate and only 10 percent on individual, whereas down at tier 5, 70 percent is based on individual goals, but the person still shares in the corporate goals.
These weights need to be talked about and aligned to your organization, says Rubino. For example, you may want to add a team column. There are many ways to slice this cheese, he says.
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What About Step-Based Pay?
Step-based pay (under which employees get set raises every year in established amounts) is highly organized and very strict, says Rubino.
Rubino’s 5 Top Reasons for Implementing a Step-Based System
1. Strict management and administration of compensation expenses (if control of expenses is very important).
2. Majority of jobs are routine and task-oriented (rote), doing the same thing every day.
3. Performance/skill variation levels of most jobs are minimal—in other words, it’s difficult to tell the difference between someone doing extremely well and average. Often these jobs are either you do it or you don’t do it, says Rubino.
4. Management cannot make appropriate distinctions among employee performance/skill levels for most jobs.
5. Use of alternative reward vehicles, such as comprehensive variable pay, is available.
You often see this kind of structure in a union contract, for example, says Rubino. A 5-year contract may call for $X the first year, then have defined increases for the next 4 years. Of course, he adds, you can build this whether you are unionized or not.
Disadvantages of Step-Based Pay
Disadvantages of step-based pay are obvious, says Rubino. All you have to do is breathe and be there every day, and you will get your step rate increase. Performance beyond meeting minimum standards is not considered.
The most important consideration for comp managers is to be sure that the system is market-based.
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