Innovation drives productivity and opens up new opportunities. The most innovative companies, from Apple® to Zappos, are also the most successful. But innovation requires flexibility, a willingness to change, and a good tolerance for risk—three things that aren’t always part of compensation management.
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Your compensation plan needs to evolve as your organization moves forward—so why not takes steps now to make it more innovative while still ensuring it ties to your business strategy? Yes, there is some risk to change, but the rewards elevate your organization and your people to a higher level, which is never a bad thing.
Here are some factors to consider, courtesy of Diana D. Neelman and Mary A. Rizzuti of Compensation Resources, Inc.
Why Innovate?
Many companies seek to change their compensation structures to achieve key strategic plan measures, note Neelman and Rizzuti. Aggressive performance goals often require new rewards mechanisms, and in some cases, anticipated company liquidity or transactions require special pay programs.
Translating Innovation to Compensation Plan Design
Innovation does not necessarily mean that you have to “shake things up” in a big way. It can also mean introducing new programs or new ways of thinking about how to look at compensation.
For some companies, it can mean introducing compensation programs that are new to them but have been used by other companies for many years.
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Where is innovation happening now in the compensation arena? Base salaries tend to be very steady and driven by market factors, so an organization that moves to a more aggressive market positioning tends to want to reward high performance and employees who consistently achieve strategic goals.
More and more, companies are embracing a variable pay mind-set to rewarding employees—in large part because companies continue to expect more with less and budgets remain tight. This means a shift toward increased attention on incentive pay.
Why Use Incentives?
Incentives achieve a number of organizational goals:
- Provide the opportunity for high‐performing and high‐potential employees to impact business strategy, mission, and financials.
- Allow highly competitive pay while limiting fixed costs.
- Are self‐funded (ideally).
- Can work deeper into the organization.
- Provide greater opportunity than merit increases.
- Begin transition from culture of entitlement.
- Reduce expectation to receive increase or bonus.
- Focus on relationship of pay and performance.
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Types of Incentive Plans to Consider
- Incentive plans tied to business goals
- Performance requirements defined up front
- Can be short‐ or long‐term in nature
- Sales compensation
- Tied to various sales goals
- Ability to impact bottom line
- Recognition or spot awards
- Designed to reward individual or team performance
- Cash or noncash rewards
- Team or group incentives: reward collective performance
Bonuses Are Not the Best Approach
Bonuses are considered “after the fact” payments based on available funds at year-end, note Neelman and Rizzuti. They are often subjective, with an unclear relationship to performance (company or individual). In fact, employees are often unaware of what they did to receive a bonus in the first place.
Bonuses can limit engagement and accountability and actually breed an entitlement mentality. For this reason, say Neelman and Rizzuti, they have a limited impact on “innovation.”
Tomorrow, Neelman and Rizzuti’s thoughts on how to bring top management on board with your compensation plan overhaul, plus an introduction to the all-things compensation-in-one-place website, Compensation.BLR.com®.