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Top Pay for Best Performance

Learn how companies in a struggling economy are using performance-based compensation to allocate limited resources, reward top performers, and increase productivity. Discover innovative approaches to compensation and the benefits of variable pay techniques.

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Top Pay for Best Performance

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  1. Top Pay for Best Performance HR Magazine Jan.2003 Vol.48 Iss.1 pg30 Presented by: Kacheyta McClellan Mark Reeder

  2. Corning Inc. • Stock price recently dipped to just over $1 • 1% of its value 3 years ago • Slashed 16,000 jobs in two years and frozen remaining salaries • Will give bonuses to employees next month (Feb 2003) who meet their goals • Increase productivity • Secure dominance in potentially lucrative market

  3. Paying for Performance in a Down Economy • Companies have a smaller pot of money to allocate for compensation • Some organizations are giving salary increases, bonuses, or both in varying amounts • With the most going to best performers and most essential employees • Alternative to giving everyone equal but minimal increase

  4. Performance Assessment • Can be based on • Individual or team contribution • Business unit results • Corporate profit or share price • Can be rewarded through • Traditional salary adjustments • Variable pay techniques • One-time or recurring bonuses

  5. Creativity in Compensation • Brad Hill, Senior Consultant with the Hay Group in Chicago • A firm gives each worker a 5% salary increase each year for 10 years • Reduced to 3.5% per year (b/c the firm is not compounding the larger raises year after year) • Can give each employee an annual bonus of 7.2% of their salary • For the same budgeted payout as 5% for 10 years

  6. Watson Wyatt Survey • 40% of top-performing employees believe they receive moderately of significantly better pay than average-performing employees • Including pay raises, annual bonuses, or total pay • Companies providing variable pay to best workers are 68% more likely to report outstanding financial performance

  7. Thoughts of… • Jay Schuster—Schuster Zingheim and Associates • John Bremen—Watson Wyatt Worldwide • Russell Miller—Mercer Human Resource Consulting • Monica Barron—AMR • Ken Abosch—Hewitt Associates • David Balkin—University of Colorado • Mike Lieberman--Synygy

  8. Thoughts of… • Schuster—in the 1990’s, we were throwing money at talent, now companies are more careful who they award incentive pay to • Bremen—on paying for performance • it takes 7%-8% compensation increase to effect employee effort • The best way for an organization to communicate with its employees

  9. Thoughts of… • Miller—Employees will share in the fruits of business success, but also share the risk of belt-tightening • Barron—should make your best performers role models communicating “do this to get these checks” • Abosch—there may be fear of unsatisfied employees • We’re trying to improve performance, not satisfaction • Sometimes we need a healthy dose of tough love

  10. Thoughts of… • Balkin—involving employees in the design of a performance pay system • Half the time, they come up with the same plan I would have • Lieberman—performance pay systems is a sales-oriented concept, easiest to measure is sales

  11. The Role of HR • HR is viewed as essentially managing the biggest cost center that most organizations have. • HR sees performance pay as the best opportunity for them to take a closer look at what they are doing and to challenge the entitlement mentality. • This new thinking gives HR the opportunity to demonstrate its value to the organization and to create a whole new generation of HR professionals.

  12. Goalsharing at Corning • Rewarding employees for meeting important goals, whether or not the company is raking in lots of money, is the heart of the “goalsharing” program at Corning Inc. • This system was developed by the employees and is reviewed and adjusted annually by committees which include workers, managers and union representatives. • The bonus is split into two different parts. • One-fourth of the bonus is based on earnings per share of company stock for the preceding year. • The rest depends on how well the worker has met job performance goals established for their unit over the year.

  13. Goalsharing cont. • “One of the basic premises of goalsharing is that every employee would have line of sight” to the corporate goal. • Individual performance standards “ are set with the idea that each employee can somehow contribute to meeting that goal.” Larry Lukefahr, manager of variable pay programs.

  14. Compensation Criticisms • One of the criticisms of compensation systems is that they fail to adequately distinguish between the best and worst performers. • A second criticism is that some compensation systems don’t take full advantage of bonus pay and focus instead on increasing base pay – a strategy that can compound payroll obligations over time and limit an organization’s options for rewarding its best employees.

  15. When to Tinker or Start Over • According to compensation experts, roughly one-third of performance pay plans fail. Some don’t get set up properly, and some don’t work as well in a poor economy as in a strong one. Even the best pay systems need regular check-ups. • However changes should be consistent, if an organization is tweaking the system back and forth it reaches the point where it is better to start over. • The goal is to establish a system that makes sense in bad economic times as well as good ones, and not to undermine it by rewarding employees who have not produced.

  16. B – YEAR Offers poor performers a salary increase of 3% C - POOR PERFORMERS Offers average performers a salary increase of 4% D - AVERAGE PERFORMERS Offers top performers a salary increase of 5% E - TOP PERFORMERS Offers no bonus A B C D E Starting salary $50,000 $50,000 $50,000 plus merit increase 1998 $51,500 $52,000 $52,500 % bonus $0 $0 $0 salary plus merit increase 1999 $53,045 $54,080 $55,125 % bonus $0 $0 $0 salary plus merit increase 2000 $54,636 $56,243 $57,881 % bonus $0 $0 $0 salary plus merit increase 2001 $56,275 $58,493 $60,775 % bonus $0 $0 $0 salary plus merit increase 2002 $57,964 $60,833 $63,814 % bonus $0 $0 $0 TOTAL FIVE-YEAR COMPENSATION BUDGET $218,670,632 COMPENSATION IN 5TH YEAR Poor performer $57,964 Average performer $60,833 Top performer $63,814

  17. B – YEAR Offers poor performers a salary increase of 2%, no bonus C - POOR PERFORMERS Offers average performers a salary increase of 4%, bonus of 3% D - AVERAGE PERFORMERS Offers top performers a salary increase of 6%, bonus of 7% E - TOP PERFORMERS A B C D E Starting salary $50,000 $50,000 $50,000 plus merit increase 1998 $50,500 $51,500 $52,500 % bonus $0 $1,545 $3,675 salary plus merit increase 1999 $51,005 $53,045 $55,125 % bonus $0 $1,591 $3,859 salary plus merit increase 2000 $51,515 $54,636 $57,881 % bonus $0 $1,639 $4,052 salary plus merit increase 2001 $52,030 $56,275 $60,775 % bonus $0 $1,688 $4,254 salary plus merit increase 2002 $52,551 $57,964 $63,814 % bonus $0 $1,739 $4,467 TOTAL FIVE-YEAR COMPENSATION BUDGET $282,098,796 COMPENSATION IN 5TH YEAR Poor performer $52,551 Average performer $59,703 Top performer $68,281

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