Special from Atlanta—SHRM Annual Conference and Exhibition

by Steve Bruce, PHR, HR Daily Advisor Editor

“I’m on a worldwide crusade to abolish merit increase base pay systems,” says consultant John Rubino. “They are demotivational.”

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, going on this week in Atlanta, Georgia.

Rubino asked his audience of HR managers if they had merit increase base salary systems. Most hands went up. How many are thrilled with the results? He asked. No hands went up.

Of course, Rubino says, cash isn't the only motivator, but it's the basis of your total rewards program. 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. You are telling a good employee that he or she did great work, you're offering a 3% increase, over 25 bi-weekly payments, that's heavily taxed. Not very motivating, he says.

Better approach? Pay for performance with larger, lump sum payments. 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

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

4. A Successful Plan Sets Total Compensation Integrated With Total Rewards

• Compensation policy must be aligned with total rewards and strategic objectives
• Incentive pay should be directly tied to performance criteria achievement: direct line-of-sight
• Consider re-defining what is meant by a base salary increase

5. A Successful Plan Yields Financial Returns to Employees

• Incentive opportunities must be perceived as “substantial” enough to motivate performance
• Timing of incentive payments should be as close as possible to the qualifying event
• If designed properly, payouts to employees will yield “slices from an expanding financial pie”

6. A Successful Plan Yields Financial Returns to the Company

• A well-designed and executed incentive compensation program can improve the organization’s bottom line
• Measurable benefits can include improved:
• Morale—On-time Performance
• Productivity—Work Methods
• Quality
• Customer Service

7. A Successful Plan Involves Employees and Managers

• Middle managers will make or break the incentive compensation program
• Must get buy-in from employees
• Should involve employees and managers in the plan design, including identification of performance criteria
• Must build trust!

8. A Successful Plan Uses Internal and External Data

• Collect and analyze accurate and valid competitive data
• Build the incentive program from a “rational” base pay foundation
• Base salary serves as the anchor in total compensation/rewards planning

9. A Successful Plan Sets Forth Clear Performance Goals

Performance criteria in successful programs are:

• A combination of quantitative and qualitative measures
• Simple to understand
• Supported by valid data
• Monitored through strong controls

Aligning rewards to performance requires the following:

• A clear (and clearly-perceived) relationship between pay and performance
• Predictable measures of performance
• Visible benefits to the employees and the organization
• Regular formal and informal performance feedback

10. A Successful Plan Achieves Clarity Through Communication

Communication mega-objectives:

• Ensure understanding
• Change perceptions (get buy-in)
• Motivate behavior

Even the most elegantly-designed variable program will not achieve the desired results unless employees and managers understand and, ultimately, buy into the program, Rubino concludes.