AON Hewitt’s annual study of worldwide compensation found that base pay was on the rise worldwide. Base wages and salaries rose in 2014 by 5.25 globally, with Africa seeing wages and salaries increase a whopping 8 percent.
How about in North America, with its stable economic environment and advantages in trade and finance? The trend was not so rosy – compensation increased by just 3 percent in that time frame.
Political implications aside, one of the accompanying trends is toward incentives. The same study showed that variable compensation had increased in the U.S. to 12.7 percent of total compensation paid to employees in 2014, up from 8.8 percent six years ago.
Some of this may be driven by Silicon Valley and competition for talent, which often is lured away by signing bonuses. Some of it may stem from companies sliding more money into bonus structures to shield themselves from big payouts to employees when company revenues don’t meet goals. But some of it is because incentives are being identified as critical to changing behaviors to drive performance.
When incentives are used with base pay (not in place of it), they can help companies not just keep their top performers, but to help those employees increase their performance. It works in sales, and there’s no reason it shouldn’t work in other areas of the business as well.
Some areas of business, like marketing and even engineering, have become used to at least the idea of incentive pay. Other roles – accounting, legal, human resources, and so on – have traditionally been wage-only jobs. The percentage of total compensation for each role must be tuned to the expectations of employees and to the market; placing too much weight on variable compensation for roles commanding high base salaries can backfire. But introducing an incentive component to the compensation for any role can encourage behaviors that can improve the performance of the whole business.
Take accounts receivable, for example. Getting paid faster adds to the bottom line – so incent your accounts receivable staff to get payments within a certain time threshold. If they meet that threshold frequently enough, they earn an incentive.
HR can be incented around things like recruiting and the speed at which employees are on-boarded, or around its ability to get the entire company to look at a crucial benefits document or a crucial HR-related training course within a pre-determined amount of time.
As CallidusCloud CEO Leslie Stretch pointed out in background for a story in Fortune, these incentives may account for only 10 or 15 percent of employee compensation, since it focuses on what those employees can control they have an emotional reaction to that part of their job and the objectives those incentives take aim on then command the most focus from employees.
That places a new onus on managers. It requires them to hone their skills around developing goals. You want to incent employees to adopt behaviors that result in greater performance, and which are measurable. The data needs to be there so both sides of the transaction are clear on achievement and success. But that data need to come from the right measurements, not peripheral indicators that may not identify success in a direct way. For instance, if you incented marketing on lead numbers, they could crank out more leads, but that might mean reduced lead quality and a drop-off in sales for your company. Instead, if they’re incented around sales-accepted leads or around conversion rates, it’s a better indicator of true success.
At the same time, managers also need to consider what employees have control over and what they do not. Paying someone based on an outcome that’s largely dependent on others in the organization can result in high-performers not being rewarded for that performance, which is exactly what you want to avoid.
This also suggests the concept of the annual review may need an overhaul. A year is a long time in today’s business world; the objectives of most employees today are not the same as they were 365 days ago. If you use incentive compensation, you must be vigilant to identify when the behaviors you need to incent have changed. The goal is to keep employees on a constant path of improvement; without that objective, and without something for employees to stretch to achieve, you will merely pay them for what they’re already good at (which is what base pay is all about).
Businesses’ desire to become more incentive-oriented in their compensation is dovetailing with the technology that’s needed to operate more complex and achievement-driven compensation plans. The software is now available, and you may already be using it. If you can assess your business’s goals, identify the behaviors that will help the people in your business to better achieve those goals, and create goals for each employee that are quantifiable and are tied to the compensation system, you’ll be well on your way to creating a compensation culture tied to achievement.
To learn more about CallidusCloud’s tools for incentive compensation, visit our website.