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Published on : March 03, 2012

Smart Rewards: Total Compensation Management Offers Employers A Cost-Effective Way To Utilize Incentives

Smart Rewards: Total Compensation Management Offers Employers A Cost-Effective Way To Utilize Incentives

Introduction

With the growing need to maximize productivity from minimal staff, numerous organizations are revisiting their compensation programs to ensure that they are getting the biggest bang for the buck.  For many companies, this unfortunately means that they must make up for lost pay and/or bonus opportunities in order to increase motivation/retention.

However, compensation experts say that organizations which see the greatest benefit from their compensation programs are those that most closely align said compensation plans with their overall corporate strategy and who also encourage behaviors that will positively impact the bottom line.  It begins with making sure that your top performers are getting properly compensated.

These concerns are fueling interest in Total Compensation Management, in which rewards are tied to driving performance and behavior that addresses specific/measurable business goals.

A case in point

Consider the example of Harbor Group Management Company, a private real estate investment and property firm based in Norfolk, VA.  Harbor Group has a global property portfolio with values in excess of $2 billion, including more than eight-million square-feet of commercial space and more than 14,000 apartment units.
Harbor Group recently overhauled its compensation program, focusing on a model that is objective rather than subjective; a model based on behaviors rather than traits. The aim is to assist individuals in adopting high performance attitudes and behaviors. The idea behind this approach is to tie compensation to desired performance/accomplishments while also making certain that each individual’s goals are obtainable.
“In order to manage our employees’ long-term growth potential, we knew their appraisals had to be specific to job function and demonstrate to them that they could control the outcome,” explains Ron Bates, vice-president of HR at Harbor Group.

To achieve this goal, the company invested in a compensation management system that can support all types of appraisals, suggest pay adjustments based on appraisal scores as well as a job performance matrix, and that can implement the company’s reward-for-performance culture.  A major focus is placed upon effectively communicating precisely how employee performance is measured, evaluated, and compensated.

“We have ended our blanket bonus programs and the total compensation management system has helped us better recognize top performances through performance management,” Bates says. “Increased employee engagement in corporate goals follows naturally.”

Why the interest in total compensation management?

Beyond having better-informed employees, why should an organization care about Total Compensation Management?  There are several reasons.  According to compensation experts, these reasons include:  increased revenue per employee, improved labor costs, improved employee satisfaction, and increased employee retention.

Total Compensation Management could also be the key to enabling many organizations to implement growth strategies that have been put in deep freeze during this frigid economy.  For many organizations, implementing TCM programs is a way to finally break out.

“Companies are having aggressive growth goals as we mark the middle of this year, but the head counts aren’t matching,” notes Mollie Lombardi, Director of the Human Capital Management Practice at Aberdeen Group.

Lombardi says that organizations are constantly faced with the task of trying to get more productivity out of already-stretched staffs as well as wrestling with how to best motivate their employees to deliver maximum results.

“This economic horror-show is the new normal,” says Lombardi. “Companies are telling themselves, ‘We’ve been pushed to the limits. We did it. Now, can we stay at that high level of performance’?”

Whether or not organizations can squeeze more blood from stones will depend largely on making sure that “the right rewards are going to the top performers,” says Jan Rose, a compensation expert for the Human Capital Management Practice at the Mercer consulting firm in New York, NY.  And that is why formal Total Compensation programs, and management tools, can play such a critical role.

The good news, according to Rose, is that: “Companies are using more evidence-based strategies – modeling the impact on the desired results. There is more data available: and assessment technologies, tools and methodologies are greatly improved.”

Creating a Total Management Program

Implementing a successful Total Compensation Program begins with determining what the corporate goals are that you wish to impact.

Once this is accomplished, the next step is determining precisely who your top performing employees are so that you can develop more employees like them. Workforce consultant David Foote, of Vero Beach, FL, says questions that you should ask include:

  • “Who is a good employee?”
  • “What makes these employees ‘good’?”
  • “How do you define their role?”
  • “How do they align what they know to what they do?”
  • “Why do you think that person has had more impact?”

The importance of identifying your top performers is so that you can document the traits and behaviors that they exhibit.  You then use those positive traits/behaviors to model your rewards program by clearly identifying the type of results that will earn the best rewards and by delineating the degree of performance that will get an employee to where they want/need to be.

Getting buy-in and sign-off

At Kronos Incorporated, a workforce management solutions provider in Chelmsford, MA, the manager works one-to-one with each employee to set these goals. According to David Almeda, Vice-President of Human Resources at Kronos One, “Goals are signed-off on to be sure they are in line with the corporate goals.”  Almeda also cautions against putting too much emphasis on top performers at the risk of the majority of employees, who “are all committed, competent and capable.” 

“You have to take a broad approach to get folks developed and engaged,” Almeda says. “You might go a couple of clicks higher for the top talent.”

Satisfying top talent doesn’t require that you empty the bank.  “The top talent will be the top talent regardless of how they are rewarded. It’s who they are,” Almeda says. Instead, Almeda says that training, time off, and/or key assignments may be the reward(s) they really crave (which free up bonus compensation budgets to be more broadly distributed).

Aligning performance with goals

As stated earlier, Total Compensation Management is a forward-driving behavioral strategy, not an after-the-fact rewards one. The key is to tie all compensation actions to specific business goals achieved.

“Low performers might be able to save you money. But high performers can get you to the next level – to help you understand how to do something you couldn’t before, or didn’t see before,” Foote says.

From a strategic standpoint, Rose advises that you ask:

  1. “Where are we trying to go?”
  2. “What are the critical jobs to get us there?”
  3. “What are the skills those jobs will need?”

Then, Rose says the top performers are:

  1. Critical roles, that have a direct impact on business results
  2. Difficult to fill jobs
  3. “Stepping stone” jobs that lead to leadership roles

Rose notes that one manager’s assessment of an employee’s performance can be very different than another’s. That makes it important that process be standardized and well communicated. Performance targets must also be realistic, based on a probability of achieving it with a stretch component built it.

Program pitfalls

A well executed Total Compensation program should motivate and engage employees. A poorly executed one can frustrate and disengage them.

There are several missteps that an organization can take when designing a compensation program. When employees feel there are too many variables involved in earning awards, and/or that their qualifications for rewards is tied to too many other individuals, they can quickly lose hope on obtaining rewards at the end of the process.

Likewise, when employees don’t understand how compensation amounts are determined, and/or they are unable to track their performance against the benchmarks which they're held to, staff can quickly become frustrated.

Some organizations design compensation programs to be overly complex with the goal of prohibiting employees from achieving bonus goals.  There have also been instances of companies segmenting bonus offerings so much that employees simply pick and choose the low handing fruit, missing the opportunity to help address broader corporate needs.

Spence offers an example of one company she worked with that had 30 different incentive compensation measures, each of which paid $500. Employees quickly got into the routine of only targeting the easy-to-achieve incentives, ignoring the others

Employee communication & involvement

If a Total Compensation program is to succeed, it must be transparent to employees and managers alike. Workers want to be rewarded for their efforts.  If/when they fail employees want to know why their work didn’t measure up.  And when they succeed, they want to know how they can repeat that success.  “Rules should be clear, and consistently applied across the organization,” says Spence.

Likewise, managers need to know what is expected of them when they evaluate an employee’s performance. They must do so objectively and within the program guidelines.  This requires a plan that is standardized, documented, and (preferably) automated.

A successful program also requires involvement at all levels of the organization, especially when it comes to executive support.

“The senior exec’s role is to explain the strategy until everyone understands it,” Lombardi says. “The manager’s role is to explain the corporate vision, and how what they are doing advance it.”

As managers design Total Compensation plans, they should keep in mind the following questions that employees will be asking:

  • “What is it I have goals set against?”
  • “How much can I earn?”
  • “If I exceed my goals, what is the payout?”

In addition to properly communicating the program up front, it is important that managers repeat the message often.  Employees should be frequently reminded how the program works, and how they can best take advantage of compensation opportunities.  Explain how compensation is tied to performance, which in turn is aligned with the goals of the business.

“This creates buy-in from employees,” Spence explains.  “It also helps create trust in the motives of the program and how it will be administered.”

Then, follow-up with feedback to the employee – and feedback should be frequent, and flexible. “Everyone likes to get feedback in different ways,” Spence advices.

Parting Advice

Summarizing the advice of compensation experts:

A Total Compensation Management program should be easy to use by managers, provide employees with access to individual profiles, and properly tie compensation awards with measured performance.

Begin by identifying the corporate goals you would like to address. “Be sure you understand your corporate strategy, and then align your compensation plan to meet that,” advises Spence.

Establish a formal process around reward and recognition. “Every time you give a reward, you have to pick the business goal you are addressing,” Lombardi says.

Performance goals should be genuinely attainable, to aid with both motivation and retention. “Employees should be rewarded for their performance as close to when the action occurred as possible,” Rose advises.
Strong performance should be acknowledged throughout the organization, so that other employees can be inspired to repeat the efforts. “Feedback is critical, but so is celebration and acknowledgement of goals achieved and progress made,” Lombardi says.

Finally, involve your staff in crafting your compensation plan, Rose says: “Build a compensation plan around what is important to them – to keep them there; engaged, and happy.”

About The Author

David Weldon is a business and technology writer based in Massachusetts. Contac him at DWeldon646@comcast.net, or through his blog at http://davidbweldon.blogspot.com/