Human Resource Association Human Resource Association Of Central IndianaOf Central Indiana

June 15, 2006June 15, 2006Designing Successful Designing Successful

Compensation Programs To Attract Compensation Programs To Attract And Retain The Best And BrightestAnd Retain The Best And Brightest

John A. RubinoJohn A. RubinoPresidentPresidentRubino Consulting ServicesRubino Consulting ServicesPhone: 914-533-5310 Phone: 914-533-5310 E-mail: E-mail: rubinoconsulting@aol.comrubinoconsulting@aol.comWebsite: rubinoconsulting.comWebsite: rubinoconsulting.com

A Plethora of Compensation Programs!A Plethora of Compensation Programs!Which Ones Are Right For You?Which Ones Are Right For You?

Base PayBase PayTraditional “Merit” PayTraditional “Merit” PaySkill-Based PaySkill-Based PayCompetency-Based PayCompetency-Based Pay

Variable PayVariable PayIndividual And Group IncentivesIndividual And Group Incentives

---Measured Output---Measured Output

---Profit Sharing---Profit Sharing

---Performance Sharing---Performance Sharing

---Equity---Equity

Using Compensation Using Compensation Programs To Successfully Programs To Successfully

Attract And Retain The Best Attract And Retain The Best And The Brightest…And The Brightest…

Can this be accomplished Can this be accomplished by using a Base Salary by using a Base Salary

“Merit” Increase Program “Merit” Increase Program as the primary reward as the primary reward

vehicle?vehicle?

Variable Compensation Plans Variable Compensation Plans May be the Answer…May be the Answer…

But Are You Ready?But Are You Ready?

““The Ten Criteria For The Ten Criteria For Success”Success”

1.1. A Successful Plan Is Aligned With A Successful Plan Is Aligned With Organizational Culture/ValuesOrganizational Culture/Values

Culture and values must support a variable/Culture and values must support a variable/

incentive framework: instilling aincentive framework: instilling a

““Sales Mentality”Sales Mentality”

Senior management must allow theSenior management must allow the

variable program to workvariable program to work

Should have “Pay By Example” at the top Should have “Pay By Example” at the top

of the organizationof the organization

2.2. A Successful Plan Is Fair toA Successful Plan Is Fair toEmployeesEmployees

Must be internally equitable and Must be internally equitable and

externally competitiveexternally competitive

Performance criteria must be discernible,Performance criteria must be discernible,

valid and understandablevalid and understandable

Program must deliver what is promisedProgram must deliver what is promised

on time and fairlyon time and fairly

3.3. A Successful Plan Is Fair to theA Successful Plan Is Fair to theOrganizationOrganization

Should work towards self-fundingShould work towards self-funding

Organization should be relatively Organization should be relatively

profitable when the program is initiatedprofitable when the program is initiated

Plan design should guard against Plan design should guard against

““windfall” paymentswindfall” payments

4.4. A Successful Plan Sets Total A Successful Plan Sets Total Compensation (Total Rewards)Compensation (Total Rewards)

Compensation policy must be aligned withCompensation policy must be aligned with total rewardstotal rewards and strategic objectives and strategic objectives

Variable pay should be Variable pay should be directlydirectly tied to tied toperformance criteria achievement: direct line-of-performance criteria achievement: direct line-of-sightsight

Consider re-defining what is meant by aConsider re-defining what is meant by abase salary increase base salary increase

5.5. A Successful Plan Yields FinancialA Successful Plan Yields FinancialReturns to EmployeesReturns to Employees

Variable opportunities must beVariable opportunities must be

perceived as “substantial”perceived as “substantial”

enough to motivate performanceenough to motivate performance

Timing of variable payments should be as close Timing of variable payments should be as close

as possible to the qualifying eventas possible to the qualifying event

If designed properly, payouts to employees will If designed properly, payouts to employees will yieldyield

““slices from an expanding financial pie” slices from an expanding financial pie”

6. 6. A Successful Plan Yields A Successful Plan Yields Financial Returns to the CompanyFinancial Returns to the Company

A well-designed and executed variable A well-designed and executed variable compensation program can improve the compensation program can improve the organization’s bottom lineorganization’s bottom line

Measurable benefits can include improved:Measurable benefits can include improved:- Morale - On-time - Morale - On-time

PerformancePerformance

- Productivity - Work Methods- Productivity - Work Methods- Quality - Etc., Etc., Etc.- Quality - Etc., Etc., Etc.- Customer Service- Customer Service

7. 7. A Successful Plan Involves A Successful Plan Involves Employees And ManagersEmployees And Managers

Middle managers will make or breakMiddle managers will make or breakthe variable compensation programthe variable compensation program

Must get buy-in from employeesMust get buy-in from employees

Should involve employees and managers Should involve employees and managers in the plan design, including identification in the plan design, including identification of performance criteriaof performance criteria

Build trust!Build trust!

8.8. A Successful Plan Uses InternalA Successful Plan Uses InternalAnd External DataAnd External Data

Collect and analyze accurate andCollect and analyze accurate andvalid competitive datavalid competitive data

Build the variable program from a Build the variable program from a ““rational” base pay foundationrational” base pay foundation

Base salary serves as the Base salary serves as the anchoranchor in total in total compensation planningcompensation planning

9 (a). A Successful Plan Sets Forth 9 (a). A Successful Plan Sets Forth Clear Performance Clear Performance

GoalsGoals

Performance criteria in successful Performance criteria in successful programs are:programs are:

- “cascading”- “cascading”- a combination of - a combination of quantitative and qualitative measuresquantitative and qualitative measures- simple to understand- simple to understand- supported by valid data- supported by valid data- monitored through strong controls- monitored through strong controls

9 (b). A Successful Plan Sets Forth 9 (b). A Successful Plan Sets Forth Clear Performance Clear Performance

GoalsGoals Aligning rewards to performanceAligning rewards to performance

requires the following:requires the following:

- a clear (and clearly-perceived) - a clear (and clearly-perceived)

relationship between pay and performancerelationship between pay and performance

- predictable measures of performance- predictable measures of performance

- visible benefits to the employees and the- visible benefits to the employees and the

organizationorganization

- regular formal and informal performance - regular formal and informal performance feedback feedback

10.10. A Successful Plan Achieves ClarityA Successful Plan Achieves ClarityThrough CommunicationThrough Communication

Communication mega-objectives:Communication mega-objectives:

- to ensure understanding- to ensure understanding- to change perceptions- to change perceptions (get buy-in)(get buy-in)- to motivate behavior- to motivate behavior

Even the most elegantly-designed variable Even the most elegantly-designed variable program will program will notnot achieve the desired results achieve the desired results unless employees and managers understand and, unless employees and managers understand and, ultimately, buy into the programultimately, buy into the program

VARIABLE PLAN ‘FRAMEWORK’VARIABLE PLAN ‘FRAMEWORK’(Can Be Tailored To Your Organization)(Can Be Tailored To Your Organization)

RANGE:RANGE: PERFORMANCEPERFORMANCE

TARGET 0 – 150%TARGET 0 – 150% WEIGHTINGS WEIGHTINGS

TIERTIER OPPORT. OF TARGET CORP. DEPT. INDIV. OPPORT. OF TARGET CORP. DEPT. INDIV.

----------------------------------------------------------------------------------------------------------------------------------------------------------------------

1 – Officers1 – Officers 35.0%35.0% 0 – 52.5%0 – 52.5% 70%70% 20% 10% 20% 10%

2 – Directors2 – Directors 25.0%25.0% 0 – 37.5%0 – 37.5% 40%40% 50% 50% 10% 10%

3 – Managers 15.0%3 – Managers 15.0% 0 – 22.5%0 – 22.5% 30%30% 50% 20% 50% 20%

4 – Profess. 10.0%4 – Profess. 10.0% 0 – 15.0%0 – 15.0% 20%20% 20% 20% 60% 60%

5 – Support5 – Support 8.0% 8.0% 0 – 12.0%0 – 12.0% 10%10% 20% 70% 20% 70%

What Is What Is SuccessfulSuccessful Performance Management?Performance Management?

Performance management is a managerial Performance management is a managerial process that consists of planning, managing, process that consists of planning, managing, improving, appraising, and rewarding improving, appraising, and rewarding performance. performance.

It is a dynamic process that It is a dynamic process that cascadescascades throughout the various levels of the throughout the various levels of the organization, utilizing observation, feedback, organization, utilizing observation, feedback, development and many other tools and development and many other tools and approaches to maximize organizational approaches to maximize organizational performance.performance.

What Is What Is UnsuccessfulUnsuccessful Performance Management?Performance Management?

Organizational performance philosophy Organizational performance philosophy not ‘determined and articulated’.not ‘determined and articulated’.

Performance criteria established in a Performance criteria established in a ‘vacuum’ --- no alignment.‘vacuum’ --- no alignment.

Primary concentration on the evaluation Primary concentration on the evaluation ‘form’.‘form’.

No consistency in management ‘thought No consistency in management ‘thought and application’ throughout the and application’ throughout the organization.organization.

Middle managers not a ‘quality group’.Middle managers not a ‘quality group’.

Variable Compensation Plan: Variable Compensation Plan: Performance ManagementPerformance Management

Corporate criteria are always Corporate criteria are always quantitativequantitative: measures how the : measures how the organization defines financial/operational success (2 or 3 criteria).organization defines financial/operational success (2 or 3 criteria).

Also, develop Also, develop “Qualitative” Corporate Goals (QCG’s):“Qualitative” Corporate Goals (QCG’s): organizational-wide business & operational objectives for the organizational-wide business & operational objectives for the upcoming performance period.upcoming performance period.

QCG’s are used to “cascade” Departmental and Individual/Team QCG’s are used to “cascade” Departmental and Individual/Team Goals. Goals.

Departmental and Individual/Team Goals Departmental and Individual/Team Goals should be should be both both quantitative and qualitativequantitative and qualitative::

Criteria must be valid, discernible and measurable and, if Criteria must be valid, discernible and measurable and, if applicable, with milestone dates.applicable, with milestone dates.--- No more than four to six criteria per category.--- No more than four to six criteria per category.--- Narrative rating scale can be used to assess qualitative criteria. --- Narrative rating scale can be used to assess qualitative criteria.

VARIABLE PLAN Performance VARIABLE PLAN Performance Criteria (example)Criteria (example)

Corporate criteria (Quantitative):Corporate criteria (Quantitative):NET INCOMENET INCOME

(% growth over previous year)(% growth over previous year)CriteriaCriteria Payout Payout

MAXIMUM >=17%MAXIMUM >=17% 150%150%

TARGETTARGET 12% 12% 100%100%

THRESHOLD 9%THRESHOLD 9% 50%50% <9%<9% 0 0

(Interpolate for points in-between)(Interpolate for points in-between)

Consider Adding MoreConsider Adding More“Pay at Risk”“Pay at Risk”

Remove performance considerations from base Remove performance considerations from base salary increase decisions – pay for performance salary increase decisions – pay for performance within the variable pay framework.within the variable pay framework.

Re-define base salary increases as across-the-board Re-define base salary increases as across-the-board market adjustments only, determined by market adjustments only, determined by competitive position analyses.competitive position analyses.

The difference between the base salary “merit” The difference between the base salary “merit” budget and the market adjustment factor can be budget and the market adjustment factor can be used to used to partiallypartially fund the variable program. (Will fund the variable program. (Will not be fully-funded the first year; requires an not be fully-funded the first year; requires an “investment” on the part of the organization)“investment” on the part of the organization)

On-going “fixed” expenses can be considerably On-going “fixed” expenses can be considerably reduced due to the compounding effect of base reduced due to the compounding effect of base salary increases.salary increases.

Variable compensation is paid in lump sum only Variable compensation is paid in lump sum only when performance warrants: “pay at risk”.when performance warrants: “pay at risk”.

Management Training Workshop Management Training Workshop One DayOne Day

Explain and discuss all components of the new Explain and discuss all components of the new rewards program.rewards program.

Discuss the role of managers in the organization.Discuss the role of managers in the organization. Assess individual management styles and Assess individual management styles and

approaches (use case study examples).approaches (use case study examples). Review and discuss the performance management Review and discuss the performance management

philosophy and methodology.philosophy and methodology. How to align performance management with the How to align performance management with the

new rewards program.new rewards program. How to write successful performance goals (show How to write successful performance goals (show

examples).examples). The charge!: Write your departmental performance The charge!: Write your departmental performance

goals (aligned with QCG’s) and assist your goals (aligned with QCG’s) and assist your employees in writing their individual goals.employees in writing their individual goals.

Employee Communication Session Employee Communication Session One-Half DayOne-Half Day

Explain and discuss all components of the new Explain and discuss all components of the new rewards program:rewards program:

---What’s in it for the employees,---What’s in it for the employees,---What’s in it for the organization.---What’s in it for the organization.

Review and discuss the performance management Review and discuss the performance management

philosophy and methodology. philosophy and methodology.

How to write successful performance goals (show How to write successful performance goals (show examples).examples).

The charge!: Write The charge!: Write youryour individual performance individual performance goals for the upcoming performance period. goals for the upcoming performance period.

Three Primary (Mega) Objectives Three Primary (Mega) Objectives of ‘Managed’ Communicationof ‘Managed’ Communication

Ensure UnderstandingEnsure Understanding

Get Buy-in/Change PerceptionsGet Buy-in/Change Perceptions

Motivate The Right BehaviorsMotivate The Right Behaviors

Tools And Techniques For Tools And Techniques For Effective, ManagedEffective, Managed Communication…Communication…

We can become more effective We can become more effective communicators by observing and communicators by observing and learning from the world around us.learning from the world around us.

Who are the most effective Who are the most effective communicators in our society…and communicators in our society…and what can we learn from them?what can we learn from them?

The Ten Criteria For The Ten Criteria For Success!Success!

A SUCCESSFUL VARIABLE COMPENSATION PLAN… A SUCCESSFUL VARIABLE COMPENSATION PLAN…

1.1. Is Aligned With Organizational Is Aligned With Organizational Culture/ValuesCulture/Values

2.2. Is Fair To EmployeesIs Fair To Employees3.3. Is Fair To The OrganizationIs Fair To The Organization4.4. Sets Total Compensation (Total Rewards)Sets Total Compensation (Total Rewards)5.5. Yields Financial Returns To EmployeesYields Financial Returns To Employees6.6. Yields Financial Returns To The CompanyYields Financial Returns To The Company7.7. Involves Employees And ManagersInvolves Employees And Managers8.8. Uses Internal And External DataUses Internal And External Data9.9. Sets Forth Clear Performance GoalsSets Forth Clear Performance Goals10.10. Achieves Clarity Through CommunicationAchieves Clarity Through Communication

Seven Steps to a Seven Steps to a Motivation-FreeMotivation-Free Compensation ProgramCompensation Program

1.1. Be sure no one quite knows what his/her job isBe sure no one quite knows what his/her job is2.2. Keep selection and promotional criteria vagueKeep selection and promotional criteria vague3.3. Don’t tie yourself or employees to tangible Don’t tie yourself or employees to tangible

goalsgoals4.4. Be vague about who measures performance Be vague about who measures performance

and howand how5.5. Keep salary ranges, increase percentages, Keep salary ranges, increase percentages,

variable plan guidelines, and most components variable plan guidelines, and most components of total rewards secretof total rewards secret

6.6. Surprise employees with a bigger paycheck or Surprise employees with a bigger paycheck or lump-sum/spot awardlump-sum/spot award

7.7. Be defensive when asked to explain and defend Be defensive when asked to explain and defend human resources actionshuman resources actions