The Best Solution to Managing Salary Costs

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Like most employers, you’ve probably been faced with the challenge of how to manage rising salary increase budgets, reward high performers, and sustain your organization’s financial health by meeting and exceeding margins achieved in past years. How do you manage these critically important yet competing demands? The best solution is to develop a variable pay program.

Variable pay: A solution to base pay management

Variable pay is one of the best solutions to confronting the problem of base salary increases. It is much less expensive to manage than annual base pay merit increases, doesn’t compound salaries over time, and can deliver meaningful rewards and additional compensation to employees without long-term hits to your margins.

Generally, it takes approximately $5 of variable pay to deliver the same financial effect of a one dollar salary increase. Additionally, base compensation costs account for about 20-25% of your revenue, whereas variable pay costs account for about 3-4% of your revenue (on average). As a result, variable pay can be a huge savings for any employer.

Executing variable pay: Paying for performance

Fundamental to variable pay is the issue of pay for performance. Variable pay requires differentiating pay by some factor, usually individual and/or company performance.

This means differentiating pay by performance and allocating all (or most) of your organization’s pay rewards to your highest performers and reducing rewards for your average or bottom performers. It also means that additional pay is entirely dependent on how your organization performs, which can ensure that your organization’s financials remain healthy and that financial performance targets are met year over year.

The trouble with pay for performance is in the execution. For it to work, you need a culture that rewards high performance; standard performance management systems which give employees the insights, tools, support, and clarity they need to reach their goals and managers the tools to evaluate and objectively compare performance; as well as meaningful payouts.

Here are proven best-practices for executing variable pay when it comes to managing these issues related to culture, performance, and payouts:

Culture

  • Types of variable pay offered match the culture. For example, strong emphasis on teamwork = team-oriented variable pay.
  • Leaders support a performance-oriented workplace and encourage rewarding “A-players.”
  • Tenure, attendance, and other non-performance related factors are not considered when making decisions about pay, rewards, or promotions.
  • Pay for performance is widespread. Everyone has the opportunity to earn more pay based on their performance – not just execs, managers, and sales staff.

Performance management

  • Goals are clear and achievable. Employees understand how to accomplish their targets.
  • A manageable number of targets are given – ideally 1 to 3 important goals.
  • Accurate measures of performance are intact and not subject to extraneous factors.
  • Performance is regularly tracked, monitored, and well-documented.
  • Performance is well-managed. Employees are coaching, re-directed, and assisted in reaching targets.

Payout

  • Payouts are substantial enough to be perceived as beneficial, motivating rewards.
  • Differentiation of pay and/or rewards is enough to be meaningful for high performers. Strive for 2 times the average payout to reward your highest performers.
  • Tiers for payouts are set to reward employees for meeting minimum goals as well as stretch goals.
  • Minimum and maximum thresholds for targets and payouts are provided.

Variable pay programs are promising and highly effective. If your organization is challenged in sustaining its annual merit increase program and controlling base pay costs, variable pay can be an advantageous solution. Just keep these best practices in mind before designing a variable pay program to ensure that the program is successful and delivers results.

Additional Resources

Performance Management Services ERC can support performance management initiatives through performance management system development, performance review form development, competency development, consulting on performance management issues, performance management/goal-setting training for employees and supervisors, and more. 

5 Things that Top Workplaces Do Differently

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Over the years, we’ve found a few simple, but consistent practices that differentiate average employers from top workplaces. Here are 5 things top workplaces do differently than other organizations to attract and retain the best talent.

They make investments where it matters most.

Like many businesses, top workplaces are forced to make tradeoffs in offerings and programs, but keep investing in the things that are most meaningful to their top performers. They don’t just throw money at programs with little value – they know what matters most to their top people and put cash where it counts. For example, they invest wisely in strategic development programs, aimed at advancing their top performers into future leadership roles and growing talent pipelines; reserve funds for meaningful rewards to show appreciation to their top people for jobs well done; keep their compensation practices updated and competitive; and also don’t skimp on basic benefits.

They keep their people passionate and engaged in their work.

Top workplaces keep their top performers motivated on the job and passionate about their work, and for these reasons, it’s no wonder that these organizations employ individuals that are more engaged, innovative, and successful than other employers. The best places to work have found simple, but creative ways to engage their top performers through the work itself – spending plenty of time on job design, getting employees involved in brainstorming and implementing ideas, encouraging and coordinating personal development, moving employees into new jobs and roles, and giving employees the autonomy they need to do their best work. Instead of spending time rolling out elaborate motivational tools and programs, they focus on keeping the work fresh and exciting.

They talk to and interact with their employees.

Take a walk through any top workplace and you’ll notice a different climate than other organizations, specifically leaders and managers talking to their employees and engaging with top performers and not huddled in meetings all day with their management teams. You may even notice leaders mentoring employees, recognizing them on the spot, working side-by-side with staff, or participating in an on-boarding event. They aren’t leading from the corner office, but rather from their daily examples. The best places to work simply talk to and interact with their top talent more often than other employers, request their feedback and involvement in the business, and as a result understand what makes them tick. Consequently, their top people feel more valued by the highest levels of the organization, and develop strong relationships with their managers.

They respect and support employees’ personal time.

In an age where businesses and employees are faced with greater challenges, demands, and stressors and fewer resources, top workplaces are realizing that employees have greater needs for support in their work/life – whether those are balancing family responsibilities, pursuing personal goals, improving their well-being, or dealing with losses and other personal circumstances. These organizations take steps to ensure that their top people are able to balance their personal and work lives by addressing workload issues, offering flexible scheduling, providing support services and generous leave, and using a supportive approach in the workplace.

They build and sustain a great culture and work environment.

Ask any top performer: a major reason they love their organization is the work culture. It’s the unique work environment and the people inside the organization that keep many top performers happy and satisfied. In fact, culture is perhaps the most frequently cited “reason for staying” at their organizations. Top workplaces are able to create cultures and work environments that their top people grow to cherish and don’t want to leave. Described as positive, fun, supportive, flexible, collaborative, open, and performance-based, top workplaces have cultures that attract the very best talent. These organizations have a knack for sustaining these cultures through the many ups and downs of business and as their workforce changes.

Many employers believe that creating a top workplace means offering all the bells and whistles, and that their quest is out of reach. Yet our research continues to show that these simple strategies can make all the difference when building a great workplace to attract and retain the very best talent.

For more information about Northeast Ohio’s top workplaces, the 2011 NorthCoast 99 winners, please visit www.northcoast99.com. In addition, for more information about the NorthCoast 99 winners’ best practices, please click here