Building a Better Carrot

Companies struggle to make their bonus plans more effective.

Navigant Consulting Inc., a Chicago-based management consultancy, is the product of more than 25 acquisitions over six years. No wonder that, until recently, its short-term incentive-pay system was seriously flawed. There was no consistent method of rewarding performance.

“It was difficult to manage so many disparate incentive tools,” says Julie Howard, vice president and human-capital officer. “It was a mess.” Even companies with only one system are struggling to make it more effective.

So last summer Navigant redesigned the system. Its short-term cash bonus plan now consists of two basic elements: Incentive pay for Navigant’s 400 senior professionals is based largely on the company’s performance, while its 800 consulting and administrative staff are rewarded primarily according to individual performance.

It’s too soon to tell fully what effect the change has had, though already the company is seeing reduced attrition. The hope is that the new incentive plan will help the $244 million (in sales) company recover from two straight years of losses. So far, “people are very excited about it,” says Howard, who has been touring the country to explain the program to employees. “Clarity is a big thing.”

Navigant is one of an increasing number of companies that now offer incentive pay to many nonmanagement personnel, linking pay more closely to performance, as it shifts from fixed to more-variable annual compensation. In a survey of 2,400 companies last year, consulting firm William M. Mercer found that 56 percent provided incentive pay to employees below the executive level (65 percent when nonprofit health- care companies were excluded). That’s up from 54 percent in 1999.

At the same time, companies have been offering variable pay to a greater number of their employees. Since 1997, the Mercer survey showed, 49 percent of respondents with incentive plans have increased the number of employees eligible to participate in the plans.

But companies clearly are struggling to design their incentive programs in an effective way. The soul-searching is aimed at motivating employees up and down the line to help companies meet their overall goals. Of course, plan specifics vary with a company’s culture, size, industry, and competitive position. But any winning formula must address the following question: To what degree should payouts be linked to the performance of the corporation as a whole; to that of an employee’s division, plant, team, or project; to the achievement of individual goals; or to some combination of all of these?

Consultants say incentive programs on the leading edge are combining goals and custom-fitting the combination to the rank of employees, much the way Navigant has done. At stake is nothing less than a company’s ability to compete, and that challenge will only grow as the economy slows. No surprise then that CFOs are getting more deeply involved in design efforts. As the overseers of human resources, they view payroll expense increasingly as an investment in human capital, and incentive compensation as something that can improve the returns on that investment.

Unfortunately, theory does not translate easily into practice: In a survey at the end of 1999 of 771 companies, management and HR consulting firm Towers Perrin found that less than a third of companies with incentive programs of any kind see a significant impact on results. Navigant nonetheless has high hopes for its new plan. If the revised incentive system is as effective as the company expects, says CFO Ben Perks, who helped align the new plan with the company’s goals, “it’s a win/win/win–for the employees, the company, and the shareholders.”

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