Alix Nyberg Stuart is senior writer at CFO.
It’s the Little Things
How companies motivate the mighty middle.
Free doughnuts on Friday doesn’t sound like much of a compensation strategy, but such “feel-good” awards — given with high frequency and independent of salary grade — are becoming more common, say consultants. Mercer Human Resource Consulting found that 70 percent of companies now use some type of nonmonetary recognition for incentive rewards, while 55 percent use spot cash awards.
Such awards, often attached to individual performance on a particular project or a one-time exceptional effort, can spread out incentives in a way that yields higher performance than more-targeted approaches. Sales groups, for example, often have a “president’s club” for the top 2 to 10 percent of the sales force, leaving other salespeople feeling “like they don’t have a chance,” says Rodger Stotz, vice president of St. Louis-based Maritz Inc., a provider of performance-improvement solutions. So some have now developed a separate “par club” for salespeople who exceed quotas by a certain percent, or show dramatic improvement over past performance. “That way,” says Stotz, “they’re competing against themselves instead of the top 10 percent,” which should lead to better performance overall. One insurance company that Maritz worked with on such a program saw sales growth among the B-players increase 16 percent more than that of the top performers, generating overall sales growth that was three times more than the industry average.
Recognition programs must be carefully managed to avoid becoming popularity contests, of course. The first year Yahoo offered its annual Super Star cash-bonus award, “we got lots of complaints from people who said, ‘How dare you single out people when we’re all one big team,’” says chief people officer Libby Sartain. But with management overseeing the list of peer-nominated candidates, she says, “we make sure it’s someone we’d all be proud to list.”
A few companies, including Best Buy, have even begun running companywide competitions for stock options. Projection-equipment company InFocus Corp., for example, is trying such a program. Each quarter, department heads nominate outstanding performers to receive bonus stock options. The candidates are then “racked and stacked in a grading system against one another” by a team made up of CFO Michael Yonker, CEO Kyle Ranson, and HR head Treasure Bailey. Before, grant distributions were “hierarchically based on pay grade” according to title, says Yonker. “Now, it doesn’t matter who you are in the company — everyone below the vice-president level is equally eligible regardless of title, and that provides motivation for all our employees.” — A.N.S.
Measured by Rank
Corporate versus individual performance.
Many companies vary the amount by which individual performance and corporate goals affect bonuses depending on how high-ranking the employee is. According to a recent Mercer Human Resource Consulting survey, individual performance drives 18 percent of an executive’s award — which is more tied to meeting corporate goals — but 25 percent for both nonexempt and nonunion employees. “Companies vary in how well they link their [corporate] goals to compensation plans as they go down the organization,” says Bill Coleman, vice president of compensation for Salary.com. “It’s pretty easy to align executive and sales goals with corporate goals, but in general, it’s not as easy to make the connection for the rest of the workforce.”
Still, some companies stick with a single metric. Casual Male, for example, bases bonuses for its top 50 decision-makers on the company hitting an EBIDTA (earnings before interest, debt, taxes, and amortization) target, with individual performance affecting only base pay levels.
“To a large degree, [the single metric] binds the team,” says CFO Dennis Hernreich. “Now finance pays more attention to what marketing is doing and vice versa.”
Of course, there’s a big difference in how much the bonus matters to different categories of employees. For nonexempt hourly workers, 2005 bonuses were 5.3 percent of base pay on average, according to an annual survey of some 2,720 companies conducted by WorldAtWork. For managers, they were more than twice that — 11.8 percent — while executives saw average bonuses that were 33.9 percent of their base salaries. — A.N.S.