05: Performance Pay Choices

The HR Pressure Cooker is Heating Up

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Santhosh Varghese/Shutterstock

Wages have always been at the forefront of any HR Department’s concerns, but it seems we are now approaching boiling point and that something may blow. Recruitment company Hays notes in its 2018 Salary Guide “a building pressure and awareness around compensation that [they] have not seen in previous years.” (Hays 2018 Salary Guide, p. 20.)

What does this mean for HR Departments? It is clear that they are feeling the pressure. Eighty-five percent say they want and need to improve their compensation plans in order to hire and retain top employees, but according to the Hays study, only 24% of HR Departments are allowed to offer more than a 3% compensation improvement.

Here is where the pressure is building for HR Departments — in recruitment. Compensation challenges and an inability to hire locally sourced talent is making it very difficult for HR departments.

The pressure is on, then, for HR to develop sophisticated, integrated strategies that address compensation levels, organization culture, and recruitment challenges. Perhaps HR professionals will increasingly need to show evidence-based research to convince senior leaders that they may have to increase their compensation budgets in the very near future.

 

Discussion Questions:

Research companies that lead the market with their compensation strategies. Identify why they have pursued these strategies.

Develop a 3-minute presentation to convince a Chief Financial Officer that an increase in the compensation budget is needed.

 

Tack You – You’re Welcome!

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Martin Good/Shutterstock

IKEA’s business model works very well, with its focus on low cost, flat packing, and distinctive style. However, there’s something else at IKEA that’s working very well — their employee compensation model. In 2015 IKEA raised its minimum wages.

Click here to read about IKEA’s wage boost.

IKEA is committed to providing its employees with a living minimum wage. It also understands the benefits of performance bonuses. Recently, the company created an employee loyalty program it called Tack!, which is Swedish for “thank you”. The following milestones suggest IKEA is doing something right with its Tack! program:

  • IKEA has increased its total revenue from 20 billion euros to over 36 billion euros
  • It is the number 1 furniture retailer in the world
  • It is the number 5 retail brand in the word.

David Hood, Country Retail Manager of IKEA Australia, describes the program as “build[ing] something for the future and giv[ing] something back … by building a long-term relationship with employees.”

IKEA’s basic compensation program has wages that are above the jurisdiction’s minimum wage — they provide benefits and now, with the expansion of the Tack! program, all full time and part time employees with over 5 years’ service will get an annual bonus based on IKEA’s performance in that country of operations.

Click here to read more about IKEA’s Tack! program.

In Canada, the Tack! program has paid out $145 million to its employees this year.

Click here to read about the Tack! program in Canada.

IKEA is an excellent example of an organization that understands that compensation, benefits, and bonus systems are key tools in a successful business.

 

Discussion Questions:

  1. Identify the pros and cons of paying front line retail workers a minimum living wage when it is above the minimum wage required by law.
  2. Research and identify the cost of high staff turnover and the relative benefits of employee retention in the retail environment. Summarize your findings by creating a 5-minute presentation.

 

 

Failure to Perform: Part 1

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The Challenges of Performance Incentive Plans

Increase rating, evaluation and classification concept. Businessman draw five yellow star to increase rating of his company.
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Pay for performance is one of the oldest and most accepted compensation practices, and in conceptual terms, it is the simplest compensate strategy. If the individual performs or delivers on one or more of what an employer wants then the individual earns more money. This a very linear equation that all can comprehend, accept and execute.

If this pay for performance system is such a simple concept, then why do performance incentive plans fail to perform and sometimes deteriorate employee performance and organizational performance?

Tom Kort and Jason Baumgarten provide us with some great insights on why performance incentive plans are fraught with pitfalls; 10 of them to be exact.

Click here to read a summary of their thinking.

Here are some of their top concerns regarding performance incentive plans:

  • Poor plan communication
  • Poor alignment with business strategy
  • Company lacks best practices or procedures
  • Does not drive correct behaviours
  • Weak performance management system
  • Profit is the only key indicator measured
  • Poor allocation of your best people
  • Management game playing with resources
  • Incentive plan causes internal divisions

As one can see, a simple intellectual concept of ‘work more get paid more’ can have some serious pitfalls. HR has to be aware of where performance incentive plans can go wrong, and if their organization chooses to use them, how to prevent the negative aspects of a poorly executed performance incentive plan. Part two of this blog will continue this discussion illustrating Daniel’s Pink’s theory of performance motivation.

Discussion Questions

  1. Research two organizations that have implemented performance incentive plans that have failed to produce the desired results. Compare them to the list above, were the reasons for their failure on the list, if not why did the plan fail.

    Click here to read how to build incentive plans.

  2. Research two organizations that have implemented performance incentive plans that have succeeded, identify what specifically about the incentive plan allowed it to succeed?

Good news. Good choices.

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People in a Meeting and Single Word Rewards
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For many students, the study of compensation planning takes place mainly within a theoretical framework. There are limited opportunities to explore real consequences of designing and deploying pay systems.

How do performance pay choices work in ‘real-life’ situations? Fortunately, the team of employees led by the owner of Homestead Organics is able to provide us with a step-by-step example of the application of theory to reality.

Homestead Organics, located in eastern Ontario, started as a family based business dedicated to growing and developing sustainable agricultural products.

Click here to access Homestead Organics website.

As this particular company developed and expanded in size, so too did its profitability. Homestead Organics decided recently to share its good fortune with its employees by introducing an Employee Share Ownership Program (ESOP).

Click here to read the article on Homestead Organics’ ESOP implementation.

Both the article and the information from the website reinforce the importance of a high-involvement managerial strategy in the application of successful pay for performance systems. Further, the article provides us with an overview of the key elements that need to be in place from the beginning of the design process through to the delivery of returns to employees who have chosen to participate in this plan.

From theory to reality, this is indeed a good news story worth ‘sharing’!

Discussion Questions:

  1. What are the positive effects for employees as share-owners of Homestead Organics?
  2. How does the concept of share-owner differ from stock-holder in this case?
  3. What types of employee behaviours will this share-owner agreement reinforce in order to ensure continued success?
  4. How do you think the values of Homestead Organics influenced the decision to provide a share-ownership program for its employees?