HR Seminar & Discussion Forum
Variable Pay Designing & Management
- Minutes Date: 3. August 2012, 14:00-17:00
Venue: The Garden Hotel, Guangzhou
Speaker: Christine Zhen, HR director of C&B, Greater China - Emerson Network Power
China
Content:
1.
2.
3.
4.
5.
Total Rewards Model
Basic Concept of Variable Pay
Linking Variable Pay with Business Objectives
Types of Variable Pay
Developing a Variable Pay Plan
Aim of the seminar: investigate the essence of variable pay from an economic angle
Employee: Provide labor value
Employer: Give Reward for Value (Ability, Performance, Acknowledgement and reward
to contribution)
Total Rewards Model
Organizational
Structure,
Business
Strategy,
Human Resource
Strategy
Total Rewards Strategy
Compensation,
Benefits,
Work-Life,
Performance & Recognition,
Development & Career
Opportunities
Employees
Attract
Motivate
Retain
←→
→
Satisfaction
and
Engagement
Total Rewards Strategy: Compensation →Variable Pay/Fixed Pay
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Business
Performance
& Results
Basic Concept of Variable Pay
Characteristics of Variable Pay




Payouts typically in lump sum cash or stock-related awards
Does not permanently increase fixed salary, but may be included in benefits
determination
Must be re-earned each year
Typically includes participation of a large segment of the employee population
below the executive level
Fixed Pay
 Orientated to compensate for day to
day responsibilities and ongoing
performance
 Recognizes long-term contribution
 Factors in Skill/Competency
development
Variable Pay
 Aimed at rewarding special objectives
and results ( e.g. increased
productivity, cost reduction)
 Rewarded for “Above and Beyond”
expected, regular contributions
 Drives strategic innovations
Variable Pay rewards for accomplishments and results



Organizational, group or individual results
Performance based compensation
Flexible and adaptable
Three Categories of Variable Pay
Incentives
 Criteria determined in
advance
 Amount of payment can
vary
 Monetary or nonmonetary
 Self-funded or budgeted
 Nondiscretionary
Bonus
 Completion of a specific
task
 Amount determined in
advance
 Monetary
 Budgeted
 Nondiscretionary
2
Recognition
 Criteria broadly defined
and subjective
 Awarded spontaneously
 Decision made after the
fact
 Focused on behaviors
 Monetary or
Nonmonetary
 Budgeted
 Discretionary
Bonus Plan Types




Referral bonus
Hiring (sign-on) bonus
Retention (stay) bonus
Project completion bonus
Linking Variable Pay to Business Objectives
Desired Business Goals→Business Strategy→Staffing/Org. Requirement→HR Strategy→
Total Rewards Plan→Variable Pay
“The society has similar companies which employ similar workers, who have a similar
educational background. They do a similar kind of work, have a similar way of thinking,
a similar price and quality, create similar products and do similar things.”
Business Strategy
 Operational excellence
 Product/ Service Leadership
 Customer intimacy
3 mostly seen strategic positions
 Costs – as a leading strategy
 Service – as a leading strategy
 Technology/Innovation - as a leading strategy
Product Innovation – Product Change, Product Variety, Product Performance
Operational Excellence – Standard Products, Low Margins, High Volume
Customer Intimacy – Customer Relationship, Product customization, Customer Service
Business Strategy drives Business Objectives
Business Life Cycle
Startup→Growth→Maturity→Decline
Threshold
Growth
Maturity
Decline
High
Total Fixed Pay
STI
STI, LTI
STI
Medium
Short Term
Investment
TFP
TFP
LTI
Low
Long Term
Investment
LTI
TFP
3
Variable Pay helps to achieve Business Objectives
Focus, Alignment, Motivation, Reinforcement
Types of Variable Pay
Objective:
By the conclusion of this module, you will be able to accomplish the following:
1. Explain short-term and long-term incentive plans, including objectives, approaches
and considerations.
2. Explain types of bonus plans, including objectives and considerations.
3. Explain types of recognition plans, incl. objectives and considerations.
Short-Term Incentive Plans
Short-Term
 Profit-sharing
 Performance-sharing
 Individual performance-based
Profit-Sharing Plans
 Share profits with employees
 Base rewards on financial performance
 Typically include entire organization
 Payout in equal or graduated amounts
Profit-Sharing Plan Objectives
 Foster employee identification with organization’s success
 Create a common focus
Profit-Sharing Plan Approaches
 First-return plans
 Threshold plans
 Operating budget plans
 Peer company comparisons
Considerations for Profit-Sharing Plans
 Promote awareness/focus
 Pay out only when company has profit
 Employee ability to influence overall performance
 Flexibility of design
 May increase administrative requirements
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Individual Performance-Based Plans
 Base payouts on individual performance
 Focus on more than financial results
Individual Performance-Based Plan Approaches
 Performance against predetermined objectives (MBO)
 Output-based
 Commission
Considerations for Individual Performance-Based Plans
 Reinforcement of performance culture
 Narrow vision
 Wide variations in pay
 High levels of administration
Developing a Variable Pay Plan
Phase 1
Pre-Design
 Considering internal and external factors
 Obtaining management support
 Identifyi9ng the design team
Internal Factors
 Organizational readiness
 Costs/resource availability
 Timing
External Factors
 Labor market
 Competition
 Geopolitical
 Legal/regulatory
 Technology
Variable Pay Effectiveness Model
Variable Pay
Plan
Effectiveness
=
Direction
 Business objectives
 Culture
5
x
Power
 Awareness
 Value
 Performance sensitivity
 Participation
Issues to Consider
Is the organization ready for a new or revised variable pay program?
Costs/Resource Availability
 Implementation costs
 Funding
 Compliance
 Support staff
External Factors
 Labor market
 Competition
 Geopolitical
 Technology
 Legal/regulatory
Obtaining Management Support
 Determine buy-in early
 Begin at a high level
 Utilize allies
Identifying the Design Team
 Considerations for an in-house design team
 Advisory group alternative
Phase 2
Design
 Determining plan objectives and plan type
 Defining eligibility
 Selecting performance measures
Determining Plan Objectives and Plan Type
 Directly address business objectives
 Limit the number of objectives
 Use SMART objectives
 Select a plan type that supports objectives
 Examples
Defining Eligibility
 Level at which performance is measured
 Participant line of sight
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

Nonparticipants
Individual criteria
Level at Which Performance Is Measured
 Organization wide
 Organizational unit
 Team
 Individual
Participant Line of Sight
 Employee’s perception of influence
 Short line of sight vs. long line of sight
 Employee/management
Selecting Performance Measures
 Identify performance drivers
 Establish performance measures
 Determine if there are single or multiple measures
Quantitative Measures
Financial
 Volume/profit
 Aggregate/end-result level
 Limited interim process feedback
 Strong indicator of past performance
Operational
 Day-to-day data
 Measure effectiveness
 Identify key processes
 Reflect value to customer
Market Prevalence Survey Result of Financial Performance
Financial Performance measure
Market prevalence
Cash Flow
24%
Earnings per share
12%
EBIT/EBITDA
24%
EVA/CVA/Shareholder Value
9%
Operating Income
9%
Profit
21%
Return on Equity/Assets
6%
Revenue
32%
Data Source: Aon Hewitt 2010 China Variable Compensation Measurement
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