According to the WSJ, NY Times, and Conference Board, as well as SHRM and WorldatWork, 2004 won´t be ´the talent business as usual´. ´Experts´ call the prospects of 2004 a ´jobless´ recovery. But many more people have jobs than don´t. So much of the focus has been on people who don´t have jobs. A recent roundtable of CEOs and chief talent officers was addressing the issue of ´how rewards might energize the 2004 recovery´. But the first piece of information they shared was that if a recovery does indeed occur in 2004, how businesses re-staff themselves might be different this time around. Here are some of the primary talent strategies they shared:
So the pending economic recovery may occur without the mass growth in employee numbers. Companies may be changing their expectations about what they want from people in terms of their ´return on staffing investment´. At this roundtable, CEOs and CTOs indicated displeasure in what they called ´helter-skelter´ re-staffing to match perceived ´pent up´ needs for more people to fill either new or pressure-point recruiting needs once business rebounded. "It´s just like piling logs on a flatcar´, one CTO said. "We just fill jobs and get bodies at the desks. And then the next time business slows, we cut the workforce quickly and without precision". So they talked about focusing on selectivity rather than just numbers.
Every CEO expressed the concern that as jobs became more plentiful their best employees are waiting to go elsewhere. They also parroted what one CEO said; "The one seemingly insurmountable challenge with keeping the best performers with the critical skill is our inability to identify them in a credible fashion." Chief talent officers focused on their company´s inability as one CTO said, ". . to credibly ´pick and choose´ between and among the people we ´must keep´, those we would ´like to keep´, and those that we wouldn´t mind losing."
While it´s clear that we don´t have a statistically derived sample of all companies facing talent challenges and opportunities, these organizations and their leaders did pose some issues that are probably shared to some degree or another by other companies. So the challenges and opportunities exist and an audience for solutions does likely exist.
Back to the Core?
Let´s explore for a minute the issue of ´core employees´ or those we call ´superkeepers´-people companies can´t afford to loose. Many companies used the business downturn to attempt to weed out the poorer performers. One CEO said, "It was high time to try to find the ´bottom dwellers´ and send them elsewhere. The problem was that we could not always find them. Our ´bottom dwellers´ go into ´hiding´ when times get tough an dour excellent people stand out". He continues: "But we finally got many of the poor performers and tried to keep our core performers. Now we are going to be very selective as we re-grow our workforce."
This could mean that companies would be selective as they add staff thereby placing a high premium on keeping the best people. It also suggests that if the company has created a disenfranchised workforce over the last few years as a result of certain human resource practices that created workforce stress, that top people are vulnerable to recruitment campaigns. In many companies the problem was a quick reversal. Going from employee retention programs just a few years ago that were more geared to the ´best places to work´ to practices of reductions in benefits, the freezing of base pay adjustments. Or, on topic for this discussion, situations where incentive plans failed to pay off because performance goals were not achieved. All of these issues can be ´explained away´ in most companies but the realities of their negative impact on employees cannot be denied.
And it´s possible your company has some people who believe the ´grass is greener´ elsewhere. And while issues of pay are certainly not the only reason why employees look elsewhere, most companies admit that they have not had the funds to distribute to the best people over the last few years. Pay issues may just compound other issues and in some instances ´trigger´ discontent because pay is a visible issue to complain about and a socially acceptable one as well. So a ´pay tune-up´ may help. So in may be time to ´green up´ your grass a bit. Our emphasis here is on incentives-not because that´s the only challenge an organization has relative to workforce retention. The problem is that according to The Conference Board and other major sources of information on pay and rewards, incentives are just not ´paying off´ and are creating ´noise´ for both senior management and employees participating in incentives.
Incentives or Not?
The companies represented at this roundtable were considered about incentives and how they will work in a market that will emphasize a smaller, but more valuable, workforce. Why are incentives troublesome to these companies? Because many companies extended incentives and variable pay to a broader proportion of their workforce-many provide incentives below the supervisory level-during the last 5 years or so. And this has created a problem because these people grew to ´depend´ on receiving at least some incentive award and also because the incentive opportunity was designed to be ´counted upon´ in setting the competitive level of cash compensation that the employee could earn based on performance. And we can talk about a lot of ´should haves´ relative to communications and coaching but companies are more than somewhat ´troubled´ as it relates to how they believe their incentives are working-and adding value to the business.
Who´s Likely to Go or Stay?
If the people your company has been trying to get rid of for years and those that you believe your company can´t do without left in equal numbers-it wouldn´t be so bad. But that´s not how it happens. And the reason the best people are most likely to leave is that many organizations may have already begun a campaign for the ´theft´ of your very top talent.
And what do you think just might be the characteristics of the people who are most likely to ´seek other opportunities´? Clearly, it is most probably the people who are most likely to find a better job. Maybe the people your organization can least likely afford to lose. CEOs and Chief Talent Officers discussing ´what´s hot and what´s not´ for 2004 at a ´roundtable´ last month focused on their search for new incentive solutions with a couple of key goals:
First, keep the best people focused on staying and helping the company perform well.
Second, prove to top people incentives can still ´pay off´ after several years of incentive plan failures.
More Challenges Than Solutions?
The ´topic heading´ for the discussion was focused on what companies need to do after several years of ´no pay off´ from incentive plans-´do we tank incentives for employees below the leadership team? Or is there some other way to keep incentives and make them ´work´ better? The tone of the exchange was highlighted by one CEO who said, "What our company needs is a change in what we now call incentives to something we need to call ´inventives´-business as usual for incentive design is just not getting the job done". And the discussions focused on looking for some different approaches to some critical challenges incentive design was facing. Do any of these ´ring true´ to what´s going on in your company?
1. Not paying off: Incentives that don´t grant awards because performance measures and goals are not met at even the ´threshold´ level of performance. Companies saying "we need that level of economic goal performance to ´afford´ incentives" and the employees saying, "Goal were unreasonable and unachievable-incentives just don´t work here".
2. Can´t influence measures: In seeking a balance to achieve a ´win-win´ for both the company and the employees, the company errs on the side of the company to prove incentives ´add value to the business´. Employees object-´Those measures are influenced by a whole lot more than what we do".
3. Too complex and confusing: To create a ´portfolio´ of measures and goals the company picks a battery of measures that represent fairly accurately the multiple and complex goals of the company. The problem is that each measure counts only a small part of the incentive opportunity and employees can ´cherry pick´ to go for those that are most achievable-not always the most important.
4. Base pay increases are ´better´ than incentives: The company begins to ´give up´ on incentives and just starts to ´plow´ money into base pay adjustments. This is ´simpler´ and ´keeps total pay´ competitive. The problem, of course, is that this may erode any alignment of rewards with key measures of company performance.
So all the things that looked good for the company at the start had not worked well. And the problem was amplified by a strong belief that incentives and variable pay need to be done right the first time. Because most believe the first variable pay plan is critical to the success of variable pay throughout the company.
The CEO´s Inventive Crisis?
And the CEOs at the table believed at least some of the reasons for the trouble were created by the guidelines that had been commonly followed to design incentives. Primary was the concept of ´self funding´ of incentives meaning the amount paid in the form of an incentive had to be justified in terms of company performance. This had caused the company to implement what was called ´stretch´ goals to make sure the incentive awards were justified. Also, the goal-setting process focused on picking measures that reflected the performance strategy of the company. Concluding with a compendium of some seven goals that included a variety of mostly quantifiable objectives that differed in their ´distance´ from the employees in the incentive plan. In other words some goals were a combination of company-wide, business-unit wide, division-wide, and in some instance ´team´ or department goals that defined the performance priorities of the entire organization.
When overall company performance objectives were missed, so too were many of the goals that were closer to the incentive plan participants. Some of the goals proved to be ´gates´ wherein a specific level of performance needed to be exceeded before other goals could provide incentive awards. "It was a ´house of cards", one CEO said. "When one part of it crumbled, the entire plan fell to disrepair. All the ´promise´ that existed at the initial communication and sponsorship turned into a huge miscue for executives and employees. Then the ´noise´ for more base pay began-and eventually all this subsequently increased base pay costs".
Not a good testimonial for variable pay and incentives but the CEO had a solution. "Let´s call our incentives something else-´inventives´-that will put the burden on us to design something that is a business tool rather than wishful thinking". And, the inventive was born! Here was the CEO´s charter to those assigned accountability for designing an incentive plan ´that works´-To paraphrase, the executive said:
So that´s the charter the CEO gave to those accountable. What would you have developed and proposed to meet this challenge? Give it some thought because there´s no ´school solution´ for this design issue.
One Company´s Inventive Solution
So the challenge was an ´all employee´ incentive plan that followed company performance and created ´noise´ about no payment and pressure for increasing base pay. The current plan was viewed as too complex with many measures and goals. But employees felt the reason the plans didn´t pay off was because the goals were out of reach and not in the influence of the employees. So the charter was, "Make it work; reward our best people; help our business turnaround". Given this charter, here´s the incentive solution for the total nonmanagement workforce:
The plan was to be used for one year. The goal was to improve performance. Three improvement goals were set for the year: (1) Improve individual performance by achieving a single significant goals cascaded from the organization, (2) Improve company net income over last year by a targeted amount that shows turn-around and growth, (3) Make improvement in a ´team´ goal that is shared with others. In order to provide the opportunity for ´course correction´, performance on all goals was measured quarterly and paid quarterly. If goals were missed in a quarter, award dollars carried over to the next quarter. So incentive participants had the chance to get the entire award if improvement goals were achieved for the full year even if they were made in the last quarter.
The plan would be just for 12 months to get performance in gear. At the end of the year the incentive plan would return to one based on budget. And to get everyone´s attention, the opportunity for this year was doubled compared to the opportunity provided to the last year-which was missed by the way. It was a targeted solution to keep the best employees and to prove that incentives can work. The ingredients of this plan are summarized in Exhibit 1.
The plan missed alternative quarterly goals but ended up making the targeted level of awards for the year. Managers coached and communicated ´how are we doing´ at least monthly. The plan consumed considerable management and leadership time communicating goals, setting individual and team goals, and coaching employees on ´what´s in it for me´ but the goal was keeping employees, preventing the loss of incentive plans, and communicating the importance of goals performance at the company, team, and individual levels.
The Key Learnings
What were the gains the company, CEO, and employees experienced from this incentive solution? For the answers, let´s return to the four major issues we introduced that this specific CEO believed were problems for the viability of the organization.
1. Not paying off: "We needed improvement and we got it and paid for it". The plan paid off so employees had the chance to understand what they needed to do to earn an incentive. Could the organization have gained the same results without the interim incentive plan, we don´t know. But the CEO believed that he showed everyone that incentives work.
2. Can´t influence measures: Considerable communications, coaching, and training showed employees that they could influence a few, effectively set, goals that resulted in improvement at the individual, team, and company level. When employees did not feel they could influence the goal, the manager coached the situation to gain understanding. It provided an active communications opportunity between employees and managers.
3. Too complex and confusing: "We simplified things. Three goals and we took care in picking them, communicating about them, and coaching all year". The CEO admitted they did have most problems with individual goals but he said, "We struggled through the individual goals. But we got through it".
4. Base pay increases are ´better´ than incentives: The CEO did not need to increase base salaries and said, "We solidified incentives by being ´inventive´. It worked for us". The company did not need to add more money to base pay adjustments to retain their key employees.
Right for Your Company?
This solution may not work for your organization but it did address all the concerns that were facing this CEO´s company. And the other roundtable attendees did get the opportunity to learn that sometimes installing an incentive plan that is ´non-traditional´ in nature. It was targeted to solve a specific short-term problem and it did that.
The next challenge the company had to face was moving from a plan based only on ´improvement´ to one based on budgeted goal performance. The CEO was confident they could achieve this one as well.
Exhibit 1
Inventive Plan Features
Key Elements and Their Translations:
Three measures for each employee:
1. Individual improvement:
2. Net income improvement:
3. Shared ´team´ goal improvement:
Time period:
1. 12 months measured and awarded quarterly
2. "Sunset´ for incentives based on ´improvement´ in one year
Basic message:
1. We must improve individual, company, and team performance
2. Our goal is to improve this year; meet budgeted goals next year.
Award opportunity:
1. Double opportunity of prior year.
2. Miss quarterly goal; carried over to year-end.
Review of solution performance:
1. Missed first quarterly goal so no award.
2. Met second quarterly goal so got first/second quarter award
3. Missed third quarterly goal so no award
4. Met fourth quarter goal and annual goal at threshold.