Given
the current slowdown in the world economy and the anticipated knock-on effect
on the Irish market, many companies are struggling to meet worker expectations
of continued year-on-year base pay increases in the absence of any guaranteed
returns to the business. Â At the same
time the relentless pursuit of performance improvement and shareholder value
growth is resulting in new expectations of employees. Increasingly employees
are being asked to take on more responsibility, make decisions previously made
by middle management and be accountable for results. Quite naturally, employees
are asking "What´s in it for me?"
Performance-related
pay might provide the solution, but if the answer seems so obvious why have so
few Irish companies introduced it for front-line employees?
The answer is most
likely a multitude of factors.
·       Â
A history of
nationally negotiated pay agreements and job benchmarking has instilled a perception
that pay is a fixed cost to a business, especially with respect to front-line
employees
·       Â
A perception that
trade unions are reluctant to explore, and or, participate in the design and
implementation of performance-related pay plans, or that addressing pay design
in partnership is too complex
·       Â
Management fear of
failure, either as a result of past experience with unsuccessful attempts to
introduce performance-related pay or a skill deficit in the technical aspect of
pay design
·       Â
Difficulty
identifying and agreeing on performance measures that truly drive the bottom
line, compounding concerns over designing a performance-related pay plan that
"pays-out " in the absence of a real return to the business
·       Â
Concern that the
ongoing management and administration of the pay plan will be cumbersome and
controversial
While
some of these factors seem daunting, the good news is that there are companies
and trade unions here in Ireland, across Europe and in the US that can provide
helpful insights on how to unlock the value inherent in performance-related
pay. Based on our experience working to implement PRP across a broad set of
industries we would suggest the following steps are critical to success and are
equally relevant in unionized and non-unionized workplaces.
1. Establish a Business Case for
Change
Identifying
and agreeing upon the need for change is a critical first step. Proceeding to
design performance-related pay plans in the absence of a clear business case
will result in a shaky start, wavering commitment and often shelving of the
initiative as a "flavor of the month" effort. Businesses may wish to introduce
performance-related pay to ensure a better return on their pay expenditure, or
to focus employees on how they can best contribute to the overall success of
the organization. Employees, and their trade union if they are represented, may
believe that performance-related pay is necessary to reward employees for
increased responsibility and accountability for results. On the surface both
sides seem to agree and with their rush to get on with the design process can
often overlook exactly why each party is engaged in the process. Failure to
establish a clear business case for has been fatal in more than a few
performance-related pay designs. Â
2. Select a Design Team
Using
a design team to design a recommended PRP plan makes a lot of sense. The team
should comprise a representative from the employees who will be eligible to
participate, an operations and finance resource and a human resources
specialist. This can help ensure that all key stakeholders are represented
building commitment and buy-in, and usually results in a better quality plan.
3. Identify a Funding Strategy
Prior
to deciding what type of plan you wish to design the source of funding for the plan
must be established. In some instances it´s obvious, e.g., profit sharing where
plan payouts are a percentage of profits. The three primary funding strategies
are:
a) Â Â Â Â
Self-funding:
Some or all the performance measures selected in the plan have directly
quantifiable impact on financial performance and a portion of the real
financial gains is shared. Testing of the plan prior to implementation under
several performance scenarios is required to ensure that meaningful payouts for
employees and adequate returns for the business can be generated.
b) Â Â Â Â
Transfer funding:
In this instance funds that were targeted for other spending are used to fund
the plan. Â Using a portion of future
budgeted base pay increases to fund the PRP plan is used when companies do not
wish to penalize employees under poor economic conditions but can simply not
afford to give based pay increases without some return to the business.
c) Â Â Â Â Â
Investment: Some
companies choose to budget more spending to fund PRP plans recognizing that if
the PRP plan works it will generate returns to the business.
4. Decide the Type of PRP Plan You
Want
Plan
options will be informed by the funding strategy you select. Don´t rush to
select profit sharing because it appears to involve the least work. Â Line-of-sight is a very important
consideration. Line-of-sight refers to the degree to which employees can see a
clear and direct connection between "What I do" (effort) to "What happens"
(results/outcome) to "What´s in it for me" (reward). When line of sight is
murky or non-existent, the potential motivational impact of the plan is
limited. Company wide profit sharing has a notoriously weak link between effort
and outcome. Also if profit sharing does not result in a pay-out, employees may
suspect boardroom gymnastics have been used in calculating the profit number.
Plan choices include:
Gainsharing: A
formula-driven plan aimed at improving productivity over historical levels and
sharing the value of the gains.
Goal sharing: These plans
often incorporate both financial and operational measures, and typically
include goals based on future business plans rather than historical
performance. These plans may include goals that cannot easily be expressed in
terms of their financial value.
Profit sharing: Plans under
which a share of profits is distributed among eligible employees.
Team incentives: Plan payouts
are based on operational performance metrics within work teams.
5. Define Eligibility
Identify
which employees will be eligible to participate in the plan (e.g., full time, part-time
etc.)
6. Select Performance Measures
The
key to effective PRP plan design is
to select the right mix of measures
that balance the needs of customers, the company and its shareholders and
against which employees can be rewarded. It is important not to use too many
measures as it creates confusion and lack of focus. The right mix of
performance measures should include measures that:
·       Â
Clearly support customer needs (e.g., service/product
quality, on time, delivery, or product cost)
·       Â
Support company needs (e.g., increase in profitability or
shareholder value)
·       Â
Are "close to home" and can be directly influenced by
employees (e.g., increasing productivity, product quality, response time)
7. Set Targets
Target
setting is the often the most controversial and difficult of the plan design
steps. No other factor has a greater influence on the success or failure of a
PRP plan than the quality of the target setting. Performance targets for PRP
plans are usually established in one of three ways.
·       Â
Performance versus history;
·       Â
Performance versus the business plan or budget; or
·       Â
Performance against some combination of historical
performance and the business plan
8. Communicate Plan Design Features and
Implement
Engage
employees in understanding how they can win under the new PRP plan. Â This is critical as it sets the tone for a
successful implementation.
Using Technology to Strengthen the Design Process and
Facilitate Smoother Implementation
If all of these steps
sound daunting take heart that the use of web and PC-based applications can
greatly simplify and inform decision-making at each juncture by:
·       Â
Quantifying
the value to the bottom line of performance improvements
·       Â
Illustrating
the sensitivity between interdependent measures (e.g., productivity and
quality)
·       Â
Facilitating
highly dynamic scenario planning
·       Â
Adding
transparency to the target-setting process
·       Â
Simplifying
administration and plan governance going forward by providing a simple link
between your existing payroll system and the new PRP plan payout
These tools also
serve to communicate and educate participants on the pay plan´s design
features, while their dynamic nature ensures pay plans remain flexible over the
long-term and can easily be adapted to reflect changing business needs.
Final Thoughts
- If you are thinking of PRP and your employees are
represented get the trade union on board quickly even if you are unsure as to
the direction the exploratory effort may take. A joint group can work very
effectively given commitment, a good process and the appropriate support.
- Unless you have internal resources with strong compensation
design skills get some help from a recognized expert who has a track record of
implementation.
- Avoid putting PRP plans on "auto-pilot" post implementation
and assuming that improvement will simply happen. Performance improvement
requires continually involving employees who are closest to the work in
discussions on how to improve performance.
- Keep the PRP plan "evergreen" by updating targets and
performance measures as changes in the business necessitate.
Triona´s expertise is in linking people strategies with operational performance. She runs MPact Consulting´s Dublin office. Triona holds an M.S. degree in mechanical and aerospace engineering from Case Western Reserve University, and received her undergraduate degree, also in mechanical engineering, from University College Dublin.
For more information contact Garrett at 312-377-1438, or Triona at 011-353-1-639-1590.