There’s been a lot of talk about the dwindling degree of employee loyalty, especially among younger generations, but companies are now discovering that to have more loyal employees (as well as happier and more productive employees) they must first have “engaged” employees.
Employee “engagement,” as well as its less benevolent alter ego “disengagement,” are nebulous concepts that are often easier to sense than define, but at its simplest, engagement occurs when employees feel enabled and enthusiastic to contribute to their company’s success.
According to a study on employee engagement conducted earlier this year, only 29 percent of employees in the United States are engaged, while 19 percent are disengaged. However, the majority, the remaining 52 percent, fall somewhere in between – not engaged but not quite ready to walk out the door. This represents an opportunity for companies, and there is certainly a compelling business case for organizations to tackle this challenge. A recent study of 28 multinational companies found that the share prices of organizations with highly engaged employees rose by an average of 16 percent compared with an industry average of 6 percent. Disengagement also carries a cost. According to one Gallup poll, disengagement has been found to cost the American economy up to $350 billion dollars annually due to lower productivity.
So what can companies do to improve employee engagement? Various factors contribute to an employee’s feelings of engagement, including competitive compensation and reward strategies, opportunities for professional growth and development, clear career paths and succession plans, as well as an organization’s leadership and culture. As we continue our series on the employee lifecycle, Spotlight will explore each of these components in more detail starting here with compensation and reward strategies.
Money Still Matters
Despite so many innovative employee perks and work life initiatives, it continues to be essential that employees feel they are paid fairly for the work they perform. That’s not to suggest that nonmonetary factors don’t contribute significantly to job satisfaction. They absolutely do. Things like flexible work schedules or casual dress codes can play a big part in the attitudes people have about their company and their job. But at the end of the day, money still matters. In the absence of everything else, it remains crucial that companies offer competitive compensation if they hope to attract and retain top talent.
Compensation is comprised of a variety of things, generally including base salary, variable pay components, and benefits. Base salary is pay earned for a given period, be it an hour, a week or a year, and excludes any additional pay, such as overtime or bonuses. Variable Pay components, like performance bonuses, profit sharing, or stock options, fluctuate in tandem with an organization’s performance and are generally used to recognize contributions toward company productivity and profitability. Benefits packages can include health insurance and savings plans, like pension or 401K plans, as well as other perks such as a company car or tuition reimbursement. Compiling and calculating the value of these elements to create a compelling compensation package is a challenging undertaking best reserved for HR professionals who find actuary tables and calculus formulas fascinating. Business owners and managers need not be compensation experts, but they should understand the various pay components and be aware of the most recent trends in the area of compensation.
Base Salaries and Job-Based vs. Person-Based Pay
Traditionally, HR professionals have determined compensation, and in particular base salaries, for a particular job by looking at comparable jobs in the same industry. For example, if an energy company was filling a job for an entry level engineer, HR would research salaries of other entry level engineers in the same industry and geographic market. (Geography can play a significant part since the cost of living can vary greatly from one city to another.) Now, however, compensation experts suggest those factors, job, industry and market, are no longer adequate by themselves. Instead of a job-based methodology, current thinking has shifted to a more person-based methodology that considers an individual’s knowledge, skills and competencies.
This trend, which seems to have evolved concurrently with the technology revolution and the demand for intellectual capital rather than mere head count, suggests that an individual’s talents should dictate what he or she is worth rather than their job. Proponents of person-based pay site a number of advantages associated with the methodology, most notably that it promotes continuous employee development and team collaboration. It seems valid, but does it work across the board? Not necessarily. Experts suggest that person-based pay is best suited for dynamic, high-performing environments that wish to remain flexible in the deployment of their human capital. However, in more staid organizations where there is consistent and routine work activity, traditional job-based pay continues to work well.
Variable Pay & Rewarding Performance
As the name suggests, variable pay is flexible compensation designed to reward a company’s top performers above and beyond their base salary. Variable pay can include profit sharing, stock options, deferred compensation or performance bonuses. Non-monetary things such as a company-paid trip or a holiday ham can also be considered forms of variable pay.
Variable compensation programs provide companies a powerful and adaptable means to recognize employees for their contributions to an organization’s goals, and as importantly, dangle a proverbial carrot in the form of a monetary incentive for future performance. Very often variable pay is linked to a company’s financial performance, but rewards can also be tied to productivity, team work, safety, quality, or some other metric important to the company and its stake holders.
Once reserved for higher ranking employees, variable pay is now a common method for companies to award employees at all levels across the organization. Variable pay plans come in a variety of forms. A few common types of pay-for-performance programs are outlined below.
Individual-based plans, and specifically merit pay increases, are the most widely used pay-for-performance variable pay plans. Merit pay increases are almost universal and allow for an increase to base salary separate from a cost of living adjustment. An employees’ performance evaluation is typically used to determine the merit increase granted, and once earned, the increase becomes embedded within an employee’s base salary going forward.
Team-based pay plans reward team members based on group outcomes or accomplishments. This could be the successful culmination of a long-term project or meeting a quarterly sales quota. Team-based payments are often awarded as cash bonuses, but can also include noncash rewards such as trips, time off, or luxury items.
Company-wide variable pay plans reward employees on the basis of an entire corporation’s performance. The most widely used program of this kind is profit sharing. Profit sharing uses a formula to allocate a portion of declared profits to employees across the organization. A company-wide plan with a more narrow scope could reward employees within a particular plant or business unit for the performance of that division. Because one division cannot be accountable for a company’s overall financial performance, other indicators, such as productivity or cost savings, can be used to distribute rewards at the business unit level.
No Profits to Share?
In recent years, progressive companies have made variable compensation a more significant percentage of employees’ compensation, ensuring that employees prosper when the company prospers. It is yet to be seen, however, whether these typically well-received plans will maintain their popularity as companies trudge their way through this economic downturn, especially if the payouts on some variable pay programs is off due to sluggish performance.
When stock options are under water and there are no profits to be shared, other compensation components, like benefits and perks, can become more meaningful. In the next issue of Spotlight, we will focus on benefits and perks and the contribution these added compensation components can play in keeping employees feeling well-rewarded and engaged.
