Driving Growth & Talent Retention through Pay for Performance

BEST PRACTICES,

®

LLC

Best Practices, LLC Strategic Benchmarking Research

Driving Growth & Talent Retention

through Pay for Performance

BEST PRACTICES,

®

LLC

Table of Contents

Executive Summary

Research Overview

Participating Companies

Study Definitions

Key Findings

Pay for Performance Program Overview

Annual Bonus Plan Strategy & Execution

Annual Bonus Targets

Implementation Challenges & Pitfalls

Implementation Successes & Best Practices

Organizational Complexity

Participant Demographic Data

Appendix: Detailed Tables

2

Copyright © Best Practices, LLC

BEST PRACTICES,

®

LLC

Topics Examined: Study Overview:

Organizational Complexity

Eligibility Strategy

Bonus Plan Metrics

Global Uniformity

Target Bonus Percentages by Job Level

Minimum Bonus Percentage to Motivate

Pay for Performance Drivers and Goals

Program Components

Approach for Managers Determining Bonus Payouts

Implementation Metrics and Success Factors

Communicating Pay for Performance Rollout

Implementation Challenges and Pitfalls

Research Objective: This cross-industry study

investigates how compensation organizations at

leading global companies are structuring and

implementing pay for performance annual bonus

programs to reward top performers and retain

talent in today's environment of shrinking

resources and increasing talent competition.

These research findings provide industry metrics

and insights that can serve as a reference point for

compensation leaders in global strategic planning

and implementation initiatives.

Methodology: Best Practices, LLC engaged 47

talent and compensation leaders from 17

industries through a benchmarking survey

instrument to collect quantitative data and

qualitative insights.

Research Overview

Best Practices, LLC conducted this cross-industry benchmarking study to identify drivers, measures

of success, common program elements, global differences, and implementation best practices for

successful pay for performance bonus plans.

3


BEST PRACTICES,

®

LLC

47 Companies Participated from 17 Different Industries

Benchmark Class Companies Include:

The 47 compensation leaders in this study represent 17 different industries, with the greatest

number in technology, healthcare and media.

4


IT / Technology 23%

Healthcare / Pharmaceuticals 21%

Media 15%

*Other 13%

Telecommunication 6%

Aerospace / Defense 6%

Finance 6%

Consulting 4%

Hospitality 4%

(n=47) *Other: Agriculture; Logistics; Manufacturing; Mining;

Oil & Gas; Textile, Apparel, Engineering, FMCG

BEST PRACTICES,

®

LLC

Key Findings: Program Components & Goals

Components: Most Pay for Performance Programs Are Multi-Faceted

Companies in both the total benchmark class and the large workforce segment indicate their respective

pay for performance programs include annual salary increases, individual performance ratings and

reviews, short-term and long-term incentives, and non-cash rewards and/or recognition.

Drivers: Pay for Performance Strategy Aims to Reward & Retain

Rewarding high performers and retaining talent are the most common business reasons or drivers for

employing a pay for performance strategy. Most companies also seek to increase the likelihood of

achieving business objectives, to attract talent, and to increase employee engagement.

Goals: Most Meet Basic Goals But Few Exceed Them

Most companies in the benchmark class met the key goals of their pay for performance plan, which

include: rewarding high performers, retaining and attracting talent, increasing the likelihood of achieving

business objectives, and decreasing over-payments to low performers. Few exceed these.

Unmet Goals: Employee Engagement & Entitlement Goals More Difficult for Large Workforces

Within the large workforces segment, more than 40% of respondents were unable to determine if their

pay for performance programs increased employee engagement, and none achieved the goal of

eliminating an entitlement culture.

Analysis revealed the following findings regarding pay for performance program components and goals.

5


BEST PRACTICES,

®

LLC

Best-in-Class

Pay for

Performance

Implementation

Process

1. Build a business case

2. Align goals with corporate business

objectives

3. Establish meaningful minimum bonus level

4. Create a simple bonus plan & standardize

globally

5. Secure executive sponsorship/support

6. Deploy supporting technology

7. Determine how to measure success

8. Develop a comprehensive

communication plan

9. Inform, involve & train managers

10. Educate the workforce in advance of

launch & beyond

11. Measure & improve

Multi-Step Process Drives Successful Implementation

Successful implementation of pay for performance is a multi-step process involving demonstrating

need, aligning with corporate goals, deploying appropriate technology, communicating to and

training all employees, and measuring and improving results.

6


BEST PRACTICES,

®

LLC

Most Pay for Performance Programs Are Multi-Faceted

Companies in both the total benchmark class and the large workforce segment indicate their respective pay for performance programs generally include annual salary increases, individual performance ratings and reviews, short-term and long-term incentives. At approximately half of companies, non-cash rewards and/or recognition tactics are also used.

Q. What are the components of your pay for performance program? (Check all that apply.)

7


70%

85%

90%

100%

95%

10%

54%

62%

82%

92%

95%

97%

55%

15%Other (specify)

Non-cash rewards and/or recognition

Long-term incentives

Short-term incentives

Individual performance review

Individual performance rating

Annual salary increase

Pay for Performance Program Components:

All Companies

Large Workforce (n=20)

(n=39)

*Other: • Cash bonus • Eligibility for management development programs • Job-based incentives and sales commissions • Long-term incentives are for Exec only

% Responses

NOTE: Blue italic text indicates

Large Workforce segment response

BEST PRACTICES,

®

LLC

Align Incentives & Reviews To Further Shape Culture

Pay For Performance

Use incentives to grow and accelerate

top performers.

Vitality Curve Performance Rating & Review: By pruning the

bottom 10%, PFT incentives are further underscored.

Savvy incentive leaders noted that pay for performance incentive systems should be aligned with performance reviews. By doing this, both the incentive and the review communicate the value of performance and underscore “entitlement thinking” is not the end game. Aligning incentives & reviews help focus the culture on performance. The “Vitality Curve” force ranking of performance – popularized by GE & Jack Welch – was cited as a complimentary performance system.

Grow Retain Prune

(INCENTIVE + PERFORMANCE REVIEW = PERFORMANCE OUTLOOK)

8


BEST PRACTICES,

®

LLC

Managers Follow Payout Guidelines with Recommendations

To help determine optimal bonus payout amounts, nearly half of respondents indicate that managers follow payout guidelines and recommendations. One-fifth of respondents in the large workforce segment require managers to use a carve-out approach where a specified portion of the bonus pool is reserved for top performers and the remainder is distributed among average to low performers.

Required to use

forced

distribution

approach

13% Other (specify):

5%

Follow payout

guidelines that

include

recommendation

s for determining

bonus amounts

49%

No bonus payout

guidelines or

requirements

5%

Hybrid Model

15%

Required to use

carve-outs, 13%

(n=40)

Q. Indicate which approach to decision making that managers use to determine bonus amounts. (Choose one.)

9


Total Benchmark Class:

*

Carve-outs: % of bonus pool reserved for top performers, remainder distributed to average and/or low performers.

(managers determine

bonus amounts) (managers determine

bonus amounts)

Required to use

carve-outs, 20%

Hybrid Model

15%

No bonus payout

guidelines or

requirements

5%

Follow payout

guidelines that

include

recommendations

for determining

bonus amounts

45%

Required to use

forced distribution

approach

15%

Large Workforce Segment:

(n=20)

** **

Decision Making Approach

BEST PRACTICES,

®

LLC

9%17%

26% 23% 20%28%

22%28%

3%3%11%11%

0% 1-5% 6-10% 11-20% 21-30% 31-40% 41-50% 50%+

Target Bonus Percentages for Executives Vary

The average target bonus percentage for executives varies among benchmarked companies. Nearly 70% of respondents in the total benchmark class, compared to 61% in the large workforce segment, set annual bonus targets for executives at 31% or more. Overall, annual bonus targets for directors fall between 11% and 30% at most benchmarked companies.

Q. What is the average target bonus percentage for employees at the following job levels?

Executives:

28%33%

17%

6%

32%

16%

5%8%6%3%

32%

5%11%

0% 1-5% 6-10% 11-20% 21-30% 31-40% 41-50% 50%+

Directors:

Large Workforce

All Companies (n=35)

(n=18)

Large Workforce

All Companies (n=36)

(n=19)

% R

esp

onse

s

% R

esp

onse

s

Bonus

Amount:

Bonus

Amount:

10


BEST PRACTICES,

®

LLC

Multi-channel Training & Communications Are Deployment Requirements No single communications channel is enough to effectively deploy pay for performance systems. Consequently, veteran pay for performance program leaders advocate multi-channel communications that consistent of training – for both managers and employees – and ongoing meeting and communications. Each year these communications cascaded are refined, updated and repeated.

Multi-channel Communication

Mandatory Training

Live Meeting

Online Training

Continuous Online

Communica-tions

11


• Face-to-face meetings

• Intranet postings

• Information packets

• Online modules

• Webinars

• Road shows

• Bonus calculator tools

• Emails

• Brown-bag lunch sessions

• Top-down executive messaging

• Classroom training

BEST PRACTICES,

®

LLC

Exec Support & Communications Are Key to Rollout Success

Critical success factors in rolling out a new pay for performance program are executive sponsorship and a sound communication plan. A majority also rated plan features and manager training as “highly important” for successful program implementation. Participants tended to favor rolling out the entire program at once as opposed to implementing the program in phases.

Q. In rolling out the pay for performance plan, how important were each of the following activities in assuring program

success? (Choose one importance rating for each activity.)

12


Success Factors (Total Benchmark Class)

11%

14%

16%

23%

15%

17%

44%

3%

2%

6%

6%

8%

6%

17%

21%

9%

19%

42%

29%

31%

23%

44%

33%

29%

83%

56%

51%

47%

46%

35%

33%

6%

5%

70%

Executive sponsorship

Communication plan

Features of the plan

Manager training

Employee/ stakeholder education

Change management strategy

Creating a business case

Rolling out the entire program at once

Rolling out the program gradually/ in phases

Somewhat Important Highly Important Not Important Not Used n =

35

36

36

35

36

35

34

35

34

% Responses

BEST PRACTICES,

®

LLC

13 Copyright © Best Practices®, LLC

Best Practices, LLC is a research and consulting firm that conducts work

based on the simple yet profound principle that organizations can chart a

course to superior economic performance by studying the best business

practices, operating tactics and winning strategies of world-class

companies.

Best Practices, LLC

6350 Quadrangle Drive, Suite 200, Chapel Hill, NC 27517

919-403-0251

[email protected]

www.best-in-class.com

About Best Practices, LLC

Driving Growth & Talent Retention through Pay for Performance

Business

Transcript of Driving Growth & Talent Retention through Pay for Performance