Driving Growth & Talent Retention through Pay for Performance


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Valuing and recognizing the company's top performers are critical factors to staying healthy and competitive in today's marketplace. In addition to other incentives, an annual bonus program provides companies with opportunities to financially reward employees for their contributions each year. However, smaller bonus pools, unfair distributions, misalignment of goals, complex global administration, and other obstacles can plague the integrity of the system, ultimately sending talent out the door.

Best Practices, LLC conducted this cross-industry study to investigate 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.

Savvy companies design, implement, and continuously evaluate a pay for performance compensation plan to reward top performers. By identifying drivers, measures of success, program elements, global differences, and implementation best practices, this study will highlight the must-haves of successful pay for performance bonus plans.

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Driving Growth & Talent Retention through Pay for Performance

  1. 1. Driving Growth & Talent Retention through Pay for Performance Best Practices, LLC Strategic Benchmarking Research BEST PRACTICES, ® LLC
  2. 2. 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 BEST PRACTICES, 2 ® Copyright © Best Practices, LLC LLC
  3. 3. Research OverviewBest Practices, LLC conducted this cross-industry benchmarking study to identify drivers, measuresof success, common program elements, global differences, and implementation best practices forsuccessful pay for performance bonus plans. Study Overview: Topics Examined:  Research Objective: This cross-industry study  Organizational Complexity investigates how compensation organizations at  Eligibility Strategy leading global companies are structuring and  Bonus Plan Metrics implementing pay for performance annual bonus programs to reward top performers and retain  Global Uniformity talent in todays environment of shrinking  Target Bonus Percentages by Job Level resources and increasing talent competition.  Minimum Bonus Percentage to Motivate These research findings provide industry metrics  Pay for Performance Drivers and Goals and insights that can serve as a reference point for  Program Components compensation leaders in global strategic planning  Approach for Managers Determining and implementation initiatives. Bonus Payouts  Implementation Metrics and Success  Methodology: Best Practices, LLC engaged 47 Factors talent and compensation leaders from 17  Communicating Pay for Performance industries through a benchmarking survey Rollout instrument to collect quantitative data and  Implementation Challenges and Pitfalls qualitative insights. BEST PRACTICES, 3 ® Copyright © Best Practices, LLC LLC
  4. 4. 47 Companies Participated from 17 Different IndustriesThe 47 compensation leaders in this study represent 17 different industries, with the greatestnumber in technology, healthcare and media. Benchmark Class Companies Include: IT / Technology 23% Healthcare / Pharmaceuticals 21% Media 15% *Other 13% Telecommunication 6% Aerospace / Defense 6% Finance 6% Consulting 4% Hospitality 4% *Other: (n=47) Agriculture; Logistics; Manufacturing; Mining; Oil & Gas; Textile, Apparel, Engineering, FMCG BEST PRACTICES, 4 ® Copyright © Best Practices, LLC LLC
  5. 5. Key Findings: Program Components & GoalsAnalysis revealed the following findings regarding pay for performance program componentsand 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. BEST PRACTICES, 5 ® Copyright © Best Practices, LLC LLC
  6. 6. Multi-Step Process Drives Successful ImplementationSuccessful implementation of pay for performance is a multi-step process involving demonstratingneed, aligning with corporate goals, deploying appropriate technology, communicating to andtraining all employees, and measuring and improving results. 11. Measure & improve 1. Build a business case 10. Educate the 2. Align goals with workforce in advance of corporate business launch & beyond objectives Best-in-Class 9. Inform, involve & train Pay for 3. Establish meaningful managers minimum bonus level Performance 8. Develop a Implementation 4. Create a simple bonus comprehensive communication plan Process plan & standardize globally 7. Determine how to 5. Secure executive measure success sponsorship/support 6. Deploy supporting technology BEST PRACTICES, 6 ® Copyright © Best Practices, LLC LLC
  7. 7. Most Pay for Performance Programs Are Multi-FacetedCompanies in both the total benchmark class and the large workforce segment indicate their respectivepay for performance programs generally include annual salary increases, individual performance ratingsand reviews, short-term and long-term incentives. At approximately half of companies, non-cash rewardsand/or recognition tactics are also used. Q. What are the components of your pay for performance program? (Check all that apply.) Pay for Performance Program Components: Annual salary increase 97% 95% Individual performance rating 95% 100% Individual performance review 92% 90% Short-term incentives 82% 85% Long-term incentives 62% 70% Non-cash rewards and/or recognition 54% All Companies 55% (n=39) Large Workforce Other (specify) 10% (n=20) 15% *Other: • Cash bonus % Responses • Eligibility for management development programsNOTE: Blue italic text indicates • Job-based incentives and sales commissionsLarge Workforce segment response • Long-term incentives are for Exec only BEST PRACTICES, 7 ® Copyright © Best Practices, LLC LLC
  8. 8. Align Incentives & Reviews To Further Shape CultureSavvy incentive leaders noted that pay for performance incentive systems should be aligned withperformance reviews. By doing this, both the incentive and the review communicate the value ofperformance and underscore “entitlement thinking” is not the end game. Aligning incentives & reviewshelp focus the culture on performance. The “Vitality Curve” force ranking of performance – popularizedby GE & Jack Welch – was cited as a complimentary performance system. (INCENTIVE + PERFORMANCE REVIEW = PERFORMANCE OUTLOOK) Grow Retain PrunePay For Performance Vitality Curve Performance Rating & Review: By pruning the Use incentives to grow and accelerate bottom 10%, PFT incentives are further top performers. underscored. BEST PRACTICES, 8 ® Copyright © Best Practices, LLC LLC
  9. 9. Managers Follow Payout Guidelines with RecommendationsTo help determine optimal bonus payout amounts, nearly half of respondents indicate that managersfollow payout guidelines and recommendations. One-fifth of respondents in the large workforce segmentrequire managers to use a carve-out approach where a specified portion of the bonus pool is reserved fortop performers and the remainder is distributed among average to low performers. Q. Indicate which approach to decision making that managers use to determine bonus amounts. (Choose one.) Decision Making Approach Total Benchmark Class: Large Workforce Segment: No bonus payout No bonus payout guidelines or guidelines or requirements ** Hybrid Model 15% requirements (managers determine ** Hybrid Model 5% (managers determine 5% 15% bonus amounts) bonus amounts)Required to use Follow payoutcarve-outs, 13% guidelines that Required to use include carve-outs, 20% recommendation Required to use s for determining Follow payout forced bonus amounts guidelines that distribution 49% include approach Required to use recommendations 13% *Other (specify): forced distribution for determining 5% approach bonus amounts 15% 45% (n=40) (n=20) Carve-outs: % of bonus pool reserved for top performers, remainder distributed to average and/or low performers. BEST PRACTICES, 9 ® Copyright © Best Practices, LLC LLC
  10. 10. 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: All Companies (n=35) Large Workforce (n=18)% Responses 28% 26% 28% 22% 23% 20% 17% 9% 11% 11% 3% 3%BonusAmount: 0% 1-5% 6-10% 11-20% 21-30% 31-40% 41-50% 50%+ Directors: All Companies (n=36) Large Workforce (n=19)% Responses 32% 33%32% 28% 17%16% 6% 5% 8% 11% 6% 5% 3%BonusAmount: 0% 1-5% 6-10% 11-20% 21-30% 31-40% 41-50% 50%+ BEST PRACTICES, 10 ® Copyright © Best Practices, LLC LLC
  11. 11. Multi-channel Training & Communications Are DeploymentRequirementsNo single communications channel is enough to effectively deploy pay for performance systems.Consequently, veteran pay for performance program leaders advocate multi-channel communicationsthat consistent of training – for both managers and employees – and ongoing meeting andcommunications. Each year these communications cascaded are refined, updated and repeated. Multi-channel Communication • Face-to-face meetings Mandatory Training • Intranet postings • Information packets • Online modules Live Meeting • Webinars • Road shows • Bonus calculator tools Online Training • Emails • Brown-bag lunch sessions Continuous • Top-down executive messaging Online Communica- • Classroom training tions BEST PRACTICES, 11 ® Copyright © Best Practices, LLC LLC
  12. 12. Exec Support & Communications Are Key to Rollout SuccessCritical success factors in rolling out a new pay for performance program are executive sponsorshipand a sound communication plan. A majority also rated plan features and manager training as “highlyimportant” for successful program implementation. Participants tended to favor rolling out the entireprogram 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.) Success Factors (Total Benchmark Class) Not Used Not Important Somewhat Important n= Highly Important Executive sponsorship 5% 9% 3% 83% 35 Communication plan 11% 19% 70% 36 Features of the plan 2% 42% 56% 36 Manager training 14%6% 29% 51% 35 Employee/ stakeholder education 16% 6% 31% 47% 36 Change management strategy 23% 8% 23% 46% 35 Creating a business case 15% 6% 44% 35% 34 Rolling out the entire program at once 17% 17% 33% 33% 35 Rolling out the program gradually/ in phases 44% 21% 29% 6% 34 % Responses BEST PRACTICES, 12 ® Copyright © Best Practices, LLC LLC
  13. 13. About 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 best@best-in-class.com www.best-in-class.com 13 Copyright © Best Practices®, LLC BEST PRACTICES, ® LLC
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