# Presentation: 355305

## Slide 1

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## Agenda 

**Basic Foundations**
**Types of Variable Programs**
**Getting Ready**
**Elements of the Programs**
**Current Usage**
**Closing**

## Variable Pay

**Variable pay refers to compensation that is received in addition to the base pay.  The amount received may be linked directly to individual, team, division and/or organization performance, and is determined (typically) by a variety of measures important to the organization. **
**It may be known in advance (incentive) or as an after the fact reinforcer (bonus).**
**Payment can be made in many forms; cash, stock, time, and even 4T’s.**

## Why Variable Pay Compensation?

**Reinforces Cultural Change**
**Aligns Pay with Results**
**Suppresses Entitlement Mentality**
**Encourages Employees ‘Stakeholdership’**
**Communicates Values to Employees**
**Focuses Employees’ Activities**
**Can “Buy” Security **

## Variable pay is part of a larger reward strategy

**Intrinsic**

**Extrinsic**

***Indirect Financial***
**- Benefits**
**- Awards**
**- Support programs**

***Direct Financial***
**- Base Salary**
**-Variable pay****   - short-term/long-term**
**- Support programs**

***Career***
**- Growth**
**- Development**
**- Opportunities**
**- Security**

***Job Content***
**-** **“Buy in” of results**
**- Level of responsibility**
**- Meaningful work**
**- Feedback**

***Environment***
**- Culture**
**- Balance work/life**
**- Relationships**

## Value Exchange Theory Requires A Balance - No program proves this more than variable pay!

**Value Exchange Theory Requires A Balance - No program proves this more than variable pay!**

**Employee Gives   ****	****	****         Employer Gives**

**Opportunity**

**Career**

**Benefits**

**Compensation**

**Job**

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## Two Primary Theories

**	****	****            **Reinforcement
**Behaviors occur due to experience in reinforcement and objective measurement of value of past rewards**
**Looking back**

- Expectancy
**Adjusts behaviors due to anticipation and subjective weighing of future rewards**
**Looking out**

***Bonus only ***

***Incentives ***

##  You have to ask yourself do you really believe this chart?

**Performance**

**High**

**Low**

**Overpaying**
**Who designed this?!**

**Ideal**
**Worth the investment**

**Underachieving**
**Something is not working**

**Unstable**
**Value Exchange Issue**

**High**

**Low**

**Pay Out**

##  ‘Type’ of variable pay

**Team-Based**

**Individual-****Based**

**Variable Programs**
**Base Programs**

**Individual **
**Incentives**

**Market Based**

## They can be ‘lumped’ together

**Spot Awards - Bonus**
**Calendar Based  Incentive**
**Event Based Incentive **
**Long Term Incentive (greater than one year)**
**	**

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## Strategy of Design

**“****Gain” sharing - Upside only**
**Risk  - Downside only**
**Balanced risk and reward  - Downside risk and upside opportunity**

## Strategy of Plan

## Process Overview

**Phases**

**Assessment**

**Design**

**Implementation**

**Evaluation**

**Time Line**

## Assessment 

**Why are you moving to a variable plan?**
**What are the core objectives? **
**Can the employees impact the objectives?**
**Is the organization ready for variable pay? **
- What level of trust is there?
- What level of communication exists?
- Can you measure objectives?
**Who is the champion of the program?**
**How committed to change are the Sr Leaders?**
**Is this the right time?**

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## Design Elements

**1. Intent**
**2. Eligibility**
**3. Participation**
**4. Performance Criteria-Measurements**
**5. Goals within Measurements**
**6. Funding **
**7. Pay Outs & Timing**
**8****	****Benefits Impact**
**9. Administration**
**10. Evaluation - Plan Success**

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## 1. Intent of Program

**Understanding the intent of the plan has two objectives:**
**	****1. Makes you think**
**	****2. Communicates to employees**
**What is the purpose of the plan?**
**What are we trying to do?**
***The plan is designed to motivate and unite key leaders by providing a pay system which allows them to share in the financial success of the organization.***

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## 2. Eligibility

**Who is eligible for the program?**
- Sr. Leaders
- Managers
- Professionals
- Hourly/Non-exempt
**Is there a required employment time frame?**
**Individuals on Leave? Performance?**

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## 3. Participation

**Is the plan designed so that all collect or only a portion?**
**Do they participate in the same amounts?**
**Will differences create barriers to team work?**

***Example of a leveled plan***

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## 4.Performance Criteria

**What are the measures to be?**
- Financial, Objectives, Satisfaction, and a million more
**At what level will we measure?**
- Organization, Unit, Department, Individual or combo?
**Can you have different measures at different levels?**

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## 4.Performance Criteria - a few words

**Don’t have more than 3-5 core measures.**
**If you say you want team work - then measure the team NOT the individual**
**If you have sub-measures make sure they are related**
**Ensure that you can get the information on the measures**
**Ensure that employees can have some impact on them**

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## 5. Metric/Goals within Measures

**Circuit Breaker **
- A performance level that turns all measures off.
**Threshold**
- The minimum performance level at which you would pay out on a variable pay program.
- Typically 80-85% of target preference
- Last years performance
- Question - can different groups, organizations, have different thresholds?
**Targeted performance**
- The performance level that you expect to be achieved and at which level you would pay the targeted variable amount.

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## 5. Metric/Goals within Measures

**Over-target (above plan) Performance**
- Payments in excess of the targeted payment for performance in excess of the established metric/goal
- Can you have some measures with opportunity for over achievement and others not?
- Do you change the ‘ramp’ with over achievement?
- Do you have a cap?
**What if a major change occurs in mid year to change the goals?**

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## A few words on the Metrics

**Keep it Smart!**
**S****ignificant but ****S****imple**
**M****easurable**
**A****ttainable**
**R****esponsible**
**T****imely**

## 6. Funding

**Where is the $$$$ to come from to fund the program?**
- New money? Increase in Performance? Current Compensation?
**Is a ‘pool’ created for distribution?**
**How do you plan to ‘get it’ in current compensation?**
- Increase Offset?
- Cut in current compensation
- “Cash-flow” movement

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## Cash Flow Example

**Current base only = $100**
**Cash Flow”**
**Base equals          = $90**
**Day One payment = $10 (advancing the payment)**
**Next Day One Base  = $90**
**Next Day One is based on performance = $0 to $20**

## 7. Pay Outs

**When are the measures to be taken?**
- Quarterly, Annually, On an event?,
**Are the pay out calculations **
- Straight line
- Ramped up
- Stepped up
- Interpolated
**What is the payout? **
- Cash, Stock, something else?
**Is it a percentage of salary, or grade? Or is it a set dollar figure?**

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## 8 & 9  Benefits, and Administration

**Must the employee be employed? When?**
- At end of measurement or payment date?
**What about LOA’s?**
**What about Death?**
**Are new hires or transfers eligible?**
**Must transfers be in their ‘group’ plan?**
**How does the pay out impact:**
- Benefits? -  Pensions, Life Insurance
- Future increases?

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## 10. Plan Evaluation

**How do you know it is working?**
**	*****Set up evaluation criteria in your plan document!***
**When will you evaluate the program?**
**	*****Every day of the year!***
**What if the program is a mess in mid year?**
***Remember many courts see this as a contract!***

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## A few words on implementation

**Variable pay is a strong communication tool.**
**You must consider all the communication needs**
- The roll out
- The measures
- The performance.
**You should document the entire plan in a plan document.**

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## Short-Term Variable Pay:  Usage

**Median base rate for incentive $30,000 - 72.8% ****	****	**
**Most effective plans have 3-5 measures**
**Most effective plans link to business**
**66% strong linkage**
**23% moderate linkage**
**11% little linkage**
**At risk component growing**
**19% FY95**
**28% FY97**
**50% >FY99**
**82% Planned >FY2001 (but I think some of this is just talk)**
**Most plans find it difficult to put $ on gains**
**42% can measure impact in $’s**
**58% can not measure impact in $’s**

## A few other facts

- Impact on Base Pay (Transition)
**Addition to current pay ****	****	****76%**
**Pay replacement****	****	****	**** 7%**
**Future Increase Replacement****	****15%**
**“****Cash Flow” model****	****	**** 2%**
- Distribution to peer members
**Same Size Awards****	****	****76%**
**Different Size Awards****	****	****24%**
- Distribution amounts
**Same dollar amount****	****	****56%**
**Percent of Base Pay****	****	****44%**

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## Summary:  Risks

**Changes behavior**
**Outcomes are not always desired**
**Will impact company culture**
**Poorly designed programs can be expensive**
**Loss of trust by employees**
**Watch out for the non-exempt issues!**

## Basic Rules To Remember

**People want to do the best they possibly can for both social and personal “approval”**
**People act in ways that get rewarded and avoid those that don’t**
**Lastly -**
***The Good News is that incentive systems work.***
***The Bad News is that  incentive systems work!***