As Pat Byrnes studied the financials for his company, Actuarial Consultants Inc., he could not escape one disheartening fact: Profitability for his Torrance, California-based pension consulting firm was slipping. "Expenses were going up, and profitability was going down," says Byrnes, the company's president and co-owner.
The root problem: Year in, year out, employee salaries kept rising due to annual cost-of-living increases, but tough competition forced Byrnes to keep a lid on the fees he charged client companies. "So I drew a line in the sand and said, `There has to be a better way to compensate employees,' " says Byrnes.
Byrnes promptly found that way. He essentially told his employees there'd be no more pay increases unless there were corresponding gains in productivity and profitability. "This focused employee awareness on the fact that if we don't make money, they don't, either," says Byrnes, who introduced a plan that, in a nutshell, gives employees the opportunity to earn sizable bonuses--but only if the company prospers.
How has it worked? "This year [my] average employee got a bonus of over 9 percent, a lot more than I would have awarded in pay increases," says Byrnes. The payoff for him: "The company's profitability is climbing. This truly is a win-win situation."
Byrnes isn't alone. Companies large and small are revamping compensation systems that haven't been working, says Gary Roberts, a management professor at Kennesaw State University in Kennesaw, Georgia. "Traditional approaches to pay haven't been based on any understanding of human nature and what really motivates people."
How have traditional approaches to compensation flopped? "Raises have become an entitlement. They are not a good motivator because they aren't tied to how individual workers perform," says Kathryn Bartol, a management professor at the University of Maryland in College Park. "The flaw that prevails in many businesses is that [raises] just don't reward hard work. In most businesses, every year workers get a raise, with slight individual variances for performance, which don't amount to much. But that's changing. Companies are finally realizing that pay is a big piece of competitive strategy--and you have to put your money where it counts."
Proof that many companies are looking for ways to get a bigger bang for their payroll bucks comes from a recent survey of 750 companies by management consulting firm Towers Perrin in Valhalla, New York. Fifty-eight percent of the businesses surveyed indicated they were engaged in comprehensive reviews of their pay strategies. Further proof is a survey by Watson Wyatt Worldwide, a human resources consulting firm based in Bethesda, Maryland. Eighty percent of the 694 organizations it polled said traditional rewards programs had only limited impact on the behaviors they were designed to encourage. Says Dennis Morris, a Watson Wyatt senior consultant, "Companies are finding there is no link between what employees do on a daily basis and the rewards they receive."