In Patricia K. Zingheim and Jay R. Schuster's new book, Pay People Right! Breakthrough Reward Strategies to Create Great Companies (Jossey-Bass Publishers, $34.95), the authors thoroughly explore the link between rewards systems and business goals. We've asked Zingheim and Schuster (who also own Los Angeles-based pay consulting firm Schuster-Zingheim and Associates Inc. to explain the vital role pay tools play in your company.
Entrepreneur.com: How is the way people are paid today different from the 1980s and '90s?
Patricia K. Zingheim: We're moving to a total reward concept, instead of just focusing on individual elements. In the '80s, most people just had base salaries. What was interesting about the '90s is that variable pay-cash incentives and stock options-were common throughout organizations, and the amount of incentive opportunities increased. People really didn't talk about stock options in the '80s, and now some companies have organization-wide stock options.
Companies are also looking at total reward as more than just the pay elements that I've mentioned-more than just base pay and variable pay. They're looking at individual growth: Do people have the opportunity to grow and develop in their jobs? Do they have a career path? Are they learning not just technical skills, but also business skills and behavioral skills?
Companies are also looking at the compelling future: Does the company present a picture that employees want to be a part of? Do they have visions and values? Do they have profitable growth? Does it look like the company has a future? People have a lot of employment opportunities these days, and the company has to position itself to say, "I'm an exciting company. Come with me." Somebody like Amazon.com will say, "I'm creating the future of e-retail." Well, that's an exciting place to be. That's the compelling future.
The last component is having a positive workplace is this: Is there quality leadership, colleagues people want to work with, interesting work and an environment with employee involvement and open communication? So companies aren't just looking at their total pay, but they're at individual growth, compelling future and positive workplaces.
Entrepreneur.com: What are some reasons business owners might want to take another look at their current pay structures?
Zingheim: [Based on] the fact that unemployment is so low and we've got a tight labor market, companies have to look at their pay to make sure they've got some differential advantage relative to other companies. And a lot of times they're asking if they can create a win-win partnership with their employees. That is, when they're successful, employees share in the success with stock options and incentives.
Entrepreneur.com: What exactly is variable pay? Why is it a useful tool for both attracting and motivating employees?
Zingheim: Variable pay is cash incentives, and it could be a gain-sharing plan where employees share in the cost savings that they create in a manufacturing plant. Or it could be an incentive to build a new quality car within the time frame they've got. Sales incentives are another example.
Jay R. Schuster: At IBM, for example, everybody in the company is on a variable pay plan, from the top to the bottom, and we're seeing that more and more. And the reason they do that is to communicate to people how they add value to the business, to extend their line of sight so they understand the company's goals, [be it] financial goals, customer goals, operational goals, people goals or future focus goals. This is a part of that compelling future that says, "Here's where the organization is going, and here's how we need to have you help."
Entrepreneur.com: How is recognition and celebration an important aspect of pay?
Zingheim: If pay is the accelerator pedal to help drive your organization, then recognition and celebration are the overdrive. They're not used in place of other pay elements; they're used in addition to other pay elements. It can be a simple personal verbal "thank you," which most people don't do often enough. Or it can be things like movie tickets or dinner for two because somebody successfully completed a project and the customer is delighted, or because they went above and beyond what you'd normally expect.
Schuster: But we're finding you have to do something more than an employee-of-the-month award. That's kind of sagging. You've got to have something that's exciting. It's got to be agile, it's got to change, and it's got to be something people want. So a lot of times you need to have the workforce involved in designing some of these plans. Ask what they want for recognition, rather than giving them what you want to offer.
Entrepreneur.com: Changing pay can be unnerving for stockholders, management and employees. What can you do to ease the transition?
Zingheim: The management team first has to articulate what they want to accomplish in terms of the business, and then explain how pay can help do that. What measures should they focus people on? Then they can start to talk about pay and we'd argue that they should have some employee involvement in designing the plan. The company should set the parameters for the design. They might say, "This is the funding for the plan, and here are our key goals. Now you figure out the criteria and how the rewards are distributed." It can be managers and employees, focus groups or design teams working on it, however you want to do it.
You can't design things in a black box anymore and HR can't design it alone because line people need to feel they have ownership in this design and you need their involvement in building a program. So they'll say, "Yeah, this will work and I can get behind it and champion it. It's a management tool for me that I can make work." So that's what you really want and that's why you should have employees more involved in your pay program design than you did in the past.