Wage and Compensation Experts Patricia K. Zingheim and Jay R. Schuster In today's tight labor market, how can you attract and retain star employees? These experts reveal why creating a compelling "reward strategy" is one of the most important steps you can take.

In Patricia K. Zingheim and Jay R. Schuster's new book,Pay People Right! Breakthrough Reward Strategies to Create GreatCompanies (Jossey-Bass Publishers, $34.95), the authorsthoroughly explore the link between rewards systems and businessgoals. We've asked Zingheim and Schuster (who also own LosAngeles-based pay consulting firm Schuster-Zingheimand Associates Inc. to explain the vital role pay tools play inyour company.

Entrepreneur.com: How is the way people are paid todaydifferent from the 1980s and '90s?

Patricia K. Zingheim: We're moving to a total rewardconcept, instead of just focusing on individual elements. In the'80s, most people just had base salaries. What was interestingabout the '90s is that variable pay-cash incentives andstock options-were common throughout organizations, and theamount of incentive opportunities increased. People reallydidn't talk about stock options in the '80s, and now somecompanies have organization-wide stock options.

Companies are also looking at total reward as more than just thepay elements that I've mentioned-more than just base payand variable pay. They're looking at individual growth: Dopeople have the opportunity to grow and develop in their jobs? Dothey have a career path? Are they learning not just technicalskills, but also business skills and behavioral skills?

Companies are also looking at the compelling future: Does thecompany present a picture that employees want to be a part of? Dothey have visions and values? Do they have profitable growth? Doesit look like the company has a future? People have a lot ofemployment opportunities these days, and the company has toposition itself to say, "I'm an exciting company. Comewith me." Somebody like Amazon.com will say, "I'mcreating the future of e-retail." Well, that's an excitingplace to be. That's the compelling future.

The last component is having a positive workplace is this: Isthere quality leadership, colleagues people want to work with,interesting work and an environment with employee involvement andopen communication? So companies aren't just looking at theirtotal pay, but they're at individual growth, compelling futureand positive workplaces.

Entrepreneur.com: What are some reasons business ownersmight want to take another look at their current paystructures?

Zingheim: [Based on] the fact that unemployment is so lowand we've got a tight labor market, companies have to look attheir pay to make sure they've got some differential advantagerelative to other companies. And a lot of times they're askingif they can create a win-win partnership with their employees. Thatis, when they're successful, employees share in the successwith stock options and incentives.

Entrepreneur.com: What exactly is variable pay? Why is ita useful tool for both attracting and motivating employees?

Zingheim: Variable pay is cash incentives, and it couldbe a gain-sharing plan where employees share in the cost savingsthat they create in a manufacturing plant. Or it could be anincentive to build a new quality car within the time framethey've got. Sales incentives are another example.

Jay R. Schuster: At IBM, for example, everybody in thecompany is on a variable pay plan, from the top to the bottom, andwe're seeing that more and more. And the reason they do that isto communicate to people how they add value to the business, toextend their line of sight so they understand the company'sgoals, [be it] financial goals, customer goals, operational goals,people goals or future focus goals. This is a part of thatcompelling future that says, "Here's where theorganization is going, and here's how we need to have youhelp."

Entrepreneur.com: How is recognition and celebration animportant aspect of pay?

Zingheim: If pay is the accelerator pedal to help driveyour organization, then recognition and celebration are theoverdrive. They're not used in place of other pay elements;they're used in addition to other pay elements. It can be asimple personal verbal "thank you," which most peopledon't do often enough. Or it can be things like movie ticketsor dinner for two because somebody successfully completed a projectand the customer is delighted, or because they went above andbeyond what you'd normally expect.

Schuster: But we're finding you have to do somethingmore than an employee-of-the-month award. That's kind ofsagging. You've got to have something that's exciting.It's got to be agile, it's got to change, and it's gotto be something people want. So a lot of times you need to have theworkforce involved in designing some of these plans. Ask what theywant for recognition, rather than giving them what you want tooffer.

Entrepreneur.com: Changing pay can be unnerving forstockholders, management and employees. What can you do to ease thetransition?

Zingheim: The management team first has to articulatewhat they want to accomplish in terms of the business, and thenexplain how pay can help do that. What measures should they focuspeople on? Then they can start to talk about pay and we'd arguethat they should have some employee involvement in designing theplan. The company should set the parameters for the design. Theymight say, "This is the funding for the plan, and here are ourkey goals. Now you figure out the criteria and how the rewards aredistributed." It can be managers and employees, focus groupsor design teams working on it, however you want to do it.

You can't design things in a black box anymore and HRcan't design it alone because line people need to feel theyhave ownership in this design and you need their involvement inbuilding a program. So they'll say, "Yeah, this will workand I can get behind it and champion it. It's a management toolfor me that I can make work." So that's what you reallywant and that's why you should have employees more involved inyour pay program design than you did in the past.