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As Pat Byrnes studied the financials for his company, ActuarialConsultants Inc., he could not escape one disheartening fact:Profitability for his Torrance, California-based pension consultingfirm was slipping. "Expenses were going up, and profitabilitywas going down," says Byrnes, the company's president andco-owner.
The root problem: Year in, year out, employee salaries keptrising due to annual cost-of-living increases, but toughcompetition forced Byrnes to keep a lid on the fees he chargedclient 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 hisemployees there'd be no more pay increases unless there werecorresponding gains in productivity and profitability. "Thisfocused employee awareness on the fact that if we don't makemoney, they don't, either," says Byrnes, who introduced aplan that, in a nutshell, gives employees the opportunity to earnsizable bonuses--but only if the company prospers.
How has it worked? "This year [my] average employee got abonus of over 9 percent, a lot more than I would have awarded inpay increases," says Byrnes. The payoff for him: "Thecompany's profitability is climbing. This truly is a win-winsituation."
Byrnes isn't alone. Companies large and small are revampingcompensation systems that haven't been working, says GaryRoberts, a management professor at Kennesaw State University inKennesaw, Georgia. "Traditional approaches to pay haven'tbeen based on any understanding of human nature and what reallymotivates people."
How have traditional approaches to compensation flopped?"Raises have become an entitlement. They are not a goodmotivator because they aren't tied to how individual workersperform," says Kathryn Bartol, a management professor at theUniversity of Maryland in College Park. "The flaw thatprevails in many businesses is that [raises] just don't rewardhard work. In most businesses, every year workers get a raise, withslight individual variances for performance, which don't amountto much. But that's changing. Companies are finally realizingthat pay is a big piece of competitive strategy--and you have toput your money where it counts."
Proof that many companies are looking for ways to get a biggerbang for their payroll bucks comes from a recent survey of 750companies by management consulting firm Towers Perrin in Valhalla,New York. Fifty-eight percent of the businesses surveyed indicatedthey were engaged in comprehensive reviews of their pay strategies.Further proof is a survey by Watson Wyatt Worldwide, a humanresources consulting firm based in Bethesda, Maryland. Eightypercent of the 694 organizations it polled said traditional rewardsprograms had only limited impact on the behaviors they weredesigned to encourage. Says Dennis Morris, a Watson Wyatt seniorconsultant, "Companies are finding there is no link betweenwhat employees do on a daily basis and the rewards theyreceive."
Earning Power
How do you make your money work better for you? The approachfast gaining favor is the one taken by Byrnes at ActuarialConsultants, where most--possibly all--pay increases are in theform of incentives linked to employee accomplishments and overallbusiness profitability.
The benefits? For starters, money is handed out only if thebusiness's profits justify it, so that puts an abrupt halt tothe painful habit of handing out raises even in years when profitstumble. A second plus: "Bonuses are awarded just for thisyear--the money has to be re-earned each year," says Bartol."This controls costs, particularly in years when the companydoesn't do as well."
Easy as it is to preach putting employees on incentive programs,in practice many such efforts have fallen short of expectations.But lessons have been learned about how to design effectiveprograms.
" `Line of sight' is a critical concept," saysJerry Newman, a management professor at the State University of NewYork and Buffalo. This means that for any incentive program towork, employees must be able to see the relationship between whatthey do and the pay hike they get. "The closer the performancemeasures and rewards are to what employees do, the better theymotivate workers," adds Newman.
"The line of sight for most employees is very short,"stresses Morris. That means you've got to work hard to identifyresults that individual employees believe they can influence--andthat actually boost the bottom line. Then set up rewards thatstrongly encourage workers to do more of what's linked toprofitability.
Here, small businesses have a huge advantage. "Theentrepreneur is close to the action and should be able to fairlyquickly set meaningful objectives for each employee," saysMark Weaver, a management professor at the University ofAlabama's College of Commerce and Business Administration inTuscaloosa.
Next step: Sell employees on the fairness of your plan."Many businesses fall very short in terms of getting employeebuy-in," warns Newman.
"Communication is critical," agrees Bartol."Employees have to understand why you are makingchanges." Redouble your efforts to communicate to employeeshow the new approach can put more dollars in their pockets.
At Actuarial Consultants, Pat Byrnes first explained in detailwhy changes were needed, then set up a system that keeps employeeson top of the company's numbers. "Every Monday morning wehold a pow-wow to explain where we're going, and monthly wedistribute the financials to every employee," Byrnes says."Doing this has focused our employees' attention on thefact that if we don't make a profit, a substantial piece oftheir income is in jeopardy."
Money Matters
How much income should be at risk? One rule of thumb is that nomore than 20 percent of an employee's pay should beincorporated into incentives, "but that doesn't alwayswork, especially in small companies. In entrepreneurial businesses,incentives that can double base pay can be great motivators,"says Weaver.
Byrnes, however, has found that higher-level workers are muchmore open to incentive pay--"they understand what we'redoing and why"--while lower-level support personnel are lesswilling to put sizable cash at risk. Many don't understand theconcept; others simply don't have much entrepreneurial zeal. SoByrnes' plan reduces the at-risk amount for lower-levelemployees but increases the stakes for high-wage earners.
How often should bonuses be distributed? Experts agree "ayear-end bonus is practically worthless as a motivationaltool," says Weaver. Why? It runs afoul of the line-of-sightconsideration. Often employees have forgotten what they did to geta bonus, so when one shows up, they attribute it to luck ratherthan hard work. That means the bonus won't do a thing in termsof shaping and influencing their future behaviors.
The cure? More frequent bonuses. At Actuarial Consultants,checks are handed out quarterly. Time frames longer than threemonths rarely get results, and some businesses may need to considera monthly distribution. Either way, a heavy burden of work shiftsto you: "It's an enormous amount of effort to implement anincentive plan," says Byrnes. "Just sitting down everyquarter to evaluate each employee is a lot of work.
"None of this is easy, but once you accept that the oldways won't work anymore, you know you've got to come upwith a different approach to paying people--one that works for themand for you. That's the only way to prosper."
Robert McGarvey writes on business, psychology and managementtopics for several national publications. To reach him online withyour questions or ideas, e-mail rjmcgarvey@aol.com.
Contact Sources
Actuarial Consultants Inc., 3848 Carson St., 3rd Fl.,Torrance, CA 90503, (310) 316-1334;
Watson Wyatt Worldwide, 15303 Ventura Blvd., #700,Sherman Oaks, CA 91403, (818) 906-2631.
