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What’s Next? Projecting the Future of Variable PayKen Abosch, Hewitt Associates LLC
2009 Total Rewards Conference & Exhibition2
Roadmap for Today’s DiscussionEvolution of Variable Pay
Projecting the Future
Variable Pay Maxims
2009 Total Rewards Conference & Exhibition3
Parameters for Today’s Discussion
Roles below the executive level
Excludes sales professional roles
Annual cash incentives/bonuses
Performance-based awards (not holiday bonuses)
2009 Total Rewards Conference & Exhibition4
“Those who cannot remember the past are condemned to repeat it.”
George Santayana
Evolution of Variable Pay
2009 Total Rewards Conference & Exhibition6
Evolution of Variable Pay: 1930’s–1940’s
2009 Total Rewards Conference & Exhibition7
Evolution of Variable Pay: 1930’s–1940’sCorporate
VPs and Directors
Individual performance plans
MBO-based goals
Modest targets
Budgeted funding
Plants/Field Operations
Plant/Field Top Management
Individual performance plans
MBO-based goals
Modest targets
Budgeted funding
1st-Level Managers/Salaried
Gainsharing/productivity plans
Minimal targets
2009 Total Rewards Conference & Exhibition8
Evolution of Variable Pay: 1950’s–1960’s
2009 Total Rewards Conference & Exhibition9
Evolution of Variable Pay: 1950’s–1960’sCorporate
VPs and Directors
Individual performance plans
MBO-based goals
Modest targets
Budgeted funding
Directors and Managers
Cash profit sharing
Company-wide metrics
Minimal targets
Formulaic funding
Plants/Field Operations
Plant/Field Top Management
Individual performance plans
MBO-based goals
Modest targets
Budgeted funding
1st-Level Managers/Salaried/Hourly Nonunion
Gainsharing/productivity plans
Cash profit sharing
Minimal targets
2009 Total Rewards Conference & Exhibition10
Evolution of Variable Pay: 1970’s–1980’s
2009 Total Rewards Conference & Exhibition11
Evolution of Variable Pay: 1970’s–1980’sCorporate
VPs and Directors
Individual performance plans
Cash profit sharing
Business incentives
Directors and Managers
Cash profit sharing
Business incentives
Team awards
Salaried/Select Hourly Nonunion
Cash profit sharing
Team awards
Plants/Field Operations
Plant/Field Top Management
Individual performance plans
Cash profit sharing
1st-Level Managers/Salaried/Hourly Nonunion
Cash profit sharing
Some use of gainsharing
2009 Total Rewards Conference & Exhibition12
Evolution of Variable Pay: 1990’s–2000’s
2009 Total Rewards Conference & Exhibition13
Evolution of Variable Pay: 1990’s–2000’sVPs and Directors
Business incentivesIndividual performance plansProfit sharing shifts to 401(k) profit sharing
Directors and ManagersBusiness incentivesIndividual performance plans
Salaried/Increased Hourly NonunionBusiness incentivesIndividual performance plansProfit sharing shifts to 401(k) profit sharing
Plant/Field Top ManagementBusiness incentivesSome use of individual performance plans
1st-Level Managers/Salaried/Hourly NonunionBusiness incentivesTeam awards
Corporate Plants/Field Operations
2009 Total Rewards Conference & Exhibition14
Variable Pay Trends—Prevalence of Variable Pay
A—Salaried/LeadershipB—Hourly
1930’s 1950’s 1970’s 1990’s 2000’s
A
B
100%
50%
0%
A—ManufacturingB—Services
1930’s 1950’s 1970’s 1990’s 2000’s
A
B
100%
50%
0%
A—Large CompaniesB—Small Companies
1930’s 1950’s 1970’s 1990’s 2000’s
A
B
100%
50%
0%
2009 Total Rewards Conference & Exhibition15
Variable Pay Trends—Prevalence of Variable Pay Type
A—Cash Profit SharingB—GainsharingC—Individual PerformanceD—EquityE—Business IncentivesF—Special RecognitionG—Team Awards
1930’s 1950’s 1970’s 1990’s 2000’s
AB
GD
C
F
E
100%
50%
0%
2009 Total Rewards Conference & Exhibition16
Variable Pay Trends (Mid-Level Professionals)
Low Eligibility High Eligibility
Organizational Focus Line of Sight
Low Participation High Participation
Symbolic Award Material Award
A 1930’s–1940’s B 1950’s–1960’s C 1970’s–1980’s D 1990’s–2000’s
A
A
A
A
B
B
B
B
C
C
C
C
D
D
D
D
2009 Total Rewards Conference & Exhibition17
Variable Pay Trends (Mid-Level Professionals)
Discretionary Funding Budgeted Funding
Discretionary Allocation Prescriptive Allocation
Few Plans Multiple Plans
Reward Incentive
A 1930’s–1940’s B 1950’s–1960’s C 1970’s–1980’s D 1990’s–2000’s
A
A
A
A
B
B
B
B
C
C
C
C
D
D
D
D
2009 Total Rewards Conference & Exhibition18
Reflecting on Our Experiences With Variable PayPositives
Inclusion
Focus
Repositioning of fixed vs. variable costs
Gravitating to greater plan alignment
More at stake
Individual performance
Negatives
Weak alignment
Winners and losers
Entitlement
Skeptism
Line of sight
Complexity
One size fits all
Lack of transparency
2009 Total Rewards Conference & Exhibition19
“May the dreams of your past be thereality of your future.”
Anonymous
2009 Total Rewards Conference & Exhibition20
Projecting the Future
2009 Total Rewards Conference & Exhibition21
Projecting the Future: Next 10–20 Years
2009 Total Rewards Conference & Exhibition22
Projecting the Future: Next 10–20 YearsCorporate
VPs and Directors
Business incentives
Directors and Managers
Business incentives
Special recognition
Salaried/Hourly Nonunion
Business incentives
Special recognition
Plants/Field Operations
Plant/Field Top Management
Business incentives
1st-Level Managers/Salaried/Hourly Nonunion
Business incentives
Special recognition
2009 Total Rewards Conference & Exhibition23
Projecting the Future: Discussion Categories
Plan type
Objectives
Eligibility
Funding
AllocationMeasures
Payouts
Communication
2009 Total Rewards Conference & Exhibition24
Projecting the Future: Plan Type
Business incentives will be dominate plan typeContains quantitative and qualitative measures
Supports multi-tiered results focusCorporate VPs Corporate Managers Corporate Salaried/Hourly Corporate 75% Corporate 50% Corporate 25% Business Unit — Business Unit — Business Unit — Location — Location — Location — Individual 25% Individual 50% Individual 75%
Plants/Field Top Management Plants/Field Managers Plants/Field Salaried/Hourly Corporate 30% Corporate 20% Corporate 10% Business Unit 50% Business Unit 40% Business Unit 40% Location — Location 20% Location 25% Individual 20% Individual 20% Individual 25%
2009 Total Rewards Conference & Exhibition25
Projecting the Future: Plan Type
Increased use of special recognition awards
Increased use of special purpose plansPatents
Royalties
Special project completion
Certifications
Competency acquisition/application
Retention
2009 Total Rewards Conference & Exhibition26
Projecting the Future: Objectives
Rewards drive behaviors that yield desired results
Metric alignment from top to bottom
Manage expenses by emphasizing variable costs vs. fixed costs
Direct linkage to business results (poor results = no payout)
2009 Total Rewards Conference & Exhibition27
Projecting the Future: Objectives
OrganizationOrganization EmployeeEmployee
ShareholderShareholder
Better pay for performance
Better cost control—shift from fixed to variable expenses
Focus employees’ on desired behaviors
Market competitivenessCompanies with lower fixed costs (e.g., with variable pay) are more attractive investments
Employees aligned with shareholder interests
Additional earnings opportunity
Greater control over rewards
Clarification of expectations
Market competitiveness
Variable Pay Value Proposition
2009 Total Rewards Conference & Exhibition28
Projecting the Future: Objectives
Organizations will focus more efforts on:
Selecting performance metrics that have line of sight for all participants
Aligning performance goal with the performance expectations for the organizational unit one level higher
Cascading performance goals down to the individual
Aligning and Cascading of Performance Goals
Department/Facility Goals
CorporateGoals
Business UnitGoals
Business UnitGoals
Department/Facility Goals
IndividualGoals
IndividualGoals
2009 Total Rewards Conference & Exhibition29
Projecting the Future: EligibilityNearly 100% of organizations will offer broad-based variable payAll nonunion employees will be eligibleIncreasing participation by union employeesNontraditional “employee” categories will be eligible
ContractorsPart-time employeesContingent workers“Free agents”
All industry categories including Education, Not-for-Profit, Health Care, and Government will be includedSignificant global participation
2009 Total Rewards Conference & Exhibition30
Projecting the Future: Eligibility
0%10%20%30%40%50%60%70%80%90%
100%
Europe Asia Pacific Latin America United States
2005 2006 2007Sources: Workspan—Broad-Based Variable Pay Goes Global, May 2008Hewitt Total Compensation Measurement™ (TCM™) 2005–2007
2020
2009 Total Rewards Conference & Exhibition31
Projecting the Future: FundingPlan “Trigger” will be in force in all plansMore planful targetingTarget level funding will be budgeted for, and accrued throughout the yearFunding levels will be based on formulaic assumptions regarding expected resultsReserve funding concept will be used to cover top performers/high potentials independent of business outcomesAmount of funding will increase to offset salary increases as vehicle for pay for performanceFunding assumptions will be more role based and less level based
2009 Total Rewards Conference & Exhibition32
Projecting the Future: Funding
2.0%
16.0%
3.0%
12.0%
Percent of Payroll
4.2% 5.5%
1990 2010 2020
Source: Hewitt U.S. Salary Increase Survey 1990–2009
Base Salary Increase Budget
Variable Pay Budget
2009 Total Rewards Conference & Exhibition33
Projecting the Future: FundingOrganization spending on variable pay is expected to grow
Actual and Projected Variable Pay Spending for Salaried Exempt Employees
11.8%
15.4%
10.6%
13.7%14.5%
5.7% 5.9%6.4%7.6%7.5%7.6% 8.0%
9.7%9.3%
10.8%
8.8%
4.2%
10.5%9.5%
3.8%
11.4%11.2% 10.8%
13.2%14.1%
15.0%
15.8%16.2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Proj.
2010
Est.20
11 Est.
2012
Est.20
13 Est.
2014
Est.20
15 Est.
2016
Est.20
17 Est.
Per
cent
of P
ayro
ll
Source: Hewitt U.S. Salary Increase Survey 1990–2009
2009 Total Rewards Conference & Exhibition34
Projecting the Future: Funding
Payout
FinancialPerformance
Service Companies
FinancialPerformance
Payout
Manufacturing Companies
Target Calibration to Business Circumstances
Level of Performance
Profit
Expenses
Revenues
Time
2009 Total Rewards Conference & Exhibition35
Projecting the Future: Allocation
Payouts reflect formulaic results and individual contributions
Managers will have more direct involvement in payout decisions
More “plans with teeth” to break entitlement mindsetMore dynamic upside/downside payouts for high/low achievement
Increased use of nontraditional measures
2009 Total Rewards Conference & Exhibition36
Projecting the Future: AllocationSalary Increase Criteria
Results
How you do it
What you could do
Competitiveness
Competencies
Development
Cumulative performance
Variable Pay
Results
Finite performance window
2009 Total Rewards Conference & Exhibition37
Projecting the Future: Allocation
AdditiveModel
Measure A Measure B Measure C
+ + =
EarnedAward
Multiplicative Model
Measure A Measure B Measure C
X =
EarnedAward
X
Measure A Measure B Measure C
+ X =
EarnedAward
Modifier
Factoring Individual Results Into the Allocation Decision
2009 Total Rewards Conference & Exhibition38
Base Salary Decision Tool
Base Pay is Low in Range
Employee shows significant potential
This is the employee's relative position in their particular pay grade.
Rate the employee's potential to contribute to the organization over the long term (2-3 years).
Base Pay is High in Range
Adjusted Merit Recommendation:
Name:Business Unit:Performance Rating:Position in Range (CompaRatio):Current Base Salary $100,000
Employee Worksheet - Salary
Relative Position in Range
Skills are readily available in the Marketplace
Rate the employee's consistency of performance over the past two years. If the employee is a high performer, has performance over the past two years been consistent? Or, if the employee is an average performer, is the employee's performance trailing off?
Does the employee posess a skill set that is difficult to recruit for or hard to find in the talent marketplace? Will the employee's specific skills be used for any specific upcoming projects or initiatives?
Employee does not show much potential
Inconsistent performance year-over-year
Consistent performance year-over-year
Long-term Potential Consistent Performance
Skills are hard to find in the marketplace
Specific Skill Set
Pete RepeatCorporate AccountingMeets Expectations100
2.2%
2009 Total Rewards Conference & Exhibition39
Variable Pay Decision ToolE m p lo yee W o rksh eet - V ariab le P ay
$4 ,000$6 ,000
$4 ,000$4 ,500
C u rren t B ase S a la ry $100 ,000
T a rg e t Ac tu a lAw ard S u m m ary
In d iv id u a l Aw ard :T o ta l:
$10 ,000$20 ,000
$12 ,000$20 ,500
50%
C o rp o rate Aw ard :B u s in ess U n it Aw ard :
W eig h t fo r C o p o ra te G o a l Ach iev em en t 20%W eig h t fo r B U G o a l Ach iev em en t: 30%
In d ivid u a l G o a l #1
T he bonus poo l is de te rm ined by g roup such tha t a re la tive com parison o f ind iv idua l pe rfo rm ance shou ld be a de te rm in ing fac to r in the fina l va riab le pay aw ard
M in im um A che ivem ent (80% P ayou t)
Low A che ivem en t R e la tive to P eers
H igh A che ivem ent R e la tive to P eers
In d iv id u a l G o a l #2 In d ivid u a l G o a l Ach ie vem e n t R e la tive to G ro u p
A ch ievem en t S am e as P ee rs
M in im um A che ivem en t (80% P ayou t)
E xceeded E xpec ta tions (150% P ayou t)
W eig h t fo r In d iv id u a l P o rtio n :
N am e:B u s in ess U n it:P erfo rm an ce R atin g :
T arg e t Aw ard :
P ete R ep eatC o rp o ra te Acco u n tin gM eets E xp ec ta tio n s
20%
T he leve l o f ach ievem en t the em p loyee as reached fo r G oa l #1
T he leve l o f ach ievem ent the em p loyee as reached fo r G oa l #2
E xceeded E xpec ta tions (150% P ayou t)
T a rge t A ch ieved (100% P ayou t)
T arge t A ch ieved (100% P ayou t)
2009 Total Rewards Conference & Exhibition40
Projecting the Future: Measures
Significant emphasis on line-of-sight measures
Dynamic measures change as business circumstances vary
Use of performance period concept
Increased use of qualitative metricsGreater connectivity to ROI requirements
Fewer metrics
2009 Total Rewards Conference & Exhibition41
Projecting the Future: Measures
Corporate
Business Unit 1
Business Unit 2
Business Unit 3
Business Unit 4
Region1
Region2
Business Unit Function Individual Leaders 50% 25% 25% Managers Individual Contributors 10% 50% 40%
2009 Total Rewards Conference & Exhibition42
Projecting the Future: Payouts
Frequency of payouts will coincide with business results/cycles
Greater upside and downside in payout matrices
Potential expansion to multi-year plansAchieve desired performance internal focus
Increased retention vehicle
Support savings efforts for employees
Significant impact of individual performance on payouts
2009 Total Rewards Conference & Exhibition43
Projecting the Future: PayoutsVariable Payout Approaches
Q1 Q2 Q3 Q4 Goal 1 3% 3% 3% 3%
Example 2 (20% Target)
Goal 2 8% 20%
Q1 Q2 Q3 Q4 Payout 3% 3% 3% 5%
Example 1 (20% Target)
Reserve 2% 2% 2% 6% 20%
2009 Total Rewards Conference & Exhibition44
Projecting the Future: PayoutsVariable Payout Mechanisms
Year 1 Year 2 Year 3 Year 4 Year 5 Customer Satisfaction Revenue Revenue Growth Market Cap
STI1STI2
STI3
MTI1
MTI2
LTI1
LTI2
2009 Total Rewards Conference & Exhibition45
Executives Management Entry
Professionals Support Short-Term Incentives Mid-Term Incentives Long-Term Incentives Special Recognition
Projecting the Future: PayoutsMix of Payout Vehicles
Fully Eligible
Partially Eligible
Not Eligible
2009 Total Rewards Conference & Exhibition46
Projecting the Future: Communication
Timely, detailed communication up front on plan metrics, expectations, award levelsUpdates on performance provided throughout the performance periodIncreased emphasis on business educationDynamic choices in media/formats
PodcastsWeb videoModelersText alerts
2009 Total Rewards Conference & Exhibition47
Projecting the Future: Communication
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Actual Budget/Strong Exceptional Very Strong
Fina
ncia
l Res
ults
2009 Total Rewards Conference & Exhibition48
Variable Pay Maxims
2009 Total Rewards Conference & Exhibition49
Maxims for Variable Pay
Variable pay will become the new pay for performance
If you are not offering variable pay, you are paying too much
One size fits no oneIt is better to reward the right things than to measure the wrong things
The company with the best managers wins
Tell it like it is
2009 Total Rewards Conference & Exhibition50
What’s Next? Projecting the Future of Variable PayKen Abosch, Hewitt Associates LLC847.442.3580Booth #909
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