Variable Pay Report
Variable Pay Report
July 2010
Bonuses on the rise, but tied decision making now than they were two
years ago. This reflects the need to address
to performance the challenging economic situation. But there
Our research found that 22 per cent of are also signs that rather than introducing a
companies had already increased the proportion ‘me too’ variable pay policy, companies are at
Rather than taking a
of variable pay, and 17 per cent said they last taking a strategic approach, aligning reward
‘me too’ approach, planned to do so in the future. Fourteen per and company strategy and strengthening
companies are at last cent of companies questioned had widened the links between reward and performance.
aligning reward and the eligibility criteria for short-term incentives
company strategy. and a further 12 per cent planned to follow suit. The volatility in the global economy over
the past two years has led companies to
Over 60 per cent of companies questioned told re-examine the measures they use to
us that their main reason for changing their assess performance, to reduce the risk of
variable pay policy was to align reward more disproportionate or undeserved bonuses.
closely with business strategy. Forty per cent told There is a new discipline around the subject,
us that a key driver was to improve performance. with companies conscious that variable pay
must be closely aligned to corporate strategy
And it’s coming from the and communicated well if it is to be effective.
But it is also apparent that companies continue
very top to be largely unconcerned by the risks involved
Variable pay has become a board-level issue. with poorly-designed or badly implemented
Fifty five per cent of companies reported the schemes. Only five per cent of respondents
board was more involved in variable pay mentioned risk as a driver of change.
What are the most important drivers of change to your variable pay program?
Better alignment with business strategy 61%
Improve company or team performance 40%
Create better alignment or line of sight between corporate and individual performance 36%
Ensure market competitiveness 29%
Reinforce specific business priorities 25%
Improve individual performance 25%
Improve employee engagement 21%
Ensure retention 15%
Better balance of fixed and variable costs 11%
Ease with which the program can be communicated and understood 7%
Satisfy external stakeholders demands (investors, media, community) 6%
Comply with regulations or governance requirements 6%
Reduce risk 5%
Other 3%
Our research
Responding to strong interest in variable pay from our clients, we questioned over 1,300
companies worldwide on their variable pay policies and their plans for variable pay strategy in
the future. Using these responses and detailed data from our PayNet databases, we are able to
identify key trends and current practices in variable pay. We also looked at the level of variable pay
that companies are using to drive performance through variable pay schemes worldwide, and what
companies planned to pay in bonuses to their managers against what they actually paid. More
information on the research methodology can be found in Appendix 1 – About the research.
Performance = the bottom line This presents problems for employee activities
that are not directly related to the bottom
Our research showed a marked change in the line, such as support and non-sales functions.
The best variable pay
approach of companies to the measures used in Perhaps more importantly, a focus on financial
programs:
variable pay. Almost half of companies said they metrics may also encourage behaviors
n reflect the company’s had already reviewed their performance metrics focused on short-term financial gain, without
business model and and a further 25 per cent said they planned to consideration for social, environmental and
work culture review their metrics in the near future. brand issues – one of the factors that drove
n take into account the credit crunch in the first place.
One of the most significant legacies of
the impact different
the economic downturn has been a trend away A successful reward strategy that encourages
employee groups have
from ‘soft’ metrics, such as employee satisfaction the most valuable performance must be
on performance
or turnover, to hard financial measures. Fifty one underpinned by the right performance
n are tailored to employee per cent of companies questioned said they were measures in the right combination. Our
preferences and using more financial metrics in performance- studies of Fortune’s Most Admired Companies
demographic profiles based pay than before. In our experience those clearly shows that while peer companies
n are fully integrated financial measures are also shifting from revenue apply performance metrics that are focused
with the overall reward growth to profitability. Operational metrics, on operational excellence, profits or revenue,
program driving specific actions or process improvements, the most admired go further by adding
have also grown in popularity with 23 per cent measures around long-term thinking, teamwork,
n are modelled against increasing the emphasis on operational metrics building human capital and customer loyalty.
projected profitability in the past two years. They recognize the need to find a better
and are hedged against balance between short and long-term metrics,
potential volatility. A concern is that companies may create the between corporate and individual performance,
impression that only performance that directly and between financial, operational, customer
drives financial returns will be rewarded. and human capital metrics.
Successful variable pay programs must balance where many are already asking their employees
competing stimuli and risks. If a bonus scheme to do more for less. Employees will no longer
fails to pay out in a bad year, employees can be happy ‘just to have a job’ and companies need
become disengaged at a time when the to find effective ways to prevent loss of talent
company needs them most. Conversely, a bonus as market conditions improve. Our Hay Group
scheme that pays out regardless of corporate Insight research has shown that companies with
performance will not drive discretionary effort. the most engaged employees report revenue
The challenge for companies is therefore not growth at a rate two-and-a-half times greater
only identifying the right measure, but the than their competitors with the lowest level
right targets: should the target be absolute of engagement. Furthermore, companies who
or relative? Should it be in line with this year’s effectively combine employee engagement and
budget or with last year’s performance? A further enablement (empowering employees with the
consideration is the level at which performance tools and processes to ‘go the extra mile’) report
targets are set: should average performance be significantly improved revenue growth, staff
awarded? Or only excellent performance? retention and employee performance.
“Variable pay is a
developing practice
in the Middle East and
those companies that
do set performance
goals for individual
employees tend to
keep the targets
low. While there is
an increasing trend
for companies to
differentiate pay
by performance, there
is still some way to
go in aligning reward
and business strategy,
and in assessing
the effectiveness of
variable pay.”
Hay Group Middle East
*Based on target bonuses for management level employees set for 2008 and paid out in 2009
In May 2010, we surveyed over 1,300 companies from across 80 countries on their variable pay
policies and their plans for variable pay strategy in the future.
42% 17%
30% 33% 51%
42%
19%
4% 6%
7%
2%
Compensation and benefits
Africa North America Chemicals FMCG and retail
HR director
Asia Pacific Communications, Life sciences
media and HR manager
Europe South/Central America technology Oil and gas
Senior management/board
Middle East Not specified Financial services Other sectors
Other
We also used detailed data from our Hay Group PayNet databases to analyze country-to-country
the amounts (as a per centage of base salary) companies planned to pay in bonuses to their managers
against what they actually paid.
PayNet, Hay Group’s online reward information database, provides instant access to the most timely,
reliable and comprehensive reward and benefits data covering 12 million incumbents, more than
14,500 organizations and all major industries.
The PayNet data used relates to time period March 2009 - February 2010 and is based on the
Hay Group standard middle management level employee, which is generally equivalent to a
middle- to senior-level manager in a department or function of a large multinational company.
In a smaller economy, it is more likely to be equivalent to be a department or functional head.