Once Is Not Enough - Infusing Continuous Rewards Into Your Compensation Strategy
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The document discusses the need for organizations to shift from traditional annual bonuses to a more continuous rewards approach for employee performance recognition. It highlights that younger generations prefer more frequent acknowledgment and that technology has made implementing continuous pay strategies feasible. A blended compensation strategy incorporating both annual and immediate rewards is suggested to enhance motivation, engagement, and retention among employees.
Once Is Not Enough - Infusing Continuous Rewards Into Your Compensation Strategy
- 1. SAP White Paper Compensation Once Is Not Enough Infusing Continuous Rewards Into Your Compensation Strategy ©2017SAPSEoranSAPaffiliatecompany.Allrightsreserved. 1 / 13
- 2. 2 / 13 Table of Contents 4 Building a Great Workforce Demands Rewarding People Through the Year 5 Why Now? 7 It Pays to Pay Continually 13 Like Planting a Garden © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 3. Once Is Not Enough 3 / 13 It’s a perpetual struggle: What’s the best way to reward and encourage performance? If your company is like most, you draw from an arsenal of tools that includes a range of variable pay options. While organizations have halved spending on salary increases from 5.5 to 2.8 percent of payroll over the past 25 years, they have tripled funding for bonuses from 4.2 to 12.8 percent of payroll.1 Indeed, 93 percent of U.S. companies hand out bonuses2 often as annual payouts. 1. “The Shifting Landscape of Variable Pay.”Workspan. Apr. 2017. 2. “Short-Term Incentives Are Playing Larger Retention Role.” SHRM.org. Aug. 11, 2015. © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 4. Once Is Not Enough 4 / 13 This statistic raises another important question: Is a yearly bonus the best way to recognize and reward performance? Not really. At least not by itself alone. While you might be showing some appreciation for your people throughout the year in nonfiscal ways, an annual bonus can take too long to financially mo- tivate and recognize employees for their work. Which explains why a survey of HR professionals reveals that only half said that annual incentive programs effectively boost performance levels.3 As Laura Sejen, global practice leader for Willis Towers Watson, told SHRM.org,“Traditional pay- for-performance programs, primarily annual merit pay increases and annual bonuses, are fall- ing short in the eyes of many employers.”4 Traditional pay for performance is falling short in the eyes of many employees too. Newer genera- tions of workers crave more frequent and instant feedback and recognition. Not long ago, research showed that 41 percent of millennials (and 30 per- cent of nonmillennials) prefer to be rewarded or recognized for their work at least monthly.5 And while there are numerous ways to acknowledge people for their work, once a year is simply not often enough when it comes to monetary rewards. Does this mean that you should ditch annual bo- nuses? No. They can — and often should — have a rightful place as part of total compensation packages because yearly rewards are often an ef- fective retention tool. Furthermore, as long as companies operate in annual financial cycles, there is likely to be an annual aspect to compen- sation as the largest single operating cost for many companies. However, building a talented and motivated workforce demands expanding pay practices that shorten the line of sight be- tween rewards and achievement as they occur throughout the year. Some businesses are already doing this — a WorldatWork survey shows that 61 percent of companies offered spot awards in 2016, up from 43 percent six years prior.6 While continuous re- wards can be an important means to recognize and reward performance, it’s critical not to over- use them. It’s also critical to recognize that they will work best when part of a holistic strategy that includes a full range of monetary and non-mone- tary rewards and recognition efforts. Here’s what you need to know as you think about introducing more frequent rewards and recogni- tion into your compensation strategy. Building a Great Workforce Demands Rewarding People Through the Year 3. “Employers Seek Better Approaches to Pay for Performance.” SHRM.org. Feb. 8, 2015. https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/better-pay-for-performance.aspx 4. “Employers Seek Better Approaches to Pay for Performance.” SHRM.org. Feb. 8, 2015. https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/better-pay-for-performance.aspx 5. PwC’s NextGen: A global generational study. PwC, the University of Southern California, and the London Business School. 2013. http://www.pwc.com/gx/en/hr-management-services/pdf/pwc-nextgen-study-2013.pdf 6. Bonus Programs and Practice. WorldatWork. July 2016. https://www.worldatwork.org/adimLink?id=80398 © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 5. Once Is Not Enough 5 / 13 TECTONIC SHIFTS IN TECHNOLOGY In the past, businesses awarded annual bonuses almost exclusively to top executives. As war upon war for talent impacted companies over the past 30 years, employers discovered that they could use variable pay to counteract strains related to increasing fixed costs, while attracting and re- taining talent throughout the enterprise. Unfortunately, the lack of technology got in the way.“Given the time and resources needed to pay annually, it was understandable that organi- zations limited bonuses to once a year,” explains Steve Hunt, senior vice president of human capi- tal research for SAP® SuccessFactors® solutions. “Maintaining a program for spot bonuses across a large company would have been extremely diffi- cult to do in Excel.” Consequently, the annual re- ward remained just that out of necessity for cor- porate HR and finance functions. Today, technology makes it possible to appreci- ate and reward people in far more ways than in the past, providing organizations like yours with opportunities to rethink their approach to com- pensation.“Technology now gives us the ability to manage, govern, and layout the framework and guidelines to drive desired behaviors through continuous rewards in a simple, streamlined, and transparent fashion,” says Joshua Hill, pay for performance solution adoption advisor for SAP SuccessFactors solutions. Modern software is mobile, cloud-based, flexible, customizable, con- figurable, and agile, all of which enables integrat- ing goals, payouts, approvals, and other data points to maintain a successful continuous re- wards and recognition program. CONTINUOUS PERFORMANCE MANAGEMENT Given the ever-increasing pace of change, busi- nesses are finding that one or two formal discus- sions during the year are not enough to effective- ly coach employee performance. As a result, enlightened companies are moving toward in- cluding more frequent conversations and con- stant attention to performance management. A recent study by HR consultancy Mercer reveals that 10 to 15 percent of companies say they are eliminating traditional end-of-the-year manager performance ratings.7 From Adobe to Accenture to Gap and beyond, organizations are abandon- ing, or at the very least reconfiguring, traditional performance processes in favor of ones that em- phasize more continuous connections between performance, recognition, and rewards. Indeed, management consultant Josh Bersin estimates that 70 percent of multinational corporations are moving toward ongoing performance manage- ment processes.8 Why Now? 7. “Mercer’s 2017 Compensation Planning and Performance Management Webcast.” Mercer. 2016. https://www.mercer. com/content/dam/mercer/attachments/global/webcasts/gl-2016-talent-compensation-planning-performance- management-mercer.pdf 8. “The Performance Management Revolution.” Harvard Business Review. Oct. 2016. © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 6. Once Is Not Enough 6 / 13 Your company also can incur risk if you place too much variable pay into a yearly bonus, which can result in both disengaged and talented workers hanging around just to earn the payout. People may mentally quit the job in October, but wait until January to collect their annual bonus before actually leaving. This is another reason to reward people at the time of significant accomplishments. While many employees value stability and a sense of corporate commitment to their long- term careers, other workers are more transient. More people today have nontraditional career paths that involve temporary or contract work. By 2020, as many as 43 percent of the U.S. work- force will be freelancing in some capacity (though not necessarily full-time).9 Therefore, when designing pay packages, it’s im- portant to keep in mind that there’s no one-size- fits-all approach. A blend of rewards and recogni- tion that includes yearly and continuous rewards, as well as other initiatives, is truly the best strate- gy to engage your entire workforce. The same Mercer research also shows that the vast majority of companies continue to link pay and performance. It’s therefore logical that pay practices, rewards, and recognition should inter- weave and evolve in ways that complement the move toward continuous performance management. EVOLVING EMPLOYEE EXPECTATIONS Unfortunately, a key problem with an annual bo- nus cycle is that by the time there’s a payout, em- ployees lose sight of achievements earlier in the year. So do managers, who are more apt to evalu- ate work done closer to decision making regard- ing bonuses (a.k.a.“recency effect”). This effect can become especially troublesome when indi- viduals report to different managers over the course of a year, which happens more and more often due to increasing levels of organizational restructuring. 9. “The Gig Economy: 2020 Freelance Workforce Predicted to Rise to 43%.” Nasdaq.com. June 14, 2017. http://www.nasdaq.com/article/the-gig-economy-2020-freelance-workforce-predicted-to-rise-to-43-cm803297 Pay practices, rewards, and recognition should inter-weave and evolve in ways that complement the move toward continuous performance management. © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 7. Once Is Not Enough 7 / 13 More continuous pay strategies can significantly improve the motivational value of compensation, but only if the strategies are well—designed and effectively implemented. The following are a few things to consider when moving toward more continuous pay. FLEXIBILITY TO DIFFERENTIATE TALENT It is both fair and effective to invest more com- pensation in employees who contribute more to the organization. It is important to distinguish and reward talent through compensation, but an- nual bonuses and merit increases often fall short. In one study, just 32 percent of HR executives said that their merit pay program is effective at differentiating pay based on individual perfor- mance and only 20 percent found it to be effec- tive at driving better individual performance. 10 Annual bonuses do enable greater differentiation — at least in theory. However, in practice, organi- zations have experienced no greater success in differentiating rewards by performance level un- der variable pay than they’ve had through salary increases.11 In fact, 82 percent of top performers do not receive a significantly differentiated salary increase and bonus payments.12 Many businesses award annual incentive payouts even to employees who fail to meet performance expectations.13 This practice can be especially troublesome since it strips money away from top performers. Continuous rewards and recognition can give companies like yours more opportunites to dis- tinguish performance financially. It is potentially easier to differentiate through spot awards than with small merit increases because they are awarded individually throughout the year.14 Man- agers should be trained and encouraged to rec- ognize individual employee’s contributions when they happen and avoid giving out awards just to make people feel appreciated. When it comes to using compensation to drive motivation,“not ev- eryone should get a trophy just for participating,” says Steve Hunt. Spot bonuses are designed to be tied to actual accomplishments. Workers can easily develop a sense of entitle- ment about receiving year-end bonuses that aren’t clearly connected to performance. They may feel that such awards are expected rather than earned. It Pays to Pay Continually 10. “Employers Seek Better Approaches to Pay for Performance.” SHRM.org. Feb. 8, 2015. https://www.shrm.org/resourc- esandtools/hr-topics/compensation/pages/better-pay-for-performance.aspx 11. “The Shifting Landscape of Variable Pay.”Workspan. Apr. 2017. 12. “The New Pay for Performance.”Workspan. Apr. 2017. 13. “North American Employers Not Expecting to Fully Fund Annual Bonuses in 2013, Towers Watson Survey Finds.”Willis Towers Watson. Aug. 15, 2013. https://www.towerswatson.com/en-US/Press/2013/08/North-American-Employers- Not-Expecting-to-Fully-Fund-Annual-Bonuses-in-2013 14. “Employers Seek Better Approaches to Pay for Performance.” SHRM.org. Feb. 8, 2015. https://www.shrm.org/resourc- esandtools/hr-topics/compensation/pages/better-pay-for-performance.aspx © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 8. Once Is Not Enough 8 / 13 Continuous rewards rely on a more direct line of sight that ties goals, results, and payouts in ways that motivate people by recognizing and reward- ing accomplishments on a more timely basis. “The shorter the distance between effort and re- ward, the more likely you will see a repeat of that behavior,”Joshua Hill explains. Indeed, a Worldat- Work survey shows that more than 60 percent of respondents say that incidental (including spot) bonuses positively impact employee engage- ment, motivation, and satisfaction.15 ADAPTABLE TO ANY PERFORMANCE MANAGEMENT MODEL Moving to more continuous compensation meth- ods does not mean your company has to get rid of annual merit increases and bonus plans. Just as a continuous performance management mod- el can still incorporate annual reviews, so too can it include a mix of annual and continuous bonus- es. That’s because when done well, regardless of whether your company maintains a conventional approach to reviews or is moving away from per- formance ratings, spot awards serve as an effec- tive type of feedback. “In most cases, the purpose of spot bonuses is not to compare people against each other,” Steve Hunt explains.“It’s about tangibly recognizing people who go above and beyond.” Spot bonuses are probably best thought of as complements to more traditional annual compensation methods, not a replacement to them. INCREASED EMPLOYEE ENGAGEMENT While most workers recognize that a slew of com- pensation calculations transpire behind the scenes, the workers like to feel as if they have ac- tual influence over their earnings. Yet research shows that 67 percent of employees say they don’t understand the connection between perfor- mance and pay.16 Spot awards are a prime opportunity for compa- nies like yours to boost employee engagement by clearly linking work with rewards. Done well, they help to elevate accountability and transparency in simple ways that make sense to employees who want to feel real sway over their pay. Effec- tive use of spot awards requires delineating clear guidelines and communication about how to use them — and monitoring how they are used to en- sure managers are applying them consistently and fairly. 15. Bonus Programs and Practice. WorldatWork. July 2016. https://www.worldatwork.org/adimLink?id=80398 16. “The New Pay for Performance.” Workspan. Apr. 2017. © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 9. Once Is Not Enough 9 / 13 While broadening your compensation strategy to include continuous rewards and recognition clearly has its benefits, it does come with a range of concerns and questions that should be reviewed. WHICH BEHAVIORS AND ACCOMPLISHMENTS SHOULD WE RECOGNIZE AND REWARD? Consider what superior or optimal performance looks like at your organization and what it means for workers to go above and beyond. Ideally, you want to reward people not for day-to-day work they’d accomplish anyway, but for special achievements that advance your company’s mis- sion and values. You also want to focus on the types of behaviors you’re looking to promote, as well as recognize and reward people for attaining sufficiently chal- lenging (and preferably quantifiable) objectives. After all, payouts for goals that aren’t aspirational enough will essentially be akin to salary entitle- ments in the eyes of employees. HOW CAN WE ACCOUNT FOR INDIVIDUAL, TEAM, BUSINESS-UNIT, AND ORGANIZATIONAL GOALS? Only 22 percent of privately held companies with short-term incentive programs reward for team or group performance, according to a Worldat- Work survey.17 That’s at least partly because most current models for recognition and rewards have inherent contradictions. On one level, there’s the notion that an entire or- ganization succeeds, and fails, collectively. When business is good, everyone reaps the rewards. When business is failing, rewards are not funded. However, on another level, goal-setting is a his- torically individualistic process by which very few organizations create group or team goals. To envision how this contradiction can play out in practice, imagine that individual workers achieve their goals — while the organization fails misera- bly. At executive levels, where rewards are tied closely to overall corporate or business-unit per- formance, it might make sense to limit payouts in such a scenario. But, as Joshua Hill points out, “There comes a point in the hierarchy where goals cease to be ‘all-for-one, one-for-all’ and be- come very individual by design.” Minimizing bo- nuses to people who have worked hard to accom- plish their objectives risks demoralizing them. “When rewarding success on a more frequent ba- sis,” Hill continues,“there is a greater chance that an individual’s successes will be highlighted in ways that recognize that person in real time.” Still, it’s critical for companies like yours to carefully plan and design pay programs that factor in prac- tical financial considerations and ensure that there are also sufficient rewards and recognition tied to team-based outcomes and initiatives. Key Considerations 17. Incentive Pay Practices: Privately Held Companies. WorldatWork and Vivient Consulting. Feb. 2016. https://www.worldatwork.org/adimLink?id=79934 © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 10. Once Is Not Enough 10 / 13 HOW SHOULD WE BALANCE SHORT- WITH LONG-TERM GOALS? Recognizing short-term accomplishments with- out undermining long-term commitment to more far-reaching goals can pose a dilemma. On one hand, employee objectives are rarely year-long anyway. On the other hand, some are. Some are even longer than that. Focusing too heavily on the long term poses risks to decreasing motivation due to lack of financial recognition. While the re- verse risks moving away from intrinsic motivation to a more transactional mindset, whereby people are more interested in adding money to their wal- lets than value to the company. “From a psychological perspective, this is poten- tially the single greatest challenge to the effective use of spot awards,” Hunt explains.“When com- panies start paying people for short-term accom- plishments people can start to view short-term tasks from a financial standpoint.” This short-term view can undermine people’s in- ternal sense of motivation toward work and cre- ate a more transactional mindset. On the other hand, failure to recognize accomplishments in a timely manner can make people feel unappreci- ated and may undermine people’s sense of com- mitment to the company. CAN WE AFFORD LARGER SPOT AWARDS? Throughout your company, managers are already likely giving out spot awards, sometimes out of their own wallets. Admittedly, most of them are probably relatively small — gift cards, company merchandise, meals, and so on. But when thinking about creating a program that encompasses bigger awards, you also need to start thinking about bigger questions of funding. For starters,it’s worth pointing out that continuous rewards can help pay for themselves through gains re- lated to increased productivity as employees feel more motivated to strive for greater accomplishments. Still, you can also pull money from the annual rewards budget, especially since it makes far more sense to spread out expenditures to drive employee engagement more consistently throughout the year.Yes, you run a risk that employees might be unhappy with a lower yearly payout, but they will instead ben- efit from a system that enables them to budget their finances more consistently throughout the year. Secondly, you may want to consider drawing from money normally allocated to salary increases or the annual bonus pool. This logic ties salary more closely to market values for positions and uses variable pay more to recognize and reward performance.This can be a particularly attractive option since bonuses don’t carry over into subsequent years like fixed salary costs.Again, the size of the award does not need to match the size of annual bonuses.For example,taking 10 percent from the annual bonus pool and funding year-long spot awards programs can provide amazing advances in employee motivation. Ultimately, regardless of how you fund continuous rewards, you want to ensure that you’re able to can measure their impact by embedding them into wider performance and recognition frameworks. © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 11. Once Is Not Enough 11 / 13 and reward specific accomplishments, rather than all at once, thereby decreasing line of sight and placing a stronger emphasis on successfully meeting objectives. Still, if an employee achieves a goal—or a signifi- cant benchmark toward that goal—earlier in the year, you might consider giving that person a par- tial payment at the time, saving the rest of the reward for year-end. Doing so helps recognize THE ROLE OF SUBJECTIVITY Some managers are better than others at recognizing and rewarding their people. Different man- agers with different expectations will likely reward employees different amounts at different fre- quencies for different accomplishments. All those differences can breed resentment and hostility if employees begin to feel a lack of fairness. Granted, some level of subjectivity is an intrinsic part of every approach to rewards, recognition, and performance management — that’s simply what happens any time you have people evaluating people. Still, there are ways to increase objectivity. Calibration Sessions and Multirater Feedback Calibration meetings and multirater feedback are common elements of many performance man- agement frameworks that you can also use to foster alignment around continuous rewards and recognition. Meanwhile, it can help to consult with compensation analysts and other experts to help inform your decision-making process. Developing Dialogue Perhaps the best way to minimize subjectivity is to encourage dialogue among managers to create understanding of the company’s rewards, recognition, and compensation philosophy.“We some- times try to hide behind processes as though compensation is solely a measurement problem, a simple formula,” Hunt explains,“but it’s really all about judgment values. The more you get managers to discuss their views about recognition and rewards, as well as train them to give feedback — something many don’t know how to do—the more meaningful, consistent, and effective your compensation and performance management practices become.” Truth in Transparency All these tips can help boost transparent decision making, which is fundamental to employee perceptions of fairness. When workers understand more clearly how they are getting paid and how these decisions are made, they are less likely to scoff at how much they are getting paid. People may not always like the rules of the game, but they want to understand them. © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 12. Once Is Not Enough 12 / 13 Inevitably, though, balancing short- and long- term recognition is probably as much an art as a science It will vary based on company culture and the nature of an organization’s workforce. Ulti- mately, the key to successfully incorporating spot awards is to ensure you are recognizing and re- warding people for meeting a mix of objectives and milestones toward reaching those objectives. HOW BIG SHOULD AWARDS BE? Spot bonuses should be large enough to moti- vate performance—and what is financially mean- ingful differs based on the type of employee. They shouldn’t be too large, though.“That can encour- age a transactional mindset that doesn’t moti- vate people to add value to the organization,” Hunt explains.“You want to be sure that even if someone who didn’t do anything worthy of spot bonuses during the year, that person is still recognized as a solid contributor.” If people start to view spot bonuses as an important part of their total compensation package, then they will lose their value as a form of spontaneous recognition. Spot awards should be only one element of a comprehensive compensation strategy that in- cludes a variety of monetary and non-monetary initiatives, from tuition reimbursement to 401(k)s to good old-fashioned verbal praise. After all, money is inherently a temporary motivator. Fo- cus too heavily on money as motivator, and you might create a mindset that diminishes the value of other forms of recognition that aren’t preced- ed by dollar signs. Fundamentally, the key is fig- uring out what combination of rewards and bene- fits fits best with your company’s unique culture. Fundamentally, the key is figuring out what combination of rewards and benefits fits best with your company’s unique culture. © 2017 SAP SE or an SAP affiliate company. All rights reserved.
- 13. Once Is Not Enough 13 / 13 As compensation practices continue to evolve across a range of industries and businesses, it’s clear that variable pay will clearly play an increasingly promi- nent role.While the annual bonus isn’t going away anytime soon,it is an insufficient tool for recognizing and rewarding for performance.Continuous rewards and recognition can effectively step in to help improve motivation, morale, engagement, and productivity. To inject spot awards into your strategy, start by defining strategic business objectives and identi- fying behaviors and values unique to your com- pany. In the end, a solid continuous rewards pro- gram should include quantitative and qualitative measures, be easy to comprehend, rely on valid data, and must includes a variety of controls to promote objectivity. All of which is also, ultimate- ly, how you get buy-in from employees, senior leadership, and other stakeholders. Finally, as Steve Hunt suggests,“Begin by piloting a program. Build a process, if not a perfect one just yet. Acknowledge that you’ll face a learning curve, and be willing to figure it all out through the right conversations. Think of it like planting a garden: You have a general sense of expectations, but as it grows, you trim and change it over time. Embrace that philosophy.” Like Planting a Garden vQ417 © 2017 SAP SE or an SAP affiliate company. All rights reserved.
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