The rapidly changing economic environment over the past few years has driven organisations to rethink their remuneration strategies to better attract, retain and incentivise employees.
During the first year of the pandemic when pay cuts were widespread, incentives were also held for cash reserves. Some incentive plans failed during that intense COVID era as business survival came first. Other programmes quickly pivoted towards more team or collective goals rather than position specific goals.
Remuneration packages can be made up of guaranteed and non-guaranteed components. Guaranteed pay is the annual amount the organisation pays for the position as base salary plus any fixed benefits, and it isn't contingent on doing a good job. By comparison, pay that is not guaranteed and is contingent on individual, team or organisational performance is provided by way of an incentive plan. That means participants can earn more when they achieve more, and the amount varies based on reaching certain levels of achievement. Bonuses, like incentives, are also not guaranteed and typically a one off, discretionary payment They may be paid as a 'thank you' or for a special event.
It's a balancing act getting the right proportion of fixed, and variable pay in order to offer a package that creates a compelling proposition that rewards the employee well and gives a good return on investment for the employer.
Research tells us that incentives can motivate the right results. What they don't do is fix substandard performance issues nor replace the managers responsibility for coaching individuals. There is no holy grail and organisations must tailor schemes to fit their own strategy, culture, and workforce Strategic Pay analysis demonstrates that they are very much an important component of pay and are tools for both encouraging and rewarding performance.
Incentive pay is here to stay
Performance pay certainly has a future in Total Rewards strategies. Boards are only too pleased to pay these when the results deserve it. Once fixed pay is right, a carrot like an incentive can positively influence both behaviours and outcomes. But putting in place the right performance measures is critical to avoid unintended consequences.
How to do it right
We're currently seeing both well considered responses and in some cases knee jerk reactions from employers in order to keep employees and entice potential employees. When more is put into the guaranteed fixed pay for newcomers it may create inequity with longer serving, faithful employees.
Incentive insights
Instead of increasing base pay in response to the talent shortage, an alternative approach is to provide incentives or one-off payments which only increase immediate variable remuneration costs rather than year on year fixed remuneration costs. Providing one-off payments is less likely to have a detrimental effect on internal equity and a fairly neutral impact on employee's organisational commitment - potentially increasing it in the short-term. ('Talent Shortages in the NZ Market' 2021, Amy Raine for Strategic Pay).
Incentives can be delivered as cash or equity (share ownership) and vary in duration from short-term (12 months) through to long term (3 years or longer). Longer term incentives have traditionally been offered to CEOs; however, these are increasingly being offered to Executives and are now filtering down to selected third tier to encourage retention.
Incentives align employee efforts with organisational goals by rewarding the achievement of desired results. There are a variety of reasons why incentives are worth it - not least to enable agile reward.
We've seen well-designed incentive plans delivering better results Keep it simple, if it can't be easily explained then participants won't have clear line of sight and know what is required.
Incentive plans with clearly defined purpose and performance measures can:
- Be a vehicle for communicating what the organisation values
- Pay for performance and not pay for non-performance
- Become real time rewards when delivered as an on-the-spot bonus
- Be a mechanism for limiting ever increasing fixed remuneration costs
Senior professional, technical specialist, middle management positions
- 9% of this level of employees from the Public and Private sectors combined received an incentive/bonus at a media value of $7,500
- More Private sector employees (21.4%) received an incentive/bonus than Public Sector employees (0.8%) at this level
CEO and senior executive positions
• 25% of all Chief Executives in our database received an incentive/bonus of 39% of base salary on average over the last year.
• 15% of all Senior Executives received an incentive/bonus of 13% of base salary on average over the last year.
Cathy Hendry leads Strategic Pay as the Managing Director and has over 15 years remuneration consulting experience. For the last 4 years Cathy has successfully set up and run our Tauranga office, resulting in significant growth in Tauranga and the Bay of Plenty Region. A recent focus of Cathy’s work has been pay equity where she has chaired the internal committee; developing and managing our systems, working on and leading client assignments in this area, and being a member of the group that presented to the parliamentary select committee on the draft legislation. She has intimate knowledge of the business and our clients and gives certainty in the continuity of our strategy and vision for growth. For more visit https://www.strategicpay.co.nz.
