People Management Reward Management

Reward management involves the analysis and effective control of employee remuneration and covers salary and all benefits. It assesses the nature and extent of rewards and the way they are delivered as well as considering their effect on both the organisation and staff. Cornwell consultants take a holistic approach to reward management, treating every element of reward as an investment. We help assist organisations to review each part of reward to determine: Its purpose An organisations return on investment The most appropriate areas for investment

Working closely with IDS our consultants have access to one of the largest private and public sector salary databases in the country. This association and our involvement with strategic remuneration bodies helps our consultants identify and advise on emerging trends and practices in addition to establishing appropriate levels of pay at national and regional levels. We also conduct bespoke salary surveys focussing on specific sectors or roles.

Job Evaluation, Grading and Equal Pay

Our consultants are highly experienced in using most proprietary job evaluation systems and are skilled in designing and constructing tailored point factor systems that meet both the specific needs of individual organisations and the exacting requirements of equal pay legislation. We have considerable expertise in helping clients ensure that grading systems reflect organisational structure and that they have the flexibility to accommodate the subtleties of all jobs across the organisation. In addition, our consultants also conduct equal pay reviews to establish whether grading and remuneration systems comply with legislation.

Reward Systems

Once of a managers most important tools is the ability to select rewards and time the rewards properly. Even if managers are not solely responsible for financial rewards, they can use a number of tools to increase the effectiveness of their organization. Reward systems can address several important managerial objectives as they relate to employee motivation. A solid reward system requires concerted attention in its development. The following sections provide a basis for a well-contructed reward system.
Purposes of Reward Systems

Reward systems serve several purposes in organizations. Effective reward systems help an organization be more competitive, retain key employees, and reduce turnover. Reward systems also can enhance employee motivation and

reinforce the image of an organization among key stakeholders or future employees. People are the most important resource for organizational competitiveness, and keeping them on the job is a key task for any manager. Competition to attract and keep the best employees is intense. For people looking for a career opportunity, thats great news, but as a manager of an organization needing to keep the best and brightest, it is a challenge. It may be even harder in the nonprofit and public sectors where flexibility in providing financial rewards may be more limited than in a commercial context. Retaining employees saves money on retraining costs, improves the consistency of services, and allows for relationships to develop between clients and the organization. In addition, proper rewards systems can reduce absences. Absences cause innumerable headaches for managers. Instructors who dont show up, too few staff members at busy times, and the lack of a cleanup crew can all increase workplace stress. Absences not only affect the manager but also fellow employees who need to pick up the slack and clients who feel the brunt of too few employees on site. As suggested earlier, understanding who, what, and when to reward can improve employees performance. However, the improper use of rewards can have a debilitating effect on employee performance. Managers need to understand their employees perceptions of the importance and fairness of the reward and then clearly communicate what needs to be done to receive the reward. Effective use of rewards can encourage employees to gain the skills that are necessary to help them and the organization grow. This can also increase their desire to continue being part of the organization. For example, an organization can pay and provide time off for employees who want to take advanced courses in an area that is valuable for the organization. Some organizations may even provide time off or support to help employees advance their own personal goals or skill sets. Ideally, an organization wants employees who not only show up to work but are excited about being there as well. This passion for work has been referred to as affective commitment. Although research is somewhat preliminary, there is some indication that affective commitment can be strengthened by rewards that enhance employee perceptions of being supported and having control of the work situation. Finally, reward systems can also help with recruiting efforts. Just as happy customers may be the best advertisement for a particular product, happy employees are often a great tool for recruiting new employees and making the organization a workplace of choice. Think about the kind of job you want. Often you will easily be able to identify an organization that stands above the others as a great place to work. As a consequence of this, the organization can attract the best and brightest, creating a virtuous circle whereby it becomes an even more attractive workplace. Hopefully you can see that establishing the right reward structure for an organization is critical to its success. The following sections delve into the details of various reward structures.
Types of Rewards

Understanding how each employee perceives and values different rewards is an essential part of management. Managers need to grasp an understanding of extrinsic and intrinsic rewards. Extrinsic rewards are external rewards tied to certain employee behaviors, skills, time, or roles in an organization. How employees perceive these rewards relevant to their performance and the rewards given to others will ultimately determine the effectiveness of the rewards. Managers also need to understand how much value each employee places on specific extrinsic rewards. For example, a well-paid but overworked employee may value additional vacation time or a reduced workload more than a few extra dollars. Money, praise, awards, and incentive prizes such as tickets to a concert or a game are all examples of extrinsic motivators. Whatever motivator the manager chooses, the employee must see the reward as a motivator for it to be effective. For example, if the extrinsic reward is tickets to the opera, an employee who hates the opera likely would not be motivated by the tickets. On the other hand, if the employee is a football fan and the extrinsic reward is tickets to a major game, the motivator might be more effective. It is simpler to explain what intrinsic rewards are by discussing what they are not. Intrinsic rewards do not have an obvious external incentive; that is, people are not acting to get a tangible reward, be it time off or money. Instead, they act because it feels good or provides some form of internal satisfaction. Intrinsic rewards are often more highly valued and more effective over time, yet using them is a difficult managerial task. Intrinsic rewards derive from employees feeling good about the job they have done, the effort they have put forward, or the role they played in a team project. Intrinsic rewards in the workplace come from the job itself, so to provide intrinsic reinforcement, a manager should enrich the job. Job enrichment involves improving work processes and environments so they are more satisfying for employees, such as eliminating dysfunctional elements or enlarging jobs (increasing the duties and responsibilities of a job). Developing an effective reward system can be a difficult task. The following sections provide some guidance on the basics of an effective reward system. These sections focus almost exclusively on extrinsic rewards, but intrinsic rewards should also be considered when developing each employees job.

Monetary Versus Nonmonetary Rewards

Monetary rewards are most commonly given in the form of pay increases, bonuses, or increases in benefits, such as pension or health care premiums. Such rewards can be divided into two categories: direct and indirect compensation (table 11.1). Both contribute to the financial betterment of an employee. Direct compensation is relatively straightforward and consists of increases in hourly pay, increases in hours (for nonsalaried employees), increases in salary, merit pay based on performance, seniority pay based on time with an organization, and bonuses based on the achievement of individual, group, or organizational objectives.

Indirect monetary compensation includes increases to benefits or the addition of benefits such as a dental plan.

It can also include paid leave in the form of vacation days, days off for training, or longer time off such as a sabbatical, as well as paid leave for illness, caring for a child, or caring for an elderly parent. Additionally, some organizations may offer services as part of an indirect compensation package, such as on-site child care, an elder care program, an on-site cafeteria, a games room or gym, and confidential counseling services for employees and their families. Again, indirect compensation should be valuable to employees and ideally should offer choices from a range of services. Nonmonetary rewards cost the organization but do not directly improve the employees financial position (table 11.1). Supplying employees with the best tools possible to do their job is an example, such as providing a new high-end laptop or having an excellent training facility for coaches at a university. A good office location, choice of furnishings, or special parking place can all be nonmonetary rewards. Employees may not know the full details of pay and other monetary benefits of coworkers, but nonmonetary rewards are often visible and can create perceptions of inequity in an organization. In some cases, this may be the intent of managers who want employees to strive to achieve the stereotypical corner office, but often it may also unintentionally encourage feelings of inequity. That inequity may have positive implications for an organization if employees strive to increase performance, or it can result in turnover and reduced performance. As with any reward, nonmonetary rewards need to be carefully thought out before being implemented.
Performance-Based Versus Membership-Based Rewards

One of the most difficult challenges for managers is to decide what to base rewards on. A common distinction is performance-based versus membershipbased rewards. As the name implies, performance-based rewards are tied to the ability of an individual, team, group, or organization to meet some previously

agreed-upon standard of performance. Performance rewardsare based on an evaluation of contribution and awards are allocated based on that evaluation. Membership-based rewards are allocated solely for being part of a group within an organization. These rewards commonly include annual cost-of-living increases to a base salary or support for an equity policy. For example, if a park and Recreationdepartment was looking to encourage staff to have masters degrees or obtain certification, they might offer pay incentives for having either or both. Membership-based rewards are also often tied to length of time with an organization. For instance, after a certain length of service with an organization, employees may receive a certain percentage increase to their pay or be eligible for additional benefits. In a unionized environment, many of these rewards are spelled out in a labor agreement. To illustrate the difference between the two structures, lets look at annual raises. A performance-based structure means that each employees performance is evaluated and raises are based on performance, with the highest performers getting the most money. A membership-based structure means that all employees receive the same raise regardless of performance. Membership structures can be demotivating to high performers because they get the same rewards despite working harder.
Nontraditional Rewards

As more and more managers understand the importance of individualizing reward systems, the use of nontraditional rewards will continue to grow. Time is often a key constraint, and for many people work is a major time commitment. Ways in which employees can individualize their work schedule are becoming increasingly important rewards. Four methods of individualization are reduced workweeks, staggered daily schedules, flextime, and working from home. Reduced Workweek A reduced workweek often sees employees working a 4-day week instead of 5 days. In return for that extra day, employees work longer on their 4 days in the office. For example, in a 40-hour workweek from Monday through Friday, employees would work 8-hour days, but the reduced workweek would see hours increase to 10 hours a day for 4 days. The benefits to the employees are longer blocks of time to take care of their personal lives, less frequent and often less busy commutes, and ultimately more useful time for themselves. The organization has no additional expenses and evidence suggests that absenteeism and time lost for personal reasons decreases. However, there are also downsides for both employees and the organization. Parents, for example, may find it difficult to find child care that is open late or early enough to accommodate the longer work schedule. The longer work day may also be a constraint to people who are involved in weekly evening activities, be it coaching a team or attending an art class. Some jobs may also not lend themselves to longer days. A lifeguard or sport instructor may be considerably less effective in those last 2 hours, which can lead to decreased performance and in some cases safety risks. Also, the hours and timing of work may affect service to clients. Even if an organization maintains its regular schedule, clients expecting to reach a particular person during traditional business hours may find the new schedule frustrating. Finally, reduced workweeks seem to be most effective when

employees themselves are involved in creating the schedule. Understand that employees participating in reduced workweeks need to be scheduled so that the entire organization is not gone on Friday! Staggered Daily Schedule An alternative to a reduced workweek may be a staggered daily schedule. Employees still work their designated weekly hours but can allocate those hours in different ways. For example, one employee may want to come in late and leave later to accommodate dropping off children. Someone else may prefer being in the office an hour earlier and leaving an hour earlier. These schedules may even be adapted weekly or monthly to accommodate changing employee needs. This idea meets employees individual needs but can often be difficult to manage. Again, a staggered daily schedule may not be appropriate in all settings and must consider not only employee needs but also organizational requirements and client desires. Flextime Flextime allows some employee freedom while still meeting client and organizational needs. Employees are expected to be in the office during a certain time frame, usually ranging from 4 to 6 hours, such as 9:30 a.m. to 3:30 p.m. Flextime emphasizes productivity and allows the employee some leeway in that flexibility zone (before 9:30 a.m. and after 3:30 p.m.). For example, take Pat, an aquatics programmer. Pat has two school-aged children and requires some flexibility to drop them off and pick them up at school. Pat has worked with the employer and agreed that he will be at the pool between the hours of 9:30 and 3:30 but will complete the rest of his work elsewhere. This ensures that Pats coworkers and clients can reach him at predictable times while still allowing him the personal flexibility he requires at this point in his life. This type of arrangement has been effective for many organizations and employees, although obviously it wont work in all situations. Flextime also allows a staff person more control over their hours. For example, a special events coordinator works 5 hours over the weekend. The following week, the coordinator comes in an hour later than usual each day. Working From Home As technology has advanced, the option of working at home for some or all of the workday is becoming increasingly possible. A high-speed Internet connection and a laptop computer connected to the workplace network provide many people with everything they need to do their job. Obviously this arrangement is more suited to some positions than others. A job developing programs for a municipal Recreation department would be more suited to a work-at-home plan as opposed to the job of instructing the programs. Working for some or all of the workweek at home can offer fewer workplace distractions, allow employees time to concentrate on projects that are important to the organization, and make more effective use of the day by eliminating the need to commute as well as the usual time killers present in most offices. However, working from home is not for everyone. The distractions of the home require discipline, and for those who consistently work at home the blurred distinction between home and office can be unsettling. Additionally, monitoring

employees at home is nearly impossible. Evaluation needs to be performance based and work-at-home schemes do not work for organizations that want to monitor how employees spend their time. Allowing employees to work at home part of the time, however, may be an excellent compromise for both employees and the organization.

Rewarding
"Rewarding" means providing incentives to and recognition of employees, individually and as members of groups, for their performance and acknowledging their contributions to the agency's mission. There are many ways to acknowledge good performance, from a sincere "Thank You!" for a specific job well done to granting the highest level, agency-specific honors and establishing formal cash incentive and recognition award programs

Employee Rewards and Incentives Employee Rewards and Incentives are not only based upon the employee performance, but on many other factors as well. Rewards & incentives are key determinants of employee performance. This chapter provides various dimensions on how rewards & incentives for an employee should be determined to achieve multiple goals of motivation, retention, execution focus, alignment with strategic priorities and budget-compliance. This chapter also shares the mechanics of team-rewards.

Components of Rewards and Incentives Rewards and incentives can have many variations. This includes the salary increase, differentiated performance bonus for employee's own achievements, enterprise variable pay for bonus related to organization or teams achievement, accelerated bonus, etc....Each component is designed to promote a certain kind of behavior or achievements. Methods of rewards and incentives is not the only variation, but also "how much" we differentiate across the higher and lower end of performance, the distribution of monies across various methods, the frequency of payments, etc....

Role Differentiation of Rewards & Incentives

There are various factors based on which an employee gets higher or lower levels of incentives & rewards. One such factor is the role being played by an individual, and the criticality of the role. In today's world as the organization priorities and its money-machine changes, there are some roles, which are more important than the others, and an enterprise needs to invest more into those roles to achieve higher performance and employee retention vis-a-vis other roles. This has nothing to do with an employee's performance within his-her role. Another role based differentiation is the split between salary and bonus. Sales people typically have a higher component of variable pay (bonus) vis-a-vis back-end support people.

Performance Differentiation of Rewards & Incentives This is the fundamental differentiation for rewards & incentives. More monies go to employees who perform better. The question with an organization is the level of differentiation, which means that how much more a better performing employee gets from lesser performing employees. Organizations with higher performance differentiation can typically drive higher performance lest they become too excessive in that.

Level Differentiation of Rewards & Incentives An execution-focused organization typically has a higher component of variable pay for the senior levels, as they have a greater control, empowerment and decision authority to achieve their goals.

Team Rewards and Incentives In the past, most of the employee rewards and incentives were linked to the person's own performance. This was paradoxical, as organizations have been placing a great emphasis on team-work and collective performance. For an execution-focused enterprise, it is must to have hard-nosed team rewards, which are not cosmetic but form a significant portion of an employee bonus or variable pay. This may not be universal as some roles are individualistic in their construct like sales staff.

Finding the Right Incentive Company and Programs that Work

Connexions Loyalty Travel Solutions | www.cltsloyalty.com

espite a challenging economy, the incentive industry is booming. U.S. organizations spend over $100

billion annually on developing programs that attract, retain and motivate their employees. Reason being, incentive programs really work. Organizations now fully realize and appreciate the need to include or increase their budget for successful, long-term incentives in the workplace.

How and why they work

Incentive programs improve performance. Carefully selected and implemented incentive programs, using rewards - whether in the form of gift cards, travel/vacations, cash or time off increase performance by an average of 22%. Team incentives can increase productivity as much as 44%. Incentive programs engage participants. Employees are motivated by being rewarded. When a program is initially offered, employers see a spike in the level of interest and motivation among employees. As the program continues an even greater performance level and job satisfaction can be achieved. Incentive programs attract quality employees. Organizations that offer incentive programs with the right mix of benefits, training rewards and recognition have the ability to attract higher quality workers than other organizations. Long-term programs outperform short-term programs. Be in it for the long haul. Studies prove that programs that run longer than a year produced a higher percentage of performance and met the goals of the program. Executives and Employees value being rewarded. Both executives and employees report they value incentive programs. Employees come to work with a new attitude and executives see a healthier and happier work environment. Quota-based rewards programs work best. Programs that give everyone a chance to be rewarded based on meeting or exceeding goals typically generate the best results. Least effective are tournament based programs, closed-ended programs that only reward a certain number of winners.

Types of Incentive Companies

Full-service performance improvement companies. Using a solutions-based approach, the full-service performance improvement company develops an analysis its core business issues to offer a wide variety of communications, training, measurement and rewards services. By conducting research on the company and determining which groups of people can affect it business goals, they can recommend targeted applications to motivate those groups of people. Full-service incentive companies. The full-service incentive company can provide incentive programs from design through operation, including promotions, administration and awards. They can offer a variety of less sophisticated and cost effective "off-theshelf" programs. These companies typically work with current users of incentive programs and assist with developing marketing campaigns, terms and conditions of incentive travel and/or non-travel rewards such as merchandise, certificates, gift cards, etc. Incentive fulfillment companies. Incentive fulfillment companies typically provide programs in the form of incentive travel and merchandise awards. They generally provide only the reward and marketing components of an incentive program which may be a catalog featuring the travel offers featured. Incentive fulfillment companies operate with lower overhead and often consist of smaller units dedicated to a specific aspect of the fulfillment business.

Designing a Successful Incentive Program

An incentive program represents a substantial investment to most organizations. Engaging all employees to participate in the program will help them receive a sufficient return on their investment. Based on the concept of quality performance, incentive programs will increase an employee's perception of themselves in achieving their program goals. In order to properly motivate, programs must be designed to offer a variety of products and services to employees based on their interests and needs. The programs need to have carefully determined their rewards methodology in order to maintain an employee's motivation. In addition, successful campaigns require clearly defined rules, aligned rewards, efficient communication strategies and measurable success metrics. By

combining each of these elements into the program, companies are better able to engage program participants and enhance the overall program effectiveness. In order to create an effective incentive program, an organization must keep the overall objective in mind when considering program design and implementation. Objectives should be clearly defined based on the company's goals and need to be specific so employees understand their expectations. Objectives can vary depending on the needs of each organization and they should be challenging, yet achievable. If objectives are viewed as unattainable, the program will not be successful. Once the program goals have been defined, all aspects of the program should be measured against this goal in order to ensure the program's success. The number of online programs has almost doubled in size every year. At present, nearly every traditional incentive company offers an online component in programs including employee motivation and recognition, sales performance, channel programs and consumer promotions. Online incentive programs pose an attractive alternative to traditional offline programs since online programs save money and time while allowing organizations to have much greater control.

Types of Incentive Programs

Points Program: Points-based incentive programs collect and redeem points for rewards. Depending on the program type and the organizational objectives, points can be awarded on a number of criteria including positive employee behavior, the demonstration of organizational values, repeat customer purchases, the sale of new products or increased overall sales. The levels at which points can be redeemed may be customized by the organization and set at virtually any level. Points programs are a way for organizations to motivate behavior over time while improving the organizations' overall performance. Employee: Employee incentive programs can increase overall employee performance. These programs often reduce turnover, boost morale and loyalty, improve employee wellness, increase retention and drive daily employee performance. Consumer: Consumer incentive programs target the customers and consumers of an organization. Consumer programs are becoming more widely used as more companies realize that existing customers cost less to reach, cost less to sell, are less vulnerable to attacks from the competition and buy more over the long term. Dealer/Channel: Dealer incentive programs improve performance for dealer and channel resellers using sales incentive programs. These programs help companies capture market share, launch new products, reduce cost of sales, increase product adoption and ultimately drive sales. Sales: Sales incentive programs motivate salespeople to achieve sales goals over a period of time. These programs are primarily used to drive sales, reduce sales costs, increase profitability, develop new territories and enhance margins. Sales incentive programs have the clearest connection directly to outcomes. While there are many important factors to consider when creating an incentive program, selecting the most engaging rewards are critical to a programs success. The goal in choosing the perfect rewards is to select items

that will spark the participant's interest or emotions and support the program's objectives. Effective rewards will both motivate short-term behavior and extend motivation over time. Below are some common types of rewards: Cash: Employees participating in a company wide incentive program often state that they prefer cash to noncash rewards. However, recent studies have shown that cash can be less motivating than non-cash rewards. Most employees agree that a cash payment is perceived to be part of an employee's total compensation package and not part of an incentive program. Additionally, cash is quickly forgotten as many participants tend to spend it on everyday items or use it to pay bills. Non-Cash Rewards: Gift cards, travel and other non-cash rewards are more often perceived as separate from compensation. Accordingly, non-cash rewards tend to stand out as rewards for performance, enhancing their long-term effect. Branded merchandise and other non-cash rewards have a higher perceived value, bringing greater recognition to the recipient at the time of the award and producing a lasting effect that can result in increased engagement in the organization's goals.

Gift cards/Certificates - Gift cards or certificates are prepaid cards or certificates that are redeemed at a later time. They are generally offered as either a major credit card brand and are redeemable at all merchants accepting the card, or brand specific cards, issued by retail, restaurant or travel merchants and redeemable only

through that merchant. Gift cards are typically the most frequently used corporate reward. Travel/Experiential Travel - Travel rewards have proven to be the most memorable. Giving the gift of travel creates memories that last well beyond the incentive program. Experiential Travel Rewards give an employee an innovative, rewarding "experience" such as a hot air balloon ride or a helicopter ride in the mountains. Merchandise - Merchandise rewards can range anywhere from small branded key chains to high-end electronics. Many employees agree that stimulating, memorable incentive programs can be built around merchandise as opposed to cash rewards.

Travel Rewards Incentive Programs

As an employer it's easy to understand why travel incentives are so alluring. Leading up to the actual award, employees can imagine themselves and their partners or families on a trip and look forward to the possibility of earning it. The nation's largest companies regularly use travel rewards for every critical audience. If you give them something that they want, it will also create a memorable experience and company loyalty that goes beyond the incentive period. Travel gets you away and gives you a break from work while simultaneously rewarding you for your efforts. Recent studies have shown that employees strongly agreed that travel incentive programs have encouraged them to increase their efforts in the program.

Ten Steps to Building an Effective Incentive Plan

Pay for Performance Principles
Most companies instinctively understand that at least part of their employees' remuneration should be performance based. As a result, building an effective incentive plan assumes an employer has determined to establish a "pay for performance" philosophy and structure upon, and within which,

he will construct his rewards programs. The objectives typically associated with such a philosophy and framework are as follows: Recruit and retain the highest quality employees Communicate and reinforce the values, goals, and objectives of the company Engage employees in the organization's success Reward contributors for successful achievements To accomplish those objectives, a compensation plan that is centered on pay for performance must meet the following five essential criteria:

1. 2. 3. 4. 5.

Must Must Must Must Must

tie performance awards to shareholder financial objectives employ the proper mix of compensation elements result in meaningful dollars embrace performance that employees can impact be effectively communicated and reinforced

Obstacles In an attempt to turn a Pay for Performance philosophy into living and breathing compensation strategies and incentive plans, many companies run into road blocks. These obstacles are typically centered on these key questions: How much should we award? Who should participate in the awards? What should be the basis for earning the award? What balance should there be between company, department/team and individual performance and determining awards? When should the award be paid? These queries reveal the need for an effective process to guide a business in developing compensation strategies that can drive productivity while increasing the economic value that inures to the company AND to the plan participants. That process should address and connect 10 related components: purpose, people, potential, share, standardization, tiers, weighting, indicators, allocation and measurement.

These components can be thought of as steps in developing an effective incentive plan. Let's look at each one of these individually.

Define the Purpose

The starting point in the building of any incentive plan is to determine the result you are seeking. This is the strategic step in the process. At this stage, you are identifying the specific goals that should be achieved as a result of the

strategy. For example, are you looking for increased sales, specific margins, higher profits, improved customer retention or a combination of those factors? Understanding the performance you want to impact has to be determined before any other step in the process can be navigated. Many companies try to engineer or reconstruct an incentive arrangement without first determining clearly what outcomes they seek in doing so. The result of such an approach is to create a rewards strategy that is at a minimum unclear in what it is trying to communicate. Worse, it does not create any "line of sight" for the employee between his performance, his role in the organization and how that is tied to the vision and strategy of the company.

Identify the People

With the key result areas identified, you are ready to determine who in the company is best positioned to fulfill the plan purpose. In doing so, you will want to think through the layers of people within the business and identify those that will have direct impact on the achievement of the strategic objectives. Not every employee will have an equal impact on the outcome of the business. You must examine the results you indicated you wanted to fulfill as well as the initiatives that will need to be executed to achieve them. Those execution elements should then be assigned to individuals that are best positioned to impact them either individually or in teams. Further on we will address the issue of "tiers" - dividing employees into groups and then "weighting" performance elements that will drive their performance.

Quantify the Value

The next step in our process is to determine the economic value that will be created for shareholders if the incentive plan objectives are achieved. In other words, the results identified in our purpose step are intended to produce a certain financial outcome. That outcome needs to be quantified. (For example, if we double revenue over the next five years, we will increase the equity value of shareholders by $20 million.) Consequently, you will want to identify a way of projecting the potential and subsequently measure the value that will be created if the plan produces the desired result. This will typically require a spreadsheet projection that allows you to ability to alter and simulate different levels of performance. As VisionLink gets involved with this process, we usually construct models that project base, target and superior result thresholds. Each of these models should include assumptions about expenses, staff additions, revenue increases, etc. so that an accurate picture can be attained of what the business will look like under certain growth assumptions. As a plan design evolves, they can then be plugged into this model so we can maintain a view of how a given rewards strategy will impact shareholder value.

Share the Value

Once an economic value has been determined and modeled to your satisfaction, the next step is to determine what amount of the increased value should be shared with the people who created it. The concept here has to do with treating compensation as an investment. Under the last step, you will have made certain assumptions about what the growth of the business will look like in terms of increased shareholder value if the plan purpose is fulfilled. Now you are determining how much of that value has to be shared to generate that result. In a pay for performance environment, excellent results are shared with the (people/talent) asset that creates them. Therefore, this step asks you to evaluate what is an acceptable, "expected" return for your company over the period you are measuring and what would be considered an

attainable, "superior" return. Once those two measures are determined, the incentive will come from that portion of the superior return you want to share with your employees. You are determining how much of the "new" value should be shared with the people who help generate it. This should be reduced to a percentage of the total potential value (e.g. up to 10%). This percentage then becomes a target goal for planning purposes.

Base level performance does not typically result in incentive awards. Sometimes incentives are paid at target level performance, but on a much smaller scale. You are trying to build incentives for a superior return, not an average ROI. This needs to be done in a way that respects shareholder value but crosses the motivation threshold employees need to experience for execution and performance to improve.

Standardize the Benefit

With the just mentioned targets in mind, the next step is to determine a standard that can be used to express the potential value of the award in current terms. Employees will relate to the future only if it is presented to them in terms that have an orientation to the "here and now". For this reason, typically the potential award will be stated as a percentage of each participant's current salary. This creates a finite measure that allows participants to translate a result into an economic benefit that can be easily calculated. How much of a person's salary should be paid as an incentive? It is going to be a little different in every company - however, here are some rules of thumb. Incentive Plan Targets (combination of short-term and long-term incentives) 60 to 80% of salary for top managers 40 to 80% for 2nd tier managers Keep in mind that a company will not typically go from having no incentives to these levels. A transition period is usually followed.

Establish Tiers
At this point, the question that naturally emerges is whether all the people who help create value should benefit equally. If not, how do you address the differences? Most incentive plans are not uniform in this regard because not everyone is in an equal position to impact the same outcomes. To address this, customarily, a business will define "tier" levels that each participating employee is assigned to. Establishing different tiers for participants allows you to assign greater potential value to those who are likely to have the greatest impact.

For example, under this approach, the highest tier (executive management) might have a target incentive of 80% of salary. The next tier of management might have a target of 60%. And so on.

It should be kept in mind that we are defining standards and tiers for the "total" incentive for which an employee is eligible. Later, we will determine how much of that should be paid in the short term and how much of it will have a longer term distribution period.

Use Weighting
Weighting is a companion to and grows out of the tier concept. To weight an incentive is to determine how much of the reward should be assigned to the achievement of various categories of expectations. It is answering the question, what percentage of the reward should be earned for achieving the company goals, the department/team goals and individual goals? The weighting assigned should be based on how much of an employee's role allows him to impact each of those categories. For example, an executive level tier might have its incentive weighted at 75% for company performance and 25% for individual achievements with no team requirements. However, a manager tier might have a weighting that assigns 25% to the company performance, 50% to the team and 25% to achieving individual milestones.

Define Indicators
With the previous measures determined, you now have a general sense of the economic benefit that can be earned by your key employees and what weight you want to give to the areas of focus they have within their stewardships. You now need to go from the general to the specific. What specific and measurable indicators will best reflect the improvements desired? Identify the indicators that will be used to measure performance in each area. Here are some examples for each of the categories outlined in the weighting step. Company: revenue growth and net income Department: improvement in customer retention; collections rate; employee productivity factor Individual: performance goal achievement For each of these indicators, a base, target and superior goal can be set. Incentive payouts can then vary depending on the threshold of performance achieved.

Determine Your Allocation

To allocate the incentive means to determine when it will be paid to participants. You will need to determine if the awards, once earned, will be paid at the end of the quarter, end of the year or at a future date. Typically, a percentage of total incentives are paid annually and a percentage will be paid in the future. This can also vary by tier. For example, tier one might have 50% of its incentive paid in the short-term (a year or less) and 50% long-term (typically 3-7 years). On the other hand, tier 2 might have 70% of its total incentive paid in the short-term with 30% allocated to the long-term. Usually, companies that do not have a pay for performance rewards philosophy and structure will

need to transition into the long-term incentive piece. They way many companies do this is by starting out the first year with, perhaps, a 70/30 split between short and long-term, then move to 60/40 the second year and finally 50/50 by the third or fourth year. Whatever transition period is used, it is critical to understand that a rewards strategy without a long-term component is not really a pay for performance plan in the truest sense. How can a company have a long-term plan for growth, but not have a compensation component that corresponds with it?

Prescribe the Measurement

This last step has to do with the long-term portion of the incentive. It asks you to determine how the long-term portion will be measure over time. You should establish the form and shape the long-term incentive will take by determining if it should be" a) held in a pool; b) credited with interest or investment earnings, or; c) treated as a stock or phantom stock incentive. Ultimately, this step leads to an evaluation of about nine different long-term plans (and combinations) that can be considered for the percentage of the total incentive that will be paid out sometime in the future (longer than a year). VisionLink recommends that companies work through a decision tree process to determine which plan is right for your company. This mechanism helps to sort through the various types of plans based on a process of elimination to arrive at a plan that is consistent with the results you are trying to drive and will match the needs of the employees that can impact those outcomes. See the same decision tree sample below.

In Conclusion
Without a process like the one described here, shareholders in a business are reluctant to approve plans that pay out significant value - because they view those payouts as added expense. Without a system of targets, metrics and measures, they will not achieve an efficient return on their compensation investment and frustration levels will increase between them and their

workforce. Likewise, they don't end up attracting and retaining the highest quality talent. Conversely, by following this kind of process, key employees know at the beginning of the year exactly what their target incentive is. They know what has to happen to achieve the optimum incentive. They know when it will be paid and they know how it will be measured. With this kind of process, shareholders know exactly what value they will accrue before the managers earn their incentives. They know precisely what percentage of future growth will be shared with the management team. And finally, they know that the managers are going to be rewarded for achieving specific, measurable results.

Building an Incentive Plan www.vladvisors.com/.../Building-an-Incentive-Plan-article.aspx

Retention bonuses are a form of financial incentive utilized by many different businesses. The bonus is usually issued to key employees as a strategy to motivate the individual to remain in the employ of the company. A retention bonus is usually extended when circumstances indicate the employee may be considering resignation, an action that will result in an undesirable loss to the ability of the business to function at optimum levels. The retention bonus is an incentive that is offered above any beyond any other salary, wage, or other benefits currently extended to the employee via his or her compensation package. Considered a one-time transaction, the bonus is often a show of appreciation for the talents and expertise that the employee provides to the employer. In turn, it is hoped that the employee will reconsider any other employment options that may have come about and stay with the employer for at least a little longer. It is not unusual for a retention bonus to be issued to key employees when a business is going through some type of major change, such as a merger or acquisition situation. The idea is to entice the employee to remain in his or her position at least until the current set of circumstances has been resolved. Since increasing salaries or issuing other types of permanent benefits may not be feasible during a period of transition, the bonus allows employers to retain employees at least until the acquisition or other major shift is complete.