Date: 3. August 2012, 14:00-17:00 Venue: The Garden Hotel, Guangzhou HR Seminar & Discussion Forum Variable Pay Designing & Management - Minutes - Speaker: Christine Zhen, HR director of C&B, Greater China - Emerson Network Power China Content: 1. Total Rewards Model 2. Basic Concept of Variable Pay 3. Linking Variable Pay with Business Objectives 4. Types of Variable Pay 5. Developing a Variable Pay Plan Aim of the seminar: investigate the essence of variable pay from an economic angle Employee: Provide labor value Employer: Give Reward for Value (Ability, Performance, Acknowledgement and reward to contribution) Total Rewards Model Organizational Structure, Business Strategy, Human Resource Strategy Total Rewards Strategy Compensation, Benefits, Work-Life, Performance & Recognition, Development & Career Opportunities Attract Motivate Retain Employees Satisfaction and Engagement Business Performance & Results Total Rewards Strategy: Compensation Variable Pay/Fixed Pay 1
Characteristics of Variable Pay Basic Concept of Variable Pay Payouts typically in lump sum cash or stock-related awards Does not permanently increase fixed salary, but may be included in benefits determination Must be re-earned each year Typically includes participation of a large segment of the employee population below the executive level Fixed Pay Orientated to compensate for day to day responsibilities and ongoing performance Recognizes long-term contribution Factors in Skill/Competency development Variable Pay Aimed at rewarding special objectives and results ( e.g. increased productivity, cost reduction) Rewarded for Above and Beyond expected, regular contributions Drives strategic innovations Variable Pay rewards for accomplishments and results Organizational, group or individual results Performance based compensation Flexible and adaptable Three Categories of Variable Pay Incentives Bonus Recognition Criteria determined in advance Completion of a specific task Criteria broadly defined and subjective Amount of payment can Amount determined in Awarded spontaneously vary Monetary or nonmonetary advance Monetary Decision made after the fact Budgeted Focused on behaviors Self-funded or budgeted Nondiscretionary Nondiscretionary Monetary or Nonmonetary Budgeted Discretionary 2
Bonus Plan Types Referral bonus Hiring (sign-on) bonus Retention (stay) bonus Project completion bonus Linking Variable Pay to Business Objectives Desired Business Goals Business Strategy Staffing/Org. Requirement HR Strategy Total Rewards Plan Variable Pay The society has similar companies which employ similar workers, who have a similar educational background. They do a similar kind of work, have a similar way of thinking, a similar price and quality, create similar products and do similar things. Business Strategy Operational excellence Product/ Service Leadership Customer intimacy 3 mostly seen strategic positions Costs as a leading strategy Service as a leading strategy Technology/Innovation - as a leading strategy Product Innovation Product Change, Product Variety, Product Performance Operational Excellence Standard Products, Low Margins, High Volume Customer Intimacy Customer Relationship, Product customization, Customer Service Business Strategy drives Business Objectives Business Life Cycle Startup Growth Maturity Decline Threshold Growth Maturity Decline High Total Fixed Pay STI STI, LTI STI Medium Short Term Investment TFP TFP LTI Low Long Term Investment LTI TFP 3
Variable Pay helps to achieve Business Objectives Focus, Alignment, Motivation, Reinforcement Types of Variable Pay Objective: By the conclusion of this module, you will be able to accomplish the following: 1. Explain short-term and long-term incentive plans, including objectives, approaches and considerations. 2. Explain types of bonus plans, including objectives and considerations. 3. Explain types of recognition plans, incl. objectives and considerations. Short-Term Incentive Plans Short-Term Profit-sharing Performance-sharing Individual performance-based Profit-Sharing Plans Share profits with employees Base rewards on financial performance Typically include entire organization Payout in equal or graduated amounts Profit-Sharing Plan Objectives Foster employee identification with organization s success Create a common focus Profit-Sharing Plan Approaches First-return plans Threshold plans Operating budget plans Peer company comparisons Considerations for Profit-Sharing Plans Promote awareness/focus Pay out only when company has profit Employee ability to influence overall performance Flexibility of design May increase administrative requirements 4
Individual Performance-Based Plans Base payouts on individual performance Focus on more than financial results Individual Performance-Based Plan Approaches Performance against predetermined objectives (MBO) Output-based Commission Considerations for Individual Performance-Based Plans Reinforcement of performance culture Narrow vision Wide variations in pay High levels of administration Phase 1 Developing a Variable Pay Plan Pre-Design Considering internal and external factors Obtaining management support Identifyi9ng the design team Internal Factors Organizational readiness Costs/resource availability Timing External Factors Labor market Competition Geopolitical Legal/regulatory Technology Variable Pay Effectiveness Model Variable Pay Plan Effectiveness = Direction Business objectives Culture x Power Awareness Value Performance sensitivity Participation 5
Issues to Consider Is the organization ready for a new or revised variable pay program? Costs/Resource Availability Implementation costs Funding Compliance Support staff External Factors Labor market Competition Geopolitical Technology Legal/regulatory Obtaining Management Support Determine buy-in early Begin at a high level Utilize allies Identifying the Design Team Considerations for an in-house design team Advisory group alternative Phase 2 Design Determining plan objectives and plan type Defining eligibility Selecting performance measures Determining Plan Objectives and Plan Type Directly address business objectives Limit the number of objectives Use SMART objectives Select a plan type that supports objectives Examples Defining Eligibility Level at which performance is measured Participant line of sight 6
Nonparticipants Individual criteria Level at Which Performance Is Measured Organization wide Organizational unit Team Individual Participant Line of Sight Employee s perception of influence Short line of sight vs. long line of sight Employee/management Selecting Performance Measures Identify performance drivers Establish performance measures Determine if there are single or multiple measures Quantitative Measures Financial Volume/profit Aggregate/end-result level Limited interim process feedback Strong indicator of past performance Operational Day-to-day data Measure effectiveness Identify key processes Reflect value to customer Market Prevalence Survey Result of Financial Performance Financial Performance measure Market prevalence Cash Flow 24% Earnings per share 12% EBIT/EBITDA 24% EVA/CVA/Shareholder Value 9% Operating Income 9% Profit 21% Return on Equity/Assets 6% Revenue 32% Data Source: Aon Hewitt 2010 China Variable Compensation Measurement 7