Thomas B' Wilson

1
A Special Workscape Webinar
Finding the Quick Fix Making
Pay-for-Performance Work Better Today!
by Thomas B. Wilson President www.WilsonGro
up.com twilson_at_Wilsongroup.com
2
Overview of the Session

• Background and Overview
• The Current Context for Pay-for-Performance Plans
• Strategies For Change Finding the Fix
• Commentary on Pay-for-Performance Plans

3
I. Background and Overview
Definition What is Pay-for-Performance?
Pay-for-Performance is a compensation payment
contingent on achieving pre-determined
objectives or performance criteria within an
established time period.

• This includes
• Merit pay increases
• Variable plans (bonus, incentives)
• Equity/Stock option awards
• Career progress/promotions
• Recognition and spot awards

• This does NOT include
• Cost-of-living pay increases
• Funding retirement plans
• Employee benefits

4
II. The Current Context for Pay-for-Performance
Plans
Overview of the Business Context

• We live in turbulent times economic, capital
  markets, political.
• Businesses are changing, adapting, and
  globalizing.
• The pressure for higher performance is increasing
  at an increasing rate
• Revenues Costs
• Productivity Service Quality
• The challenge to attract and retain critical
  talent continues to be grow and the
  demographics are changing the landscape.
• Few people are satisfied with how well
  pay-for-performance plans work both employees
  and employers. Why?

5
II. The Current Context for Pay-for-Performance
Plans
Primary changes companies are implementing in
2008
The percent of companies implementing these
change efforts.
Source Wilson Group Survey Report Changes in
Variable Pay Plans 2007 2008
6
II. The Current Context for Pay-for-Performance
Plans
The importance is related to age demographic
whats important to them
Reasons why employee leave an organization
Source Watson Wyatt Total Rewards Report - 2006
7
II. The Current Context for Pay-for-Performance
Plans
How Pay-for-Performance Plans impact different
employee groups
Source Based on research on reward preferences
conducted by the Wilson Group.
8
II. The Current Context for Pay-for-Performance
Plans
Merit pay (salary increases) are increasing
slowly and so is inflation
Source WorldatWork 2007-2008 Salary Budget
Survey
9
II. The Current Context for Pay-for-Performance
Plans
The number of companies using pay-for-performance
plans is high.
10
II. The Current Context for Pay-for-Performance
Plans
Variable pay plans are highly important to top
executives.
11
II. The Current Context for Pay-for-Performance
Plans
Variable pay programs are viewed with limited
effectiveness.
of Companies view of their variable pay plans
Source Wilson Group Survey Report Changes in
Variable Pay Plans 2007 2008
12
II. The Current Context for Pay-for-Performance
Plans
Equity based compensation is becoming
significantly more limited and less contingent on
performance.
Changes Being Implemented in Equity Compensation
Plans
Level Using Starting/
Decreasing/ Still No Change
Increasing Eliminating Considering Stock
Options 19 12 44 12 Time
Restricted Stock 25 37
0 12 Perf. Restricted Stock 20
20 0 20 Restricted
Stock Units 13 26 0 12
Source Wilson Group Survey Report Changes in
Equity Compensation for 2006 - 2007
12
13
II. The Current Context for Pay-for-Performance
Plans
Employee loyalty and engagement continue at
risk.
44 of employees understand their
organizations goals 56 do not! 19
have clearly defined goals for their
jobs 81 do not! 9 of employees
believe their work has a strong link to the
organizations top priorities 91 do
not!
Source Gallop Organization, Survey of Employee
Opinions
14
II. The Current Context for Pay-for-Performance
Plans

• Why This Is Important
• The success of every organization is largely
  determined by the actions of their people
  Behaviors (a.k.a. Performance).
• There are few systems that drive performance as
  well as pay-for- performance
• This is the right time to make changes.

An old saying If you always do what youve
always done, Youll NOT get what youve always
gotten.
14
15
III. Strategies for Change Finding the Fix
What is broken -- What are the issues
Source Wilson Group Survey Report Changes in
Variable Pay Plans 2007 2008
16
III. Strategies for Change Finding the Fix
Most variable pay plans are based on overall
corporate and individual or discretionary
performance.
The percent of employees groups linked to
performance of different units.
Source Wilson Group Survey Report Changes in
Variable Pay Plans 2007 2008
17
III. Strategies for Change Finding the Fix
How do organizations create the right balance
to focus performance?
Corporation
Functions
Divisions
Departments
Work Teams
Individuals
18
III. Strategies for Change Finding the Fix
How do organizations use measures to drive
desired performance?
Financial -- Revenue growth --
Profit margins and dollars -- Actual expenses to
budget -- Economic value-added -- Cash flow --
Return on equity/assets -- Return on invested
capital -- Total shareholder return
Customer -- Availability --
Price-value -- Lead time to delivery -- Product
mix -- Marketshare -- Customer Experience --
Share of the customers -- Customer
retention -- Customer referrals
Internally Driven Externally Drives
Operational -- Unit productivity --
Product/service quality -- Process
quality/variance -- Accuracy/error rates --
Reliability/rework -- Inventory utilization --
Revenues/Sales per employee -- Cost per
transaction -- Safety rates
Capabilities -- Employee
loyalty engagement -- Turnover voluntary, in
key jobs -- Knowledge and skill capabilities --
Succession plan -- Training and development --
Team effectiveness -- Internal communication --
Process optimization -- Cultural responsiveness
Quantitative Measures Qualitative Measures
19
III. Strategies for Change Finding the Fix
Measures become drivers of business
success. The prevalence () of performance
measures used in Variable Pay Plans
Products Services
Revenues
Sales Process
60
Market Leadership
Operating Profit
Customer Satisfaction
15
Earnings before Interest Taxes
41
Net Income
23
Cost of Goods Sold
Corporate Expenses
29
Shareholder Value
Operating Expenses
Technology Process
Payroll
Project Results
Personal Goals
23
35
Source Wilson Group Survey -- Variable Pay
Trends and Practices 2004
20
III. Strategies for Change Finding the Fix
High performing companies do some things
differently
Source Hewitt Associates Study VCM 2004-2006
21
III. Strategies for Change Finding the Fix
How can you improve the impact of
Pay-for-Performance Systems?
Entitlement
Measures Feedback Consequence
Goals Discussions Rewards
Too general or undefined Unclear measures or
goals
Little information on progress One-on-one
feedback Focuses on your weaknesses
Same time each year Not sure why or how
determined Will keep it!
22
III. Strategies for Change Finding the Fix
How can you improve the impact of
Pay-for-Performance Systems?
Achievement
Measures Feedback Consequence
Goals Discussions Rewards
Know what to do Performance Measures
Know how to do it Feedback and discussion
Timely Important Contingent
23
III. Strategies for Change Finding the Fix
Key changes that companies are making to their
pay-for-performance plans
Source Wilson Group Survey Report Changes in
Variable Pay Plans 2007 2008
Communication Goal Setting Feedback
24
III. Strategies for Change Finding the Fix
Key changes that companies are making to their
variable pay plans

• What You Can Do Today
• Focus PFP plans on what it can do best.
• Increase communication on how the plan works.
• Focus the measures and results on something
  people can truly impact.
• Involve people more in goal setting.
• Implement better administrative systems fasting
  tracking and payouts.
• Track, display and discuss progress.
• Tightly connect the rewards with the results.

• Primary Issues
• Limited impact on performance
• Dont know how the plan works
• Little involvement in setting goals
• Payout has become an entitlement
• Dont know what actions to take

25
IV. Commentary on Pay-for-Performance Plans
How these fixes apply to different employee
groups
Employee Group Key Issues or Themes Possible
Actions Executives Visibility of pay
plans Articulate the real total Total
Direct Compensation compensation
philosophy Managers The importance of
leadership Adjust the mix of pay Achievem
ent and growth Simplify the process Sal
es Changing business model Examine pay
accelerators From Hunters to Developers Let
them use their abilities Competition
Collaboration Examine recognition plans
26
IV. Commentary on Pay-for-Performance Plans
How these fixes apply to different employee
groups
Employee Group Key Issues or Themes Possible
Actions Professionals Career
development Base pay for competencies Fo
cus on making an impact Variable pay for their
unit Service Operational Job security and
skills Base pay for skills employed Employees
Recognition for contributions Individual and
team celebrations
27
IV. Commentary on Pay-for-Performance Plans
What really makes Pay-for-Performance Systems
work
"Know how well I am doing FEEDBACK DISCUSS
"Have a reason for doing it REWARDS
CONSEQUENCES
"Know what to do" MEASURES GOALS
BEHAVIORS PERFORMANCE
"Know how to do it" HIRE TRAIN
28
IV. Commentary on Pay-for-Performance Plans
A Thought to Remember
" The winds and the waves are always on the
side of the ablest navigator." ----
Edward Gibbon
29
And Now Time for More Questions
?
30
THANK YOU!
31

• Our mission
• To strengthen the competitive advantages of our
  clients by aligning all performance based reward
  systems with the strategies they need to
  succeed.
• Develop Total Rewards Strategies to focus time
  and money BOARDS OF DIRECTORS
• Link Executives with the Strategy and
  Shareholders
• Utilize Sales Incentives to Build Market
  Leadership EXECUTIVES
• Build Performance Driven Incentive Programs
• Create Performance/Competency Focused Base Pay
  Programs SALES ORGANIZATIONS
• Make Special Recognition Special
• Re-engineer the Performance Management
  Process TOTAL ORGANIZATIONS
• Publications and Resources
• Innovative Reward Systems for the Changing
  Workplace (McGraw-Hill, revised 2003).
• Rewards that Drive High Performance Success
  Stories from Leading Organizations (1999).
• Variable Cash Compensation 2004 Survey of
  Trends and Practices
• Special Report Changes in Variable Pay
  Programs - 2005
• Survey Report Changes in Equity-Based
  Compensation Programs - 2006