How Companies Compensate Their Employees – Part II

Performance-based compensation is supposed to drive the worker, and in some cases the material components may be quite substantial, where as in other cases the link between the work and the compensation given for it is weaker (regarding the distinction between the two types of components, motivational and material, see Part I).

Where salary is situated on the material-motivational spectrum varies from one organization to the next and is affected by three factors:
1. Collective compensation and the size of the group compensated – The larger the group the more the collective compensation will be considered material, because the individual worker’s portion of the collective achievement is concomitantly smaller. Presumably the individual’s feeling regarding the impact his performance had on the collective compensation will be stronger if the group consists of 10 workers than if it has 100 workers.
2. Timing – The longer the gap in time between the time of the work and the time of the compensation, the more materialistic the performance-based reward becomes. For instance, a monthly reward for performance has a more motivational impact than an annual reward.
3. The amount of the reward in relation to the effort invested – The more meager an amount is given for great effort, the more the reward will be considered material.
The three main forms of performance-based pay are incentives, bonuses and options. Employees – and even managers – don’t always know how to distinguish between an incentive and a grant, but in my opinion the following distinction can be drawn: an incentive and its amount can be committed to in advance and even included in the job contract, therefore the organization is obligated to award it. A grant, on the other hand, is not known about when the operation begins and is generally at the management’s discretion, therefore normally a prior commitment is not made

Incentives
An incentive program is characterized by a predetermined agreement between the employer and the employee. The respective sides are aware in advance what is gauged and how the gauging process is carried out. Obviously this is a motivational reward program intended to affect the employee’s conduct and work. In general incentive programs are tailored to set groups within the organizations, whether based on the employee’s position (e.g. development managers) or the unit they work in (e.g. a phone service center).
A medium-size consulting firm with 200 employees runs a program with monthly personal growth objectives for each manager based on various parameters, such as sales volume, profitability or the level of funds collected from customers. At the end of each quarter the manager’s performance is compared with the objectives, the results are analyzed and managers receive an incentive according to their achievements.
At a large consulting firm the incentive guidelines are simpler. Every employee who brings work into the firm, whether short-term or retainer, is rewarded with a certain percentage of the income generated from working with that client.
At an industrial company in the metal industry the parameters that form the basis for incentives change annually to fit the company’s goals. For instance, if during a certain year parameters related to reducing stock days are set and a significant improvement is made in that area, the following year goals will be set in a different area.
The company management earmarks budget funds for employee incentives. Factory managers give out incentives based on the extent to which goals are achieved, in accordance with formulations and gauges known in advance. Some incentives are collective and are distributed to the members of the work team equally, while others are given to individuals who display excellence and outstanding performance. The frequency of the distribution of incentives varies according to the type of activity: at manufacturing plants incentives are given out monthly, in marketing and sales departments on a quarterly basis and for senior employees and managers on an annual basis. An incentive for a senior manager can be as much as 35% of his annual salary.
A certain hotel chain wants to motivate its workers to improve in the area of service. To achieve this end it is conducting surveys among guests to assess their degree of satisfaction with the hotel. Both the managers and the staff members are rewarded for an increase in the level of satisfaction with a broad range of incentives. For instance, as part of a campaign held during the two peak seasons, Passover and August, hotel guests receive fake bills and are asked to hand them out to staff members based on their satisfaction. The employees are then able to convert the fake bills into regular cash.
Also, the three workers who accumulated the largest number of bills win prizes, such as a home computer, a micro-stereo or a digital camera. Human resources departments at every hotel keep track of the process and display the names of the leading workers on the bulletin board every week.

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Bonuses
Unlike incentive programs, bonus programs are not predefined in terms of the relationship between achievement and reward. A bonus can be given following a decision by the company’s board of directors and may depend on its overall success. This type of success, especially at large companies, is almost entirely divorced from the employee’s performance and even from the group’s performance. Sometimes an unexpected rise in interest rates can affect the amount of the bonus (and even whether or not it’s granted) more than impressive performance by workers.
At a small organization an employee may have a greater impact on the organization’s performance, therefore this type of reward can be seen as motivational as well. On the other hand, the larger the organization, the less likely the worker is to see the link between the amount of the bonus and his performance, even if according to company policy bonuses given out vary from one employee to the next. In this regard it could be said the bonus is a material reward.
There are cases in which granting bonuses is an integral part of the organization’s collective agreement – in part thanks to the achievements of the workers’ committee – meaning the organization makes a commitment to grant its workers bonuses once given only at the directorate’s discretion. This arrangement is common at organizations that were formerly publicly owned – government- and Histadrut-owned – and today are privately owned. The commitment transformed the reward into a type of incentive, but in practice it is a bonus for the organization’s overall performance and not for specific performance. For instance the organization can commit to pay a certain amount if sales or any other objective reach a certain minimum, or can commit to divide the difference among the workers. The contract signed with senior figures at the organization may include a paragraph entitling them to a portion of all annual earnings beyond a certain level. At organized workplaces the work agreement (as well as the individual contract) lists which bonuses are given out at the organization, e.g. an extra vacation, a day off on Tu Bishvat, Maskoret 13 (a bonus equal to a regular month salary, usually paid at the end of the year), etc.

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Examples:
According to a collective agreement at a large bank, employees receive a set bonus whose level is determined by the amount of capital the bank yields every year. In 2006, for example, the average bonus was equivalent to about three months’ salary per worker.
The bank divides the bonuses budget among its 12 divisions. Each division receives an allotment according to the number of employees on its staff and the division manager formulates a distribution model suited to his needs and to the structure of the unit he heads. He also allocates a certain amount in discretionary funds in order to rectify allocation distortions or grant a special added bonus for outstanding employees.
This can be illustrated through the distribution of bonuses at the bank branch: The amount each branch receives depends on its income during that year. A branch that posted modest performances may receive a reward equivalent, on average, to the value of two months’ salary, while a branch whose performance was highly impressive will receive a bonus equivalent to four months’ salary. The branch manager makes the final decision how much each employee receives, generally through consultations with the workers’ direct supervisors, i.e. the department managers at the branch.
One concern is that managers who want to avoid creating conflicts with their workers may decide to evenly divide the amount allocated to the branch among all of the workers. This approach strips the bonus of its real purpose – higher compensation for better performance. Therefore in general an equal amount cannot be given to all branch workers because bank guidelines state that every branch must select outstanding employees who will then receive larger bonuses than their colleagues. Today there is still no control apparatus in place to prevent a branch manager from allotting a uniform amount to the remaining workers not chosen for excellence, but the funds are tracked to ensure top workers receive more – and the converse.

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The compensation arrangement at a large fashion chain is contingent on sales. Both the employees’ and the managers’ pay consists of a base salary and additional amounts related to sales. The company’s pay policy states that a salesperson in a store receives a bonus for the entire store’s sales. The bonus may earn the worker an increase of tens of percent above his or her base salary. Still, it could be claimed that it’s unfair for a worker in a lively store at the Dizengoff Center Shopping Mall to receive a higher bonus than a salesperson in a store situated in a less desirable location. In this case the salesperson’s achievements do not necessarily correspond to his abilities, but to the volume of buyer traffic. In reply to this claim company managers say salespeople at the Tel Aviv branch have to shoulder a heavier workload. “It’s easier,” say the company managers, “to serve a single customer than to serve ten customers at the same time.”
The reward policy of a large international communications company with thousands of employees in Israel states that every worker is entitled to a bonus. The key to receiving it: a high level of performance reflected in his performance assessment. The decision of whether to give out bonuses depends on the parent company’s performances. Generally these performances allow bonuses to be given out, but there have also been less successful years when the parent company did not allocate a decent amount. Company management in Israel, which did not want to forego the customary bonuses distribution, set aside some of its own funds.
The distribution of bonuses begins with an analysis of data on employees’ performance assessments filed on the computers belonging to the parent company, which earmarks a different amount for each subsidiary in every country, based on results. The subsidiary then allocates funds accordingly to its various units – divisions, sections, departments, etc. Every manager in the chain is given a certain amount of flexibility in how he or she wants to allot the funds. Eventually the bonus reaches every worker. At the end of the process the company management evaluates the managerial decisions regarding the level of allocations at the various managerial levels in a comprehensive manner, and only then does it decide whether to grant final approval for carrying out the distribution.

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In conclusion, it should be noted that not at every organization is the bonus compensation merely for productivity or given on a periodic basis. For instance, at the industrial company mentioned above, the bonus may be an expression of appreciation for a worker involved in extra areas, e.g. successful mentoring of new workers or notable work in the field of job safety.
Another example: A large accounting firm grants bonuses according to predetermined requirements, such as meeting the timetables for a complex project. The bonus can even be given as an expression of appreciation at the end of a period of extra work and concerted efforts, e.g. at the end of the period for submitting annual reports.

 

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