MarketWatch, May 17, 2011, Tuesday

MarketWatch

May 17, 2011, Tuesday

MarketWatch

Companies tie more of workers’ pay to performance
By Ruth Mantell, MarketWatch

WASHINGTON (MarketWatch) — Companies increasingly are connecting pay to employees’ performance, in part as a strategy for growing their business in uncertain economic times

Labor costs generally are a large portion of a company’s spending. Continued emphasis on pay gains that vary based on employees’ performance reflects companies’ efforts to control costs and focus on spending for results, according to human resources consultancy Aon Hewitt.

“If you give a salary increase, it’s a fixed cost for life, whereas if you give someone a bonus it’s a cash payment for 12 months,” said Ken Abosch, compensation practice leader at Aon Hewitt. Performance-based payments “are very effective at getting employes to shape and change their behavior.”

Budgeting for performance-based pay has little risk for employers, he said. “It doesn’t mean they are going to spent it. Because it’s a bonus, it will only be spent if performance warrants it,” Abosch said.

Abosch said he expects employers’ spending on variable pay for certain workers in 2012 to be 11.8% or 11.9% of total salaries, compared with 11.8% this year. The record high of 12% was reached in 2009, and 11.8% is the second highest rate since data tracking began in 1976. He noted that gains in variable pay do not mean that base pay will be cut.

Some workers prefer riskier pay models

While an employer might see variable or performance-based pay as a flexible and fair arrangement, workers may view it instead as less-than-reliable. But that’s not a problem for everyone.

While shifting pay models may worry some employees, others appear eager to accept the risk, said Kevin Hallock, director of the Institute for Compensation Studies at Cornell University. In a study he co-authored in 2009, some workers chose almost all base pay, while others wanted almost all stock options.

“Younger employees, more experienced employees, higher paid employees, and male employees are more likely to allocate a larger fraction of their total compensation to at-risk alternatives,” according to the paper.

Adopting more variability into the compensation structure, such as increasing the proportion of a worker’s overall compensation that is bonuses and stock option, can help companies control costs during uncertain economic times, Hallock said.

When times are tougher, companies can cut the variable component of a worker’s compensation. “It’s a buffer for firms,” Hallock said.

But moving towards greater compensation variability is more attractive to firms than some workers. “In many circumstances,” Hallock said, “it’s easier for firms to deal with [financial] fluctuations than individuals. Workers don’t want fluctuations in their income. But then again, neither do firms.”

Some want stability

Unfortunately for workers, the employment environment currently doesn’t give workers much leverage to ask for a raise that, say, handily outpaces inflation. In the meantime, many workers prize stability.

With the tough economic times, workers have become more risk-averse, Hallock said.

“Workers are interested in a more stable job with lower total compensation than a riskier job with higher compensation,” Hallock said. “Everybody is a little more worried about risk than they were in the summer of 2008.”

Economist Larry Katz of Harvard University said that while there will be more worker demand for security, workers will have less trust that a single firm can offer a secure traditional pension and future benefits.

“Even public-sector workers now fear for their pensions and job security,” Katz said.

But not all workers feel that way, Katz said.

“Many young workers remain highly confident about their own talents and abilities to help a firm,” Katz said. “Such workers are more willing to trade off some base pay for performance pay and stock options that depend on their own or their firm’s performance.”

What keeps workers happy

Workers differ on other aspects of job satisfaction, too, according to data from 2010 from the Society for Human Resource Management.

For example, a higher percentage of employees between 31- and 45-years old than those between 46 and 64 said career advancement opportunities were very important aspects of job satisfaction. And a greater proportion of women than men said both career development opportunities and benefits are very important.

Overall, job security and benefits were the top aspects of employee job satisfaction from 2008 through 2010. In 2010, while 63% of employees cited job security as very important, 53% cited compensation/pay, according to SHRM.

A compensation-related issue of particular importance to women is workplace flexibility — the ability of workers to set their own hours and location of work. According to SHRM, flexibility to balance life and work issues is “very important” to 55% of women, compared with 38% of men. Overall, flexibility was very important to 46% of employees in 2010.

However, less than one-third of full-time workers said they have flexible hours, compared with 39% of part-time workers, according to a 2010 report from the Council of Economic Advisers. Also, less-skilled workers have less scheduling flexibility than highly-skilled workers. Read CEA report.

A study in April by the Business and Professional Women’s Foundation finds that Gen Y women — those born between 1978 and 1994 — want to be evaluated based on their production rather than the hours they’re at their desk.

“These sentiments are not unique to Gen Y. More and more workers are questioning the traditional 9-5 workplace ritual,” according to the report.

“Gen Y women want to be evaluated based on their results,” said Kara Nichols Barrett, who worked on the report. “There’s this larger question of if there is another way that work can be done.”