Corporate performance and CEO pay are poorly correlated, according to executive compensation expert Graef Crystal.

Crystal recently completed a study for Bloomberg News on the relationship between shareholder returns and CEO pay, and found that no matter how the data was sliced, the relationship was a poor one.  In other words, the relationship between what shareholders earn on their investments in a company and and what CEO earns is not a very good one.

By viewing the interactive graph at this link,  one can see that the link between pay and stock performance is a tenuous one. The data is based on over 2009 data from 271 large public companies that have already reported their financial results and their executive compensation.  2009 was a very good year for the most stocks, but a generally poor one for most businesses, so we should expect some divergences.

In periodic posts in the coming months we will look closer at this topic, as it's a "hot" one that won't seem to go away.

Upcoming StrategicPay Series Workshop:

Don't miss our upcoming intensive  1/2 day workshop "Utilizing Market Data and Conducting a Competitive Pay Analysis" on June 10th.  See here for more information.

Thank you to my "guest posters" for sitting in while I was away!  I'm back, but will have a few more guest posts, because so many colleagues were nice enough to contribute.  Getting back to my own work though, temporarily at least, the following post is a from my recent post at the Compensation Cafe.

The days of near-guaranteed base pay increases and growing employer contributions to ever-increasing benefits costs are slowly (but surely) dwindling.

No, base pay isn't going away, nor are periodic pay increases, but the battle against the growth in fixed compensation costs (base pay, health care costs, etc.) is gaining strength, even as the economic recovery starts to take hold.

Most employers are willing to pay out increased compensation, but today much of those pay increase budget dollars are going into variable pay, which typically flexes with organizational performance and ability to pay. The trend toward increased variable pay has been going on for two decades, but it seems to have hit a "tipping point" in recent years, as organizations struggle to absorb a never-ending battle with health care cost increases (crowding out merit budgets in the process), while trying to get more "bang for their buck" with their compensation dollars.

While organizations try to keep a lid on fixed costs, more enlightened employers realize that there's more to the "attract, motivate and retain" equation than just base pay and benefit dollars. But before going on, let's look at some general reward trends over the last few decades, and how we ended up where we are at today.

• The 1970's and 1980's: plain-vanilla base pay and benefits; defined benefit (DB) pension plans were common in larger, manufacturing and/or unionized organizations. Variable pay is confined largely to executives and sometimes middle management.
• The 1990's: many employers add variable pay (or push variable pay into lower levels of the organization) and other reward elements into the mix, such as stock option programs. Many employers freeze or eliminate DB pension programs and retiree medical as just too costly to maintain. Health care cost sharing is increasingly pushed down to employees. The 401(K) is the new pension program.
• The 2000's: a greater movement towards "total rewards," including variable pay for the masses and a greater recognition of the need to pay more attention to qualitative vs. purely quantitative (dollar dominated) rewards. Employers continue efforts to contain fixed costs, especially in the form of sharing increased health care costs with the employee base.
• The 2010's: as we enter a new decade, we see a greater focus on comprehensive or "holistic" rewards, including a movement away from purely quantitative rewards to qualitative and work-life rewards. Qualitative rewards include career/job growth and development opportunities, increased focus on organization culture and communication, work flexibility options, work-life "fit"options, and  creating a culture of appreciation/recognition.

Decades ago, Herzberg's work on motivation and job enrichment theorized that that pay is a more of a "satisfier" (it can meet basic needs and satisfy, but cannot make employees "happy" about their employment).  Confirming this, many studies have shown that pay is generally not the reason employees leave organizations (unless pay is noticeably below what's available in the relevant labor market); it was considered more of a "hygiene" (in Herzberg's terminology) or satisfaction factor. I believe this is an accurate characterization of base pay's role in job satisfaction, even today.

In reality, it's how managers treat and manage their staff, and how leaders lead their organizations that has the greatest impact on retention, job satisfaction and the propensity to turnover.  This is where rewards are headed; not just dollars (there are so few to spread around these days), but with qualitative or psychological rewards that can help to engage and retain employees (or to dis-engage and repel workers when not provided, or provided poorly or disingenuously).

Qualitative or psychological rewards focus more on genuine management/leadership, honest communication and regard for employees; building a culture of respect and appreciation, providing honest and constructive performance feedback, offering career and professional development opportunities, offering work flexibility and work-life balance fit options.

With the limited merit budgets of today and (predicted) for the future, there is just not enough "oomph" in the dollars that employers can offer to assist too much with the critical ideal of "attract, motivate and retain." Variable pay will help, but most of the rest will have to come from other types of rewards.

It's time to start thinking beyond dollars...


Doug Sayed is principal at Applied HR Strategies, a Seattle-area compensation consultancy and author of the StrategicPay Series Base Pay Toolkit, and hands-on, "do-it-yourself" (DIY) guide to developing a strategic market-based compensation program, complete with dozens of pre-built tools and templates, ready for use.

The StrategicPay Blog would like to thank fellow Compensation Cafe blogger Darcy Dees, for her contribution of this excellent posts on incentive plans.  Thank you Darcy!

Jim Collins wrote a book entitled Good to Great that discusses the importance of having the right people in the right jobs at your company in order to be successful.
From Jim Collins's website: This book addresses a single question: Can a good company become a great company, and if so, how? Based on a five year research project comparing teams that made a leap to those that did not, Good to Great shows that greatness is not primarily a function of circumstance; but largely a matter of conscious choice and discipline. This book discusses concepts like Level 5 Leadership, First Who (first get the right people on the bus, then figure out where to drive it), and the Flywheel.

I buy into that concept, but I've never really liked his analogy of having the right people in the right seats on the bus.  Unless you're a character in Speed, bus passengers are passive participants in the bus ride; only the bus driver can make the bus go in a particular direction.  So this comparison leaves a bit to be desired because it would indicate that only one person has an impact on where the company goes.  You may ask:  What difference does the analogy make if the underlying theory is sound?  I believe that inappropriate correlations can cause skewed thinking and result in skewed decision-making.  I sometimes wonder if this analogy has been used to justify some of the excessive executive compensation packages we've seen.  If you believe only the bus driver matters, you're going to pay that driver really well.

I've always preferred the analogy of a rowing crew.  You place people in the seat that utilizes their individual strengths and everyone works together to achieve a common goal.  You must row in concert and in the same direction in order to get where you need to be.  You won't do as well if you have weakness in any seat, but there are particular seats that need a stronger performer than others.  So in business parlance, you can get by with "B" players in certain seats, as long as you have "A" players in the most important seats.

From the perspective of the rowing crew analogy, I think this is why more and more businesses have extended participation in cash incentive plans deeper into the ranks.  (Well this and the fact that it decreases the pressure on the fixed cost of base pay).  An incentive plan can make sure everyone on the "boat" understands where they're trying to get to and how to get there.  Incentives are sometimes overused and misused, which is why Dan Pink is selling so many books.  It doesn't do any good to tell someone lying at the bottom of the boat without an oar to take us someplace, line-of-sight is imperative.  But an incentive can be a powerful tool for motivating your team who are holding oars and reaching an agreed upon destination.

Incentive plans, just like analogies, usually aren't perfect.  But they both continue to be used because they can help achieve goals and improve understanding.  It is important to continually review to make sure that they are working as designed and aren't doing more harm than good.

Darcy Dees, CCP works as the Compensation Manager for Rock Bottom Restaurants, Inc., headquartered in Louisville, CO.  She has worked with RBR for nearly 10 years helping to develop many of the compensation and performance management programs the company uses today.  She spends what little free time she has hiking and reading.
The opinions expressed here are the personal opinions of Darcy Dees. Content published here is not monitored or approved by Rock Bottom Restaurants, Inc. before it is posted and does not necessarily represent the views and opinions of Rock Bottom Restaurants, Inc.

Image:  Creative Commons Photo "Tufts, Head of the Charles" by crschmdit

The StrategicPay Blog is very happy to have Paul Hebert of I-2-I and the Incentive Intelligence Blog as a guest blogger.  Paul is a leading expert on the application of incentive and motivational programs to various compensation and rewards programs.  To contact Paul, click here for more information.  Thank you Paul!

Even if you have Pay For Performance You Still Need Non-cash Incentive Programs

Pay for performance (P4P) is hot right now.  Companies struggling to rein in compensation expenses are looking at P4P as a solution.  Pay a base salary, and pay additional monies for performance over and above some benchmark.  That is an incentive.  It is the basic "do this- get that" structure.

But, if you have a P4P system in place do you need other "non-cash incentives?" 

My answer is yes.  Not 'cuz I sell incentive programs and associated awards (I don't – I sell advice on how to design the best influence programs.) 

You need additional non-cash incentive programs to guide the behaviors that lead to the "performance" part of P4P.

A Couple of Goals A Couple of Bucks

From my point of view, P4P typically focuses on a few goals that when achieved will increase the person's compensation.  However, most jobs encompass a huge variety of tasks.  Too much emphasis on one or two goals and the majority of other important tasks may suffer from the focus on the achievement of the cash-reinforced tasks.  Too much emphasis on a few performance goals can lead to some wide ranging effects.

The Atom Bomb

The best metaphor/analogy (I can never decide which is the right use) for this is…

P4P is like asking a pilot to bomb a weapons factory.  They load the plane, take off and go to the target.  They get over the target and at just the right moment they open the bomb doors and drop the bomb.  Hopefully it will be close enough that the power of the bomb used will take out the target.  It doesn't have to be right on target because the bomb's blast radius is big enough to hit the factory even if it lands a block away or 10 miles away –depending on the power of the bomb. 

An atom bomb has a pretty big blast radius so I don't need to be very exact if I want to take out the factory.  Think of some of the bonuses on Wall Street as atom bombs.

That's kind of how your P4P works if you allow too much to ride on one big incentive opportunity.  You can give folks a target to hit – and a big bonus (blast radius) – and they will do whatever is necessary to drop their bomb.  Unfortunately, because the blast radius is very large you risk a lot of collateral damage - unintended consequences.

A Smart Bomb

Contrast that with a laser-guided bomb.  It is physically smaller, with a much smaller blast radius.  But it is very accurate.

Even if you have Pay For Performance You Still Need Non-cash Incentive Programs

To make a smart bomb effective you need some system to adjust the flight of the bomb as it falls to ensure it hits the target.  Guided bombs have very complicated electronics and the ability to change their trajectory.  That's what makes them accurate.  But that's also what makes them expensive. 

Smart bombs trade the cost of collateral damage for the cost of accuracy.

You could try to convert your P4P atom bomb program into a P4P smart bomb program by guiding behavior toward a goal using a bunch of smaller cash awards that target specific behaviors based on individual skills.  But trying to keep up with very specific goals would mean adjusting compensation plans so frequently no one would ever understand how they were getting paid.

Remember, we're dealing with compensation – the stuff people use to pay for condos, cars and college.  Messing with compensation is serious business.  Most people need to plan and have some sort of understanding of what their next check will look like.  Not many employees can live the life of commission-only sales person who consciously takes on the risk of widely variable pay to achieve an overall higher level of compensation.

So in the P4P world you can either have a few very broad goals that can result in unintended consequences (as most plans do), or try to create many, many small goals that change frequently and create confusion and apathy.

Neither scenario is good.

Non-Cash Incentives

Non-cash incentives allow you to guide behavior without the same expense and confusion. 

Non-cash incentives guide behavior but because they are not linked to compensation, (or shouldn't be) you don't have to adjust compensation plans, worry about confusion or discrimination.  And - you get another benefit – non-cash awards typically have a higher "perceived value."  Non-cash awards tap into the part of the persons brain that imagines them using and having the item/trip – not just the dollar value of it.  It changes their relationship with the reward.  This can help decrease your overall cost.

Using non-cash awards as the guidance system on your P4P program will allow you to impact behaviors that drive results, reduce costs, reduce comp plan changes, clarify goals and allow you to adjust direction more often.

In other words, non-cash awards allow you to create a "smart bomb" and reduce the blast radius, increase the accuracy and avoid a lot of pitfalls associated with changing compensation structures.

Take a cue from our own military – what are they using more of today – atom bombs or smart bombs?

Pay increases in 2009 were at an all-time low, at least since good records have been kept on this type of data. In 2009, over 50% of companies either froze pay or worse, by far the highest pay pull-back/retrenchment numbers I have seen in my 25+ year career in HR and compensation.

2010 portends to be a bit better for employees, but employers are still keeping a pretty tight clamp on their purse strings, and understandably so, with economic recovery still looking a bit tepid.  Predictions are for pay increase budgets of about 2.7% in 2010, a vast improvement compared to an average 1.8% increase in 2009, by far the lowest year on record. Both of these data points are from a recently released Hewitt report.

Variable pay budgets (budgets for incentive or "bonus" programs) are expected to remain stable at about 12% for 2010. While the 2010 variable pay budgets are about in line with 2008 and 2009, the long-term trend has seen a slow but steady upward march, and we at the StrategicPay Series expect that trend to continue.  In 1990, corporate variable pay budgets were about 5% of payroll, and today they are more than double that, while merit pay budgets have been at historically low levels since the 2001 recession. 

Hewitt expects variable pay budgets to slowly continue upwards.  In a study released in the spring of 2009, Hewitt predicted  an average variable pay budget of 16% of payroll and a base pay increase pay budget of 2.0% in 2020.

While, of course, no one knows what's going to happen 10 years into the future, the predicted trends are clear: continued pressure on fixed-cost compensation increases (i.e. base pay), combined with a continued willingness to pay for performance, in the form of variable pay.  We agree.

Note: this is an updated version of my recent Compensation Cafe Post.

Amid all of the talk about motivation and incentives in the past few months, as HR and compensation influencers, we need pay attention to what we're paying for, why we are paying it (are we getting what we think we're paying for?), and in communicating this information throughout our organizations.

In their classic book "Pay People Right," Zingheim and Schuster argue that base pay should be pay for ongoing value, not for results. Each person brings to work their unique set of education/training, skills, experiences and talents, and base pay is to compensate for use the of skills and abilities that employees bring to work every day.

Zingheim and Schuster go on to say that variable pay (typically in the form of short-term cash incentives) should be used as pay for results. Using their model, we can use base pay to pay for what I call the employee's "toolkit" (all those skills, abilities, etc.), while reserving variable pay for the actual results achieved via a combination of the employee's abilities and efforts.

Although employee efforts are a key component of achieving desired outcomes, efforts do not always equal results, and so we should separate them from each other in terms of pay and rewards.

Efforts are critical though, especially those "discretionary efforts" that we as HR and rewards professionals seek out, and thus, while we probably shouldn't pay for them per se, we certainly can recognize, applaud and occasionally even celebrate these "above and beyond" efforts.

In the book "17 Rules for Successful Companies Use to Attract and Keep Top Talent" author David Russo states ("Rule #6") "applaud effort; reward contribution" and I couldn't agree more.  Efforts are critical, and worthy of recognition and applause, but not of pay per se.

If we pay for effort alone, in the absence of tangible results, we run the risk of creating rewards confusion (especially for those who actually achieve intended results) and possibly of mis-placed rewards expectations and/or feelings of entitlement ("I busted my butt on that project...").

Of course, we need to be clear and transparent about what we pay for and why; what base pay is for, and what variable pay/incentives reward. If we don't do that, many of our pay related programmatic efforts will be waisted, because people will not understand what they are paid for and how they can improve their own personal rewards system.

Doug Sayed is principal at Applied HR Strategies, a Seattle area compensation consultancy and author of the StrategicPay Series Base Pay Toolkit, a hands-on, "do-it-yourself" (DIY) guide to developing a strategic market-based compensation program, complete with dozens of pre-built tools and templates, ready for use.

The StrategicPay Blog would like to thank repeat guest blogger Theresa Chambers for her holiday contribution to our space.  Theresa is Chief Motivation Officer for Recognition Works in Seattle, and our local "guru" on all things recognition. Remember, it's not all about the almighty dollar.  People need recognition too!

It's December and commonplace for companies to express their GIANT and sometimes perfunctory thank you to employees for their hard work throughout the year. It often comes in the form of an end-of-year recognition event or party.

The word on the street is that employees are empathetic if their company has to scale back on menu items, do a potluck instead, or even cancel the party altogether. Hopefully, you haven't been saving up your employee appreciation for this one big moment anyway, right? If you have, then Bart Simpson has an assignment for you:

I will notice out loud when someone does something well!

So go ahead — you can take away the presents and the decorations, but when it comes to genuinely appreciating your employees you cannot compromise on the quality of the message or how it's delivered. It needs to be specific, meaningful, and personal.

Here are three low-cost ways to share the gift of gratitude at any time of year:

Simple, Sincere Thanks: Get a box of holiday greeting or thank you cards and a list of employee names. Take the time to really think about how each person on your team contributed in their own unique way. What positive attributes or skills did they share? How did their work have a positive impact on you, the team, the department, or the company? How do they exemplify one or more of the company values?

Galaxy of Stars: Supplies needed: 12 inch or larger foil stars (one for each employee), clear labels, and fishing line. Have employees draw names and ask employees to think about 3 things they appreciate about that employee. They can either write or print the employee's name and the 3 qualities on the star. At the next team meeting, each person gets up and presents their star to the person they selected explaining what they appreciate about that person. Later they can hang the stars with fishing line from the ceiling for the galaxy of stars effect.

What's worth celebrating? Purchase question mark (?) candles from the grocery store. Purchase angel food cake (low fat!), pumpkin pie or some other treat to share. Light the candle and ask employees, "What's worth celebrating? What did we do well this year? What are our most important accomplishments? How did you make a positive difference?" Let them tell you what's important. Add your own accolades, tell them you are proud to be part of the team and optimistic for a successful and productive 2010.

Let us know how it works or if you have other ideas to share. Happy Holidays!

Guest blogger Theresa Chambers is Chief Motivation Officer for Recognition Works in Seattle.  You can reach her via her website, at theresa@recognitionworks.net or at 206-353-8267.  Thanks Theresa, and happy holidays!

Another major salary budget survey (this one from Hewitt Associates)  is out and it shows that merit and variable pay budgets have largely stabilized for 2010. With the economy (but not the labor market yet) on the mend, it's likely that these numbers will approximate what we will actually see in 2010.

Projections made in 2007 for 2008, and again in 2008 for 2009, turned out to be completely off the mark, mostly because few saw the recession (or or its strength) coming. But barring another swoon, merit projections have largely stabilized and are now looking like they will hold in 2010, for the most part.  Thanks to our friend Ann Bares at the Compensation Force blog for lending us her graphic.

As you can see, compared to projections made months earlier, it looks like most employer budgets are headed for the 2.5% range +/- based on this sample of over 500 companies, mostly larger employers.

Variable pay budgets have held up fairly well too, with companies budgeting 11.2% of payroll for variable compensation for salaried exempt workers, down somewhat from 11.7% in the earlier study done by Hewitt. Other employment groups were virtually unchanged from the previous survey.

Despite the slight drop in variable pay budgets, the longer-term trend for variable pay has been steadily up, increasing from 6.4% in 1994 to 11.2% in 2010 for exempt workers.

Another encouraging trend is that far fewer employers are planning to freeze salaries in 2010, 17%, down from nearly half (48%) in 2009.  Our guess is that if the economy continues to stabilize and slowly improve, the prevalence of salary freezes will drop even further.   In addition 0% of companies in the study were planning salary reductions for 2010, vs. 10% in previous earlier survey earlier this year.

Hewitt predicts, and we agree, that merit budgets will remain constrained for some time, as employers put more emphasis on variable/incentive pay, and as employers continue to struggle with rapidly rising employee benefits costs, primarily in health care.

Incentives have been a very hot topic on the WorldatWork community website lately, generating more comments than any topic to date. Some say they work, some say they don't, and some folks just just got downright nasty about it. 

To see my take, see my post at the Compensation Cafe.

One of my favorite HR/compensation bloggers is Paul Hebert of the Incentive Intelligence blog and "i2i - A Validation & Incentive Planning Consultancy."

Paul has posted one of his classic rants, this time about an incentive program myths article posted on the American Express website (that's right - the credit card company).

Paul's post is certainly worth a read if you happen work with incentive programs, or hope to some day, since there certainly are a lot of myths about them, such as that they boost morale (not! - usually), or that they show the employer is generous by offering incentive compensation (ha!).

Happy reading and ranting!