Monday, May 12, 2008

Variable Payment Systems - Retention Issues

Based on an article in Employee Benefits on 2006-02-01

The size and prevalence of bonus payments are on the up, so the impact on staff retention is worth considering. According to Towers Perrin's Worldwide total remuneration study 2005-2006, the use of variable pay internationally is increasing with Latin America and Asian nations also implementing the systems.

Back in the UK, the results of the Chartered Institute of Personnel and Development's (CIPD) survey Reward management 2006, due to be published this month, reveal that 85% of private sector organisations and 32% of public sector organisations pay bonuses - up from 69% and 22% respectively last year.

According to the CIPD, bonuses are an attractive compensation strategy because they are self-financing and do not inflate the pay bill. Put simply, they only pay out if the money comes in.

Philip Hutchinson, director of HR and reward consulting at AWD Consulting, explains: "Employers want to reduce the risk of employing people. Bonuses reduce that risk because if you don't perform you don't get paid."

With annual bonuses in particular making up a significant proportion of salary, rational behaviour dictates that employees will delay leaving an organisation until after the bonus is paid. Because a lot of organisations pay out around February, organisations may be left short of talent in the spring, after employees have bailed out.

One can expect if bonus is paid in April fewer resignations will be in February and March than you will get in May,

Of course, employees will develop expectations about the bonus. While a high payout might prompt some to take the money and run, a disappointing bonus could also lead some others to jump ship.

Annette Cox, lecturer in human resource management at Manchester Business School, says to avoid this employers must design bonus schemes carefully, ensuring that they are robust and clearly defined to set the goalposts.

Alan Judes, a senior consultant at Hewitt Associates, says: "The old cycle of everyone moving just when the bonus is paid has been enough of a problem for organisations to take action."

But some observers believe the effect is minimal.

Brooks points out that when employees enter the employment market after taking a high bonus payment, they make an expensive proposition for other employers, so a good bonus might actually compel people to stay, not least for the promise of the same again next year.

The growth of long-term incentives, which cynics dub as golden handcuffs, has no-doubt risen partly in response to the high staff turnover that comes with a no-strings-attached gift of a cash payment. According to the CIPD's survey Reward management 2005, 40% of private sector employers now offer long-term incentives, with sharesave schemes leading the way.

"Employers are seeing the retention factor in long-term incentive plans and the wealth creation that brings. Sharesave schemes, share options, and matching shares are all things you can do so you don't get the annual exodus of talent when the annual bonus is paid," says Judes.

Brooks adds that the use of long-term incentives can fulfil those aims. "Deferred stock is used extensively by investment banks. If a proportion of the bonus comes from a deferred stock, it grows in value over time in the way any other stock does, you just don't own it for an initial period. If you are a bad leaver and go to a competitor you are likely to lose all of it, or at least most of it. If you are a good leaver, perhaps for ill health or you go to a company that isn't a competitor, then you are allowed to take most of it."

And he believes that nothing says 'I like you' than the opportunity for employees to build ownership in the company.

"If you can let people accumulate capital and ownership of the companies in which they operate, retention should follow.

Even when employers are not in the position to offer long-term incentive options, simple adjustments to the existing bonus structure may encourage retention rates. Paying a bonus for a calendar year in April, for example, ensures employees are well into next year's earnings before they receive last year's dues.

Recognition has a role apart from bonus

Manchester Business School's Cox says employers should attempt to foster a culture of recognition to improve retention.

"If your boss comes to your office and says 'Thanks for your hard work. I'll tell you now, we're going to give you a bonus to reward you', that's probably going to feel better than having a note in your payslip saying 'Here's some extra cash."

We have to remember that people go to work for more than just a pay cheque, regardless of how it is formulated.

"People aren't mercenaries. They do consider the employment opportunities, the training and development, and the colleagues they work with," says Judes.

For the full article

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