Apex ConsultingPay for Performance Program

Presented by: The RentsChristine Gilliam

Preeti ParthasarathyNidal Khaznadar

April 16, 2014

What is a PFP System?

PFP is a compensation model that offers financial rewards to employees who meet or exceed specific, pre-set targets

PFP is about the whole notion of differentiation

PFP is a motivation tool

Advantages of PFP systems

Eliminate a culture of entitlement Create healthy competition in work environment Motivate employees to work harder towards common goals Build fairness and equity into total rewards system Urge managers to communicate effectively and provide

feedback Improve retention Motivate future performance

Components of PFP

Detailed job design and job descriptions Clear expectations SMART goals Ongoing communication Tangible rewards

Types of Rewards under PFP

Component RewardFixed Base Pay

Variable Performance Bonus Spot bonusStock bonusEmployee stock options (ESOPs)Gain/profit sharing

Other Incentives Referral bonusSigning bonusTechnology reimbursement

Survey of PFP programs

Source: SIBSON Consulting – 2010 Survey

Best Practices: Example 1

Tool Reward

Base Pay Increase

0% increase for Poor performance 3% increase for Good performance 5% increase for Very Good performance 8% increase for Outstanding performance

Annual Bonus(1 year exp.)

No Bonus for Poor performance 5% of salary for Good performance 10% of salary for Very Good performance 15% of salary for Outstanding performance

Employee Stock Option Plan(1 year exp.)

No stock options for Poor performance Up to 4% of salary for Good performance Up to 8% of salary for Very Good performance Up to 10% of salary for Outstanding performance

Best Practices: Example 2

Tool Reward

Base Pay Increase

0% increase for Poor performance 3% increase for Good performance 5% increase for Very Good performance 8% increase for Outstanding performance

Profit Sharing(1 year exp.)

0% of salary for Poor performance Up to 4% of salary for Good performance Up to 8% of salary for Very Good performance Up to 10% of salary for Outstanding performance

Spot Bonus $100-$2,500 based on nature of extraordinary performance and level/grade

Recommendation

Annual Base Salary Adjustment Merit Pool

• 5% Merit pool • Allocated % based on APRs

Bonus Awards 3% Bonus pool Spot awards for staff Bonus structure for management

• Employee Stock bonus plan• Cash bonus

Overview of each component

Merit Increase Program Merit Allocation

• Performance criteria set annually by unit leaders and tied to unit goals

• Eligibility criteria: All employees with more than 6 months of service• Amount will range from 0-10% and will tie to overall annual

performance rating• Units will be allocated a merit budget based on 5% of the aggregate employees’ current base salary in each respective unit

Overview of each component

Bonus Programs Spot Bonus Program

• Awards based on meeting unit specific performance criteria• Performance criteria set annually by unit leaders and tie to unit

goals and represent employee contributions to special projects, client services, resourcefulness and creating efficiencies

• Performance must be extraordinary• Eligibility criteria: Staff positions, cannot be awarded within 12

month period• Amount can range from $100-$2,500• Short-term employee incentive

Overview of each component

Management Bonus Program Eligibility Criteria

• Unit must meet performance (budget efficiency)• Awards based on meeting unit specific employee performance • Management positions, employee with more than 1 year of

service, annual performance review score of above average Cash Bonus Program

• Amount awarded based on corresponding merit award allocation• Amount will represent 2/3 of total annual bonus award• Short-term Incentive

Employee Stock Bonus Program• Amount awarded 1/3 of total annual bonus award• Long-term Incentive

Organization Implications

Area of Impact Implications

Financial Implications(500 employees)

5% merit on $15 million comp budget equals $750,000 3% merit to bonus Permanent compensation increase of $750,000 Annual costs for bonus plan $450,000 funded by units

(may be less if units perform poorly)

Training and Development

Assist unit leaders in developing unit specific criteria for unit performance and measurement that cascade down from company vision and mission

Assist unit leaders on how to develop individual performance goals that tie to unit goals

Training for managers on how to conduct effective performance reviews

Communication Plan Annual Evaluation Planning starts early and incorporates annual goal setting

Expected outcomes

Component Relationship impact & long term benefits

Short-term gains Employees will be incentivized to meet performance goals Creating an link between performance metrics and rewards

helps employees meet performance objectives

Long-term gains Performance evaluations are linked to performance objectives and business goals creating a sense of purpose

Employees feel that their performance is rewarded and remain engaged

Employees stay connected with company mission and vision

Organization commitment to rewarding employees creates an environment that produces excellent performance results

References

Sibson Consulting P4P Study - Strategic HR Consulting, Fall 2010.

GAO Symposium “Symposium on Designing and Managing Market-Based and More Performance-Oriented Pay Systems”, IBM presentation, U.S. GAO Report - Human Capital, July 2005.

 https://www.shrm.org/hrdisciplines/compensation/Articles/Pages/EffectivePfP.aspx

http://www.shrm.org/hrdisciplines/compensation/Articles/Pages/Short-Term-Incentives-Up.aspx

http://www.shrm.org/hrdisciplines/compensation/Articles/Pages/Productivity.aspx

https://www.worldatwork.org/home/html/home.jsp

https://www.youtube.com/watch?v=NTtCAyBe6Ak

http://www.sec.gov/answers/empopt.htm

COMPENSATION ROUNDTABLER “10 insights on Pay for Performance” www.cr.executiveboard.com, 2010.

COMPENSATION ROUNDTABLER “Creating a Pay for Performance System, Driving employee performance with better linkage with pay.” www.cr.executiveboard.com, 2010.

Presentation by Stacey Carroll, “Should your company pay for performance” www.cr.executiveboard.com, 2010.