End of bonuses, beginning of incentives

Until recently, nearly every company of any size would put something extra in the pay envelope for its employees at Christmas time. Even companies in tight financial circumstances could at least manage a Christmas turkey or a bottle of wine, or sometimes a raffle for a gift basket. But the number of companies offering year-end bonuses has declined dramatically.

Nearly 65 percent of companies offer no holiday bonus at all, according to a recent study by Hewitt Associates in San Francisco, and nearly 12 percent of companies discontinued them within the past two years.

Instead, companies are increasingly tying pay to measurable performance. Another Hewitt study reports that the number of companies with at least some type of performance-related compensation plan has grown from 47 percent in 1990 to 78 percent in 2000.

Performance compensation, or pay-for-performance, has long been a key component of paying sales forces, but its shift to other areas of the workplace has come about because of the increasingly competitive nature of business.

Detroit leads the way
The U.S. auto industry, in fact, owes its continued existence to the willingness of workers at Detroit's Big Three to accept performance bonuses that were tied to their own work and then to deliver with significantly improved quality levels. DaimlerChrysler employees, for example, have been taking home bonuses in recent years that have been equal to more than 15 percent of their base pay, as that company's profits surged through the late 1990s and into 2000. Even with sales down for the end of 2000, DaimlerChrysler employees still enjoyed healthy pay-for-performance bonuses.

If pay-for-performance works so well, why has it taken so long to catch on?

Historically, companies have been slow to evolve from entities that were owned outright by a single individual to entities that were managed on behalf of a large number of shareholders. The ownership of companies, and with it, the means of production, was an outgrowth of feudal times, and with it came the rights of the owner. Clearly, owning the means of production conferred enormous power on owners, and it was a power that could be and often was abused.

The shift in corporate governance
As the number of shareholder-owned companies rose at the end of the 19th century and the start of the 20th, managers felt that they were measured by their owners. The manager, aping the owner, assumed the owner's "rights" and, slowly and increasingly, his responsibilities.

But it was not until the extreme labor shortages brought on by World War II that companies began to concede a larger measure of equality to their workers. With that concession came a shift in attitudes toward bonuses, so that they gradually became an entitlement when the company was doing well.

This attitude did not begin to change until the early 1980s, when the idea that a corporation had more "stakeholders" than shareholders and workers began to take form. The stakeholder idea was based on the corporation as a public trust, and that as such, a company had responsibilities that extended far beyond simply making a profit. Now it had to make a profit in a socially responsible way.

This radical shift in corporate governance has turned executives and managers into often wary and weary arbiters of the workplace, still responsible for contributing to the bottom line but at increasing career risk for any false step.

Overwhelmingly, executives and managers are not opposed to the new rules. They would simply like to have some tools by which they can positively influence their work force toward desired behavior. At the same time, they need to know whether the changes they are making in the workplace have a positive or negative effect on profits, so that if a solution does not work, another might.

What it gets down to is metrics. What are the things you need to measure in the workplace that affect profitability, and how do you measure them and modify them to provide the right kinds of workplace incentives? The answer can be found in pay-for-performance program-management tools that allow companies to model, administer, report and analyze a wide range of metrics.

They enable CEOs and CFOs to quickly determine a company's most profitable behaviors and then provide the intellectual capital, in the form of information, that allows a company to create pay-for-performance incentives that have a chance of working for the entire company. A dollar of sales is not worth a dollar unless it represents the most profitable sale you can make. Those profits have to come not only from the alignment of a company's value chain from top to bottom but also the alignment of a company's values to all of its stakeholders.

Variable compensation-management software provides the tools that senior management needs to ensure that the interests of all stakeholders can be well balanced, while allowing management to choose the best path to profitable growth.

As the economy continues to shift and business models are rethought, pay-for-performance software will continue to be an essential tool in balancing the responsibilities of managers and salespeople, pushing each level to recognize their own profitability while working toward the profitability of the company as a whole.