Posted April 03, 2018 by

Successful variable pay programs: Interview with John Rubino

 

Variable pay programs are rising in popularity. John Rubino, president and founder of Rubino Consulting Services (RCS), knows a lot about this trend and how employers are currently succeeding (and failing) at implementing variable pay programs. Rubino will be a speaker at SHRM 2018 conference, presenting “Successful Variable Pay Programs in Action: A Case Study Using a Proven Eight-Step Design Approach.” I connected with Rubino to get his insight into how to ensure success, what mistakes to avoid, and what it has to do with engaging entry-level employees. 

Why are variable pay programs increasing in popularity?

John Rubino: Three words. Pay For Performance. These plans have proven to be the one cash reward program that truly aligns performance with pay and, as a result, motivates the workforce. Base salary merit increases have failed miserably in that regard. In addition, as companies around the world continue to emphasize variability and de-emphasis base pay increases, they find they can reap significant savings in their huge fixed pay expenses. It may be surprising to many that total base salaries (a fixed company expense) as a percentage of a company’s annual operating budget can be upwards of 50%!

Do you see any generational differences in how variable pay can motivate employees?

Young employees expect variable payRubino: I do see generational differences in embracing variable pay. Older workers have grown up in a work environment that emphasized delayed gratification and sticking with an organization over the long haul, thereby accepting gradual increases in their base pay. The entry-level and younger employees want to recognized and rewarded immediately and substantially for their good performance and are not married to any one organization forever. Thus, they are more accepting and motivated by variability — a 180-degree shift in culture within my lifetime!

Also read: 10 ways managers can better engage milennials

When and why would paying for performance backfire?

Rubino: Variable pay programs fail for a number of reasons. Primarily, the performance metrics used are poorly designed and are not cascaded and aligned from the top of the house downward. I always advise my clients that the first step is to make sure they have an effective performance management system in place before they even think about implementing variable pay. The programs also fail if management does not allow the variable plan to operate on its own. In other words, managers step in and impose too many exceptions. I tell my executives they must transfer some of their authority to the variable system. That’s difficult for many executives to do. The bottom line is this: Culture is key. The culture of variability is “what have you done for me lately”. If employees want more money out of your company, they must produce today, tomorrow, next week and next month. Otherwise, their compensation will be stymied. Many organizations and employees are not ready for the ramifications of what that type of cultural change really means!

You must have an effective performance management system in place before you even think about implementing variable pay.

How should employers implement variable pay program to ensure success?

Rubino: I’m convinced that variable pay programs should be used only to reward tangible results. That’s what performance metrics are based on. However, there is room in an organization’s total compensation strategy for recognizing and rewarding values and competencies. When an organization has a fully-functioning, comprehensive variable pay program embedded, I recommend taking performance results out of base pay considerations entirely, and moving it all to the variable plan. This allows pay designers to redefine the criteria for base pay increases. Those new criteria can include competencies demonstration as well as living the values of the organization.

So far in my career, I have designed over 300 variable pay programs all over the world in a wide variety of industries. Thus, I have developed the “Ten Criteria For Success” for creating variability in organizations. To succeed in your implementation of a variable pay program, your organization must ensure it:

  1. Is Aligned With Organizational Culture/Values
  2. Is Fair To Employees
  3. Is Fair To The Organization
  4. Sets Total Compensation Integrated With Total Rewards
  5. Yields Financial Returns To Employees
  6. Yields Financial Returns To The Company
  7. Involves Employees And Managers
  8. Uses Internal And External Data
  9. Sets Forth Clear Performance Goals
  10. Achieves Clarity Through Communication

Editorial comment and food for thought from Anna Peters, Content Manager at College Recruiter: Rubino will tell you, perhaps in his SHRM 2018 presentation, that “middle managers will make or break the incentive compensation program.” This strikes me as an extremely important point that is at risk of being underestimated. A good manager will drive up team performance for the long-run, and should be on the look out for employee behaviors that might result in only short-term results. An employee might earn a raise by producing short-term results, at the same time that he or she damages the team dynamic, thus reducing someone else’s performance or negatively affecting overall team performance in the long-run. Employers who are truly values-driven might start to tie performance management, and thus, pay structure, to behavior that supports company values. There are land mines here for sure, with so much subjectivity and cultural bias around how to express certain values. However, with technology that allows coworkers to give on-demand performance feedback, the data isn’t out of reach. Given how elusive and expensive cultural change can be, it seems to me that when paychecks are tied to values, leaders might find cultural change easier than they think.

John RubinoJohn Rubino of Rubino Consulting is president and founder of Rubino Consulting Services (RCS), a global human resources consulting company based in Pound Ridge, New York USA.  His areas of expertise are in the design and implementation of corporate values/objectives and their linkage to human resources strategies, compensation analysis and program development, performance-driven incentive plans, sales compensation programs, performance management systems, management training programs, team dynamics, leadership skills, motivational training, and human resources communication programs. John performs human resources consulting work and is a featured speaker for various organizations in the United States, Johannesburg, Cape Town, Hong Kong, Singapore, Tokyo, Taiwan, Buenos Aires, Toronto, Vancouver, Edmonton, Guatemala, Trinidad, Cayman Islands, Switzerland, the United Kingdom, the Netherlands, Bahrain, Abu Dhabi, Dubai, Kuwait City, Oman, Cairo, and more.

 

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