For Incentive Pay (International Public Management Association for Human Resources)

Transcription

1 For Incentive Pay (International Public Management Association for Human Resources) Getting Incentive Pay Just Right for the Public Sector By Patrick J. Cole, SPHR Faced with challenges to do more with less, government agencies are turning in increasing numbers to a productivity booster with a long track record in the private sector incentive compensation. But off-the-shelf solutions borrowed from private industry do not convert automatically to successful programs in the public employment sector. Designing and implementing an effective incentive pay program that is just right for participants requires close attention to details of design and implementation, sensitive to the culture of the agency and responsive to the principles of change management. Pressures for Productivity, Knowledge Transfer Incentive compensation plans are increasingly attractive to government agencies as they strive to adjust to 21st-century economic and demographic shifts. Economic uncertainties affecting employment, the credit and housing markets, and retail spending squeeze agency budgets and present strong pressures for increased productivity. Revenue sources supporting government operations have tightened, reducing proceeds from taxes on income, property, and sales. At the same time, many public bodies meet steady or increased demands for service. Often the only solution is to increase output without proportionately increasing staff. Incentive pay can help to bring employees on board in the drive to improve productivity, and it can help to motivate experienced workers to pass along their skills and insights to younger staff in the face of the brain drain many expect as the great wave of baby boomer retirement hits the workforce. Boomers, the nearly 80 million Americans born from 1946 to 1964, have already started to retire. 1 To prevent their expertise from walking out the door with them, employers are searching for ways to transfer their knowledge to younger workers. An Incentive, Not a Bonus Government agencies have considerable experience using productivity bonuses and endof-the-year payouts to share cost savings with employees. As welcome as these may be to workers, bonuses can quickly take on the nature of an entitlement program. Workers often see a bonus as their share in a windfall that has no direct connection to performance. In contrast, an incentive compensation program sets out clear, upfront information about ways employees can qualify for extra reward through extra effort. The boost in motivation translates into productivity gains. Although incentive plans rely on performance measures that many associate with production-oriented operations, pay-for-performance programs can be effective with any group of employees, even those in jobs commonly thought of as back-office positions. Service to customers including internal customers can provide performance metrics in tasks as varied as those of accountants, administrative assistants, and filing clerks.

2 Fulfilling customer expectations for work quality, quantity, and timeliness, for example, can offer a standard for measuring employee performance in any incentive program. Preliminary Cultural Assessment Designing effective incentive programs begins with an assessment of workplace culture. Gauging employee readiness for an incentive program not only helps to tailor the plan to specific concerns but also allows plan designers to address potential sources of resistance. For example, employees who already feel underpaid in comparison to workers with comparable skills in the local marketplace might balk at an incentive program. They might view it as a way to wring extra effort to bring them up to the level they feel they should receive as base pay. For workers with such attitudes, an incentive compensation plan can be salt poured on a wound. Recognizing the mind-set in advance allows plan designers to present the program in a more positive light. The culture assessment process can provide plan sponsors with a reading on the level of reward that employees will value. For example, no matter how much effort goes into a plan, if it offers only a $100 annual reward, the chances are slim that it will motivate many employees. Substantial rewards say, 10 percent of income or more have a better chance of stimulating extra effort than smaller amounts do. When collective bargaining agreements are in effect, union leaders play a significant role in providing insight into worker attitudes. Involving labor leaders early helps to secure their partnership in plan design and implementation. With a clear understanding of employee attitudes toward pay and the opportunity to earn more, plan sponsors are in a stronger position to design an effective program. Information-gathering activities associated with the assessment also lay the groundwork for worker participation in the design phase of the plan. Defining Objectives and Parameters With the culture assessment as a guide, detailed plan design can begin. The first step is to define the objectives and parameters of the program. Clear focus on goals and scope from the outset helps keep efforts on track. Plan creators need to ask, Why are we doing this? What do we hope to accomplish? Who will be eligible to participate? What metrics will we use? When the plan's scope is either too broad or too narrow, later problems are a certainty. For example, focusing on just one metric, such as productivity, fails to recognize other important elements of performance. On the other hand, too many measures can diffuse efforts and diminish the significance of any single indicator. Tapping internal and external expertise is important for achieving an appropriate balance. Design and implementation teams made up of top-performing employees and supervisors lend crucial insights to plan development and credibility during rollout and operation. Expertise of outside specialists brings the perspective of best practices and can accelerate the process by coaching the design team in techniques for communication and data collection.

3 The balanced scorecard concept, aligning business operations with strategic goals, provides a useful framework for identifying performance measures. The scorecard approach looks at performance from four perspectives: growth, effectiveness (in the private sector, profitability), quality, and stakeholder satisfaction. Stakeholders in government operations are numerous, but the key stakeholder is the taxpayer receiving the agency's services. Others include other agencies regulating or overseeing the delivery of services or funding operations. Some incentive plans may have fewer than four metrics, and some may have more. A good rule of thumb is to use at least three metrics but no more than seven. Drafting a Plan That Can Be Tested To allow identification and correction of problems before implementation, the design schedule needs to include time to test the plan before rollout. For example, testing might reveal that data for one of the metrics is difficult to collect or substantiate. Spotted in advance, the problem metric can be tweaked or replaced before the program takes effect. Usually, design begins three to six months before the implementation date, which is frequently tied to the beginning of a new fiscal year. Working on this schedule, plan sponsors can use year-end figures to give examples to employees of how the program would have changed their income during the previous year. Implementing the Program No matter how well designed a plan may be, it will fail if it is implemented poorly. Experts in project management and change management agree that good execution allows a design that is good not necessarily excellent to outperform a top-quality design that is poorly implemented. Communication is critical to implementing the program. One best practice is to employ a multitude of techniques to explain the program and answer questions. Repeating the message again and again in different ways increases the likelihood that all workers get the message and feel comfortable asking for information. Focus groups, newsletters, and PowerPoint presentations augment , intranet, and face-to-face communication. To ensure consistent information, administrators provide supervisors with scripts to follow as they pass on explanations to workers in their departments. Another communication best practice is to send a representative of senior management to visit each department, to reinforce the supervisors' message. Continuing these visits as the plan progresses helps keep communication lines open as operational results begin to become clear. In these follow-up meetings, management reminds employees of plan goals, reports on actual operations, explains results, and invites questions. Another key communication task, usually performed by the human resources staff, is preserving rollout materials to be used in orientation programs for new hires.

4 Evaluating the Program Often incentive compensation plans seem to begin so smoothly that plan sponsors can quickly become complacent. In these cases, it may come as a shock at the end of the year to realize that plan momentum had slowed down somewhere along the way, producing disappointing productivity gains and incentive payouts. An effective evaluation plan, conducted at least annually, looks at return on investment for the program and determines what went right and what went wrong. The evaluation, like the testing phase, allows for modifications in response to changes in circumstances. It provides an opportunity to revisit the entire design and implementation process. With experience, the annual evaluation becomes easier and more efficient. But even when the process seems laborious, a yearly assessment is worth the effort to ensure that the plan remains aligned with current conditions. Worst Practices Plan designers need to be alert for unintended negative consequences that can undercut the potential of incentive compensation plans to improve productivity. Four causes of plan failure were identified in a 2006 study by World at Work, the global association for compensation professionals. 2 These "worst practices" are: 1. Lack of a performance management process, clear goals, meaningful metrics, and effective feedback channels; 2. Lack of plan understanding among participants; 3. Absence of ability to influence outcomes in key performance areas used as metrics; and 4. Lack of participant trust of plan administrators or a suspicion that the plan masks a hidden agenda. Getting It Just Right Some incentive compensation plans are too big, some are too small; some are too barebones, and some are just too fancy. The just-right plan has the appropriate number of metrics, fits the specific workplace culture, and balances productivity, quality, and stakeholder satisfaction. It offers rewards that participants value for performance gains they can influence. Or, in other words, it gets results and rewards all parties involved. Now that s a best practice worth emulating. Patrick Cole is an executive specializing in human resources and compensation with Crowe Chizek and Company LLC in Grand Rapids, Mich. He can be reached at or pcole@crowechizek.com. 1 James J. L Allier, Ph.D., and Kenneth Kolosh, Preparing for Baby Boomer Retirement, Chief Learning Officer, June 2005 ( Nation s First

5 Baby Boomer Receives Her First Social Security Retirement Benefit, U.S. Social Security Administration press release, Feb. 12, 2008 ( 2 Toward an Empirically Validated Variable Pay Methodology, WorldatWork Journal, December 2006.