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High-Performance Pay: Fast Forward to Business Success
by Patricia K. Zingheim and Jay R. Schuster
WorldatWork, January 2007

To order, contact WorldatWork
ISBN 1-57963-1614 paperback

Read more about High-Performance Pay

Table of Contents

Foreword by Michael Davis
Vice President, General Mills
Chairman of the Board, WorldatWork
October 2006

At many companies—and in many industries—total rewards systems are in trouble. They were built upon a series of premises that no longer hold true. The world of work is rapidly changing, but the designs of pay, benefit and total rewards systems are stuck in the mud.

A primary challenge for all leaders is sustaining or enhancing business results. To add value to the business, rewards must be part of the business solution. Today that is often not the case. Only when businesses achieve goals and attract the best people with the top skill and talent that can be translated into real performance can all the elements of total rewards be retained. So the key issue is making pay for performance real—many talk about this but it has not yet become prevailing practice. Companies need to either find ways to improve performance and relate increasing total rewards costs to results or change what they offer.

Think about other major problems that exist. It is hard to open a newspaper and not find an article about company benefit plans. Health-care costs have increased so dramatically that for many companies it is the fastest-rising expense on the income statement, rising in many cases more quickly than sales or profits. This is leading companies to change how they approach health care. Almost all employees are feeling the pinch of higher premiums, larger deductibles and bigger co-pays or coinsurance payments. Consumer-driven health plans are increasing in number as companies hope that an ounce of health-care consumerism will yield a pound of reduced health-care expense.

Retirement plans are also under fire. Companies are discovering they can no longer afford their traditional defined benefit pension plans. In some industries—automobile manufacturers, airlines and steel producers—these obligations threaten the financial viability of many large employers. As these plans are closed to new entrants or frozen for existing employees, they are being replaced with smaller, but more affordable, retirement and/or savings plans.

Stock plans are also in a state of stress. U.S. accounting rules have recently changed to require expensing of stock option grants on company financial statements. Prior to this accounting change, virtually every publicly traded company offered stock options to its executives and other senior employees. At some companies, all employees periodically received stock options. With the accounting change, U.S. companies took a fresh look at their stock granting practices and most changed something. Some employees, the most unlucky, simply stopped receiving grants. Others still received stock grants but they were smaller. In other cases, the nature of the stock grant changed from stock options to restricted stock or some form of performance-based long-term incentive.

On top of this rapid change, we have discovered a surprising number of companies were quietly backdating their stock option grants, to pretend that they were granted on an earlier date at a more favorable strike price. It is still too early to tell what the ramifications of this unfortunate practice will be on total rewards systems going forward.

The truth is, the entire total rewards framework that emerged in the 1980s and 1990s is simply unsustainable. As Thomas Friedman points out in The World Is Flat, the world is rapidly globalizing whether we like it or not. The economics of doing business are changing forever, and we can either change too or get left behind. Shareholders, who for decades were very silent, can now be heard with a roar. They have a lot to say about how executives and employees are compensated and how the company makes use of stock in compensation and benefits arrangements. Congress, the SEC and the IRS have also been paying attention to the various corporate scandals of recent years and have introduced new legislation, rules and regulations impacting what companies can or cannot do in pay and benefits systems.

Lastly, the workplace is getting more complicated. Most companies have employees from four generations in the same workplace. Recent generational diversity studies have shown that these generational groups are not homogeneous. What they expect to put into work and what they expect to receive in exchange are not the same. The “good ole” cookie-cutter approach to total rewards leaves many of these folks dissatisfied, some unmotivated. This is not a prescription for success in an increasingly competitive world.

The good news is this situation is entirely fixable. Most total rewards systems do not have to be scrapped, they have simply become ineffective. Using an automobile metaphor, they are in need of a major tune-up. This tune-up needs to reflect the new realities of work now and in the future. It needs to reflect what is in the hearts and minds of current and future workers. It needs to reflect the changing expectations of relevant external constituents. In short, it needs fresh thinking.

Pat Zingheim and Jay Schuster are fresh thinkers. They have shown in their two previous books, The New Pay and Pay People Right!, that they are not afraid to challenge the status quo. Not only do they paint a picture of what is wrong, but they also offer a thoughtful analysis of the situation, and actionable ideas and solutions to improve the situation. Pat and Jay were among the first to speak out on behalf of total rewards and were early in presenting the field with a total rewards framework that went well beyond traditional compensation and benefits. Their work caused many companies to rethink their approach to compensation and benefits, into a more holistic total rewards mindset. WorldatWork awarded Pat and Jay its highest honor, the Keystone Award, for their pioneering work in transforming practitioner thinking from siloed compensation and benefits to integrated total rewards.

Pat and Jay are not ones to rest on their laurels. They once again sensed something was amiss, and they penned this new text, High-Performance Pay: Fast Forward to Business Success, in response. They believe total rewards systems play a unique and important role in creating high-performance organizations. However, they see many companies’ total rewards practices are stuck following conventional wisdom, often leading to less-than-high-performance pay solutions. They further believe that many of these solutions are no longer economically viable and lead to many of the gut-wrenching downsizing, outsourcing and offshoring actions that have come in the face of a business or industry downturn. They have presented 18 chapters of ideas about how to remake a total rewards system into a high-performance system, how to properly link the total rewards system to the operational side of the business to drive results, and how to create “win-win” solutions for companies and their employees.

As usual, their ideas are thought provoking and insightful. Their solutions are clear and actionable. Once again, Pat and Jay have their fingers on the pulse of change.

 

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