Business are responding to the realities of the Digital economy by becoming more agile. They are doing this by improving the way they work, optimising processes and headcount, and reorganising and restructuring. Reward is rarely a top priority in the road to agility. This inertia may not have been a problem in the past when change was something that disturbed long periods of calm. But organisations need to put formal mechanisms in place to reinforce the constant changes and reward employees to demonstrate and reflect ongoing changes in business strategy. They can do that by demanding more agility from their Reward programs, especially their Incentive plans.
Reward strategies and programs such as Incentive plans should be able to respond to shifts in the external environment— when strategic imperatives change, so too must Incentive plans, otherwise organisations risk supporting the wrong strategies.
Many companies use their Incentive programs (Variable pay, Bonus plans and other Incentives) to add flexibility and better aligning Rewards with their business strategy. But despite the need for flexibility, Incentives are often unchanged for many reasons: -
- Incentives are usually only thought of once a year at the start or end of the performance cycle
- Incentives are often the output of lengthy internal negotiations and subject to contracts that are hard to change mid-way through the performance cycle
- There is hyper-sensitivity to moving away from past practice or even worse, moving away from industry practice which causes decision-making paralysis (the very antithesis of Agility).
The reality is that a systemic lack of rigour across organisations in both differentiating performance and in determining ‘who should receive which incentive and how much’ has become a cultural barrier to change during times of volatility. There is a feeling of “My incentive is my entitlement”. If employees think of incentives as Fixed reward, then the whole reason for, and motivating benefit of, Incentive pay is taken off the table.
Designing for flexibility
The good news is that, there are ways of building flexibility into Incentive plans. It ultimately comes down to the plan design allowing flexibility (and the participants understanding the real prospect of such flexibility being exercised) and directors and management having the courage and conviction to respond to strategic change with a corresponding change to Incentive design. It is not about cutting costs or reducing the Incentive opportunity, but instead aligning incentives to strategy, which might be constantly evolving.
A more flexible Reward structure
An important element of a flexible Reward structure is the need to communicate that to stakeholders, and how it reflects changes to strategy and its benefits in the medium to long-term. More importantly, conversations at the start of the performance period need to make it clear that Incentives are a strategic tool and might be subject to change in line with any changes to strategy should business conditions alter. If organisations communicate the change well, people will respond to it better.
Here are key areas to consider when building an Incentive program:
■ Purpose of Incentives: Does the Incentive plan underpin business performance, in addition addressing issues such as competitive payout levels and retention risk? Do performance hurdles and the performance period support the changes being undergone by the business? Should there be flexibility to ensure that the plan design is tailored to a fast-changing business, differently than with mature ones?
■ Measurement & Governance: Are Incentives, especially at senior management level, viewed as Strategic tool? Does the organisation operate on a ‘set and forget’ basis or are performance against targets reviewed very regularly and in the context of organisational performance and strategy?
■ Eligibility to Incentive plans: Most organisations fail to be targeted with who participates in such plans. Hence, these organisations – because of their broad-based approach – find it more difficult to be agile in times of rapid change.
■ Line of sight between Performance and pay: Most organisations fail to differentiate between strong performers and poor performers, even where the performance hurdles are properly set. Improving differentiation delivers higher payouts to stronger performers by eliminating payouts for Non-performers, making the Incentive plan more effective towards changing desired behaviours.
An agile Incentive program can be an effective tool that keeps pace with changes in business conditions, rather than just being an operational one that lags change. The real challenge for decision-makers is having the courage to leverage this flexibility in times of transformation when everything else is a competing priority. However, we know that Reward (especially Incentive programs) can be that strategic enabler of change if the organisation it prepared to make it more agile.
Webinar series: Join our experts and guests to learn the capabilities required to thrive in a digital world and understand the true state of digital sustainability among today’s leading organisations. Register now.