In a marketplace that is characterized as the "war for talent," companies in every industry are facing the most difficult time in memory for attracting and retaining people. So what are the trends in the marketplace? How is this "battle for the best" being played out? What are the more successful companies doing? These questions will be the focus of this Fall, 2000, Wilson Group newsletter: Rewards that Work.

While we could examine creative recruitment and attraction techniques, we will focus our attention on how companies are retaining their people. We will examine the key trends in: base salaries, variable compensation, equity participation and other "cool stuff" in benefits and workplace conditions. . We will also examine practices in hiring and retention bonus programs. Your task will be to compare what you are doing now, and see if there is anything important for your company in this data. Then to determine how you can create a competitive advantage in this talent marketplace?

For another year, average salary increases will be between 4.0% and 4.5% for most employees. This is supported by almost every industry survey and has been repeated in large measure for the last 10 years. With CPI (Consumer Price Index) forecasted at less than 3%, people on a macro-scale are making a little progress in their income over inflation. The data indicates that companies are NOT competing for talent with base salary programs. However, the surveys don’t tell us:

1. What companies are doing to address special challenges for those who are at risk of leaving the company,
2. The number or amount of counter-offers made to employees,
3. The pay equity adjustments made to current employees when new hires receive higher levels of pay.

To address these situations, many of our clients have increased their "special adjustment funds" from ½% of payroll to 1%, and some are even more. If they are finding the need to make major changes, then they respond by revamping their base pay program, and tying it more closely to market pay practices.

These are internal responses to competitive situation. Companies that are growing or have internal promotional opportunities move people into higher paying positions, and this usually, as several surveys indicate, means a 7% to 10% increases in pay.

In short, while there is considerable pressure on salaries, companies are highly reluctant to increase their fixed costs. Therefore, they must find alternative, innovative solutions to become or remain highly competitive for talent.

A lot of action is happening with variable pay. The trend over the last 5 years is clearly to include more and more people in variable pay programs. These programs are going well beyond executives and sales staff. An organization often implements these programs for three reasons:

1. To focus efforts on new performance priorities,
2. To reinforce a value of teamwork, continuous improvement, or shared rewards,
3. To remain competitive with compensation without adding the dollars to fix costs (a.k.a. salaries).

The WorldatWork (formerly the American Compensation Association) 2000 Salary Practices Survey indicates that 61% of US companies now have variable pay plans below executives, and 27% are considering them. In a survey conducted by Buck Consultants on Fortune 1000 companies, only 58% of companies offered variable pay to exempt-professional staff in 1995, but now 78% offer them; 27% of the companies offered them to non-exempt staff, but now the prevalence is between 36% and 40%.

The payout opportunities usually correlate exponentially with salaries—the larger the salary the larger the payout. The average payouts as a percent of different base salary levels usually range:

Under $35,000 5%

$35,000 to $65,000 10%

$65,000 to $100,000 15% to 20%

$100,000 to $165,000 25% to 30%

$165,000 to $250,000 35% to 45%

and the numbers continue to increase.

Survey research indicates that the number varies by industry, job function, and size of the company. In our experience, the numbers vary by the ability to set and monitor effective measures, the support from senior managers, and the degree of employee engagement needed for the organization to perform. When these programs work well, they make a remarkable difference on the culture and attractiveness of the organization.

Further, as the equity markets have "hammered" the stock price of a number of companies, particularly in the technology sectors, many firms are turning to (or returning to) cash incentives as means to establish meaningful rewards. The interest is growing with GoalSharing programs, project based incentives, and multiple measure business unit based incentives. MBO (Management by Objective) programs are probably the most common form of incentive, but have become entitlement programs in some companies.

The evolutionary development of variable pay programs is quite interesting. First, companies get pressure to extend this pay program to new areas, like in engineer, customer service, operations, and service support functions. So, in response they offer a "profit sharing" program for all employees. Management sees this as an opportunity to share the risk or share the wealth; employees see it as a way to make a little extra money. Controllable measures are seen as too difficult to set or too complicated to explain. The problem is that after two payments, the program becomes an entitlement, where people expect to receive the payouts but don’t know how to effect the results. Other problems arise when executive and managers realize that the business is more complex than reflected in a single measure, and need to focus efforts on specific objectives, like new product development, revenue growth, customer retention, etc. The profit sharing plan may work satisfactorily for a small company, but not when a company grows to over 100 employees; people lose site of what they do to impact profits.

Then the program sometime transforms to become an MBO (Management By Objectives) program, where an individual has a target bonus (say 10% of salary) and is suppose to have a set of objectives to determine whether he or she receives this amount. If the manager takes the objective setting process seriously, the program works well. Otherwise, it becomes just a "discretionary" bonus program, which managers usually like but most employees (and internal lawyers) feel highly unclear about the award criteria. This program also begins to break down when executives realize that the focus on individual goal achievement is frequently in conflict with achieving group or company goals. Some people receive their payouts, but the organization at large fails.

After a time, pressure mounts to increase the payouts to remain competitive, but executives are uncomfortable about making larger payouts without knowing what they are either encouraging or rewarding. The objectives are seldom "rolled up" or link directly to strategic priorities. This can then leads companies to develop a more GoalSharing approach, which uses a multiple measure scorecard. This approach can emphasis company, unit and individual goals. The performance levels are determined in advance, and the associated payouts are clear. Progress can be tracked and used to "rally the troops." However, this process requires a high commitment to goal setting, communication and involvement. Those that make the investment (like Corning, Inc.) yield incredible results. The process becomes a way to translate strategy into unit-based objectives and individual buy-in. It is not perfect, but it addresses the issues many companies and individuals have with variable pay plans.

Developing a variable pay plan is often a "Zen experience." The organization needs to find the right balance in the alternative approaches for different employee groups (from executives to operational or service employees). The outcomes are that people are focused on the critical issues and share in the results that they help achieve; this is what produces continual high results.

Stock options and other forms of equity participation are also growing in significant usage. The WorldatWork survey indicated that now over 50% of US companies (mostly publicly traded) offer stock purchase plans to their employees, usually in some discounted or retirement contribution manner. Stock options are provided to exempt-professional-managerial staff by 66% of US companies and to nonexempt-salaried-hourly employees by approximately 24% of US companies. Stock grants are used by 40% of the companies for executives and 18% for professional-managerial staff. Phantom stock or equity simulators are used by 14% of the firms for executives and 6% for professional-managerial staff. Most firms use a combination of programs to address specific groups of people and market needs.

Companies tend to use one of two approaches with their stock eligibility. In a recent Hewitt Associates study, 38% of firms granted them only to the top 25% of the employees, and 32% granted them to virtually 100% of employees. Those that limit the options to the top 25% have a philosophy that these people are the leadership team, have the responsibility for the success of the organization, and need to be rewarded for its growth. By limiting the number, they can provide more shares without diluting shareholder’s interests. Companies that include everyone tend to be either start-up or emerging high-growth companies, that want to the focus and involvement of everyone, or they are very large companies (like DuPont, Boeing, etc.) that use broad based stock options as a symbolic statement of commitment and as a special benefit to all employees.

In another study by Hewitt, technology companies granted stock options down to people with an average salary of $41,000, while the salary level was $80,000 for established companies. This clearly reflects the broader participation rates of equity plans in the technology industry. However, when comparing the overhang (the total options and shares authorized by for managers and employees), both technology and general industry averaged around 22% of their total outstanding stock for these purposes.

Several studies, including those conducted by the Executive Compensation Advisory Service and Price/Waterhouse/Coopers indicate that the general run rate (the number of shares awarded annually as a percent of the total shares outstanding), has been increasing. The increase has been from 1.6% in 1995 to 2.2% in 1999 for general industry; and the technology industry has increased its run rate from 3.5% in 1995 to 5.6% in 1999. For companies that are emerging growth or pre-IPO (Initial Public Offering) the percentage is 1% to 3% higher. Successful firms usually have an established pool of shares that can allocate to managers and employees over several years, and they do not need to get shareholder approval each year. Then, as additional shares are awarded, there is no or very little dilution in share price because of the growth of the company.

Most firms allocate stock options/shares based on a range in number of shares. Here, the company has a target number of shares for different levels, with a range in both the number provided and the timing in which they can be awarded. Some firms combine this with an allocation pool to senior managers based on the unit’s performance, who in turn allocate the equity awards based on individual or team performance. The effectiveness breaks down when there are no clear performance factors, and stock option awards become another entitlement program.

There are a highly committed but smaller number of firms that relate equity awards to a target dollar amount. They allocate the shares based on the projected value of the shares and associate it to the salary of the individuals (e.g., grant value may equal 100% of one’s salary). This enables them to give out more shares when the price is low and less shares when the price is high.

An exciting new trend is to offer mega-grants, and then accelerate the vesting and/or other provisions (such as reloads of the options) based on performance. The January-February, 2000 issue of the Harvard Business Review has an excellent article to explain these three strategies.

In an environment of high uncertainty as we find the current stock market, the potential for extraordinary gains or losses in relatively short periods of time make this vehicle highly risky as a primary tool for rewarding performance. When stock price falls below the exercise price, companies are not repricing shares as they once did. Instead, they are using reload options or accelerated grants to take advantage of this low exercise price, and shortening the vesting period or making it more frequent (such as quarterly instead of annual vesting). Therefore, we recommend to our clients that they use a balance of cash and equity, and utilize several creative techniques to reinforce performance achievements as a process for awarding of dollars or shares.

Once a firm has established the requisite amount of employee benefits, it often seeks new ways to create a competitive advantage. In a survey conducted by Boston Magazine, the top seven benefits used by the survey participants were:

• healthcare insurance,
• tuition reimbursement,
• paid maternity leave,
• 401K plans,
• year end bonuses,
• casual dress and
• fitness clubs.

Other programs that are gaining in popularity are:

• child care/elder care support,
• food available at the workplace and in meetings,
• transit reimbursements,
• flextime,
• special summer hours or extended vacations/holidays
• discounts on sports, movie and other tickets,
• discounts on other forms of insurance,
• electronics and outfitting one’s home office.

There is also a lot happening with special or performance recognition programs. Companies are implementing both formal and informal processes to recognize key contributors, as individuals and as teams. A description of these programs is beyond the scope of this paper. The key theme in our experience is that companies are using these program to celebrate achievements made by groups or the entire company, and are de-emphasizing service awards or limited "employee-of-the-month" type programs. What is quite interesting in our client work is how creative companies can be in this area. They seek to reinforce a unique image of the company as a "cool place to work."

As stated at the beginning of this issue, companies are in a battle for the best employees. In a survey by WorldatWork, 93% of the survey participants have taken some action in 1999 and 2000 to address this issue. The most prevalent actions have been:

• Market based adjustment to salary increases: 62%
• Sign on or hiring bonuses 60%
• Change in work environment (dress code, flextime, etc.) 48%
• Retention or stay bonuses 28%
• Emphasis on promotions and career development 27%
• Paying above the market 24%
• Special education and training 22%
• Spot bonuses 19%
• Stock programs 19%

For hiring bonuses, companies are making deals that amount to between 10% and 15% of one’s salary. We recommend that companies make this an attractive dollar amount, and emphasize the "zero’s." Buck Consultant’s 1999/2000 Salary Budget Survey of Fortune 1000 companies show these ranges in practices:

Low Median High

Executives $1,500 $15,000 $50,000

5% 12.5% 30%

Exempt—Manager/Professional $1,970 $5,000 $50,000

4% 12.5% 25%

Salaried Nonexempt $200 $1,650 $8,400

1% 7.5% 25%

As indicated above, retention bonuses are less prevalent, but are an important tool in the talent wars. They were quite popular for Information Technology staff during the "rage of the Y2K." Once these have been paid, the issue is what to do now. Many of the Wilson Group, Inc.’s clients have replaced them with other projects are at critical risk or have converted the programs into project based or GoalSharing type incentive programs for these staff. Others have just said "Thank you and we appreciate what you have done."

In terms of practices, the dollar amounts tend to be larger than for hiring bonuses, because companies feel there is more at risk with losing someone where they have made a major investment or presents a serious risk to the business. The Buck Consultant’s survey sited above provides summary of practices data here as well:

Low Median High

Executives $7,200 $20,000 $50,000

10% 20% 75%

Exempt—Manager/Professional $1,000 $8,250 $50,000

2% 10% 50%

Salaried Nonexempt $500 $4,000 $7,200

5% 10% 50%

Additional information is available on retention strategies at the Fortune Magazine Special Fall 2000 issue, in the special section entitled "The Talent Connection." This can be obtained on by going to the Wilson Group website (www.wilsongroup.com) or to Fortune’s website (www.fortune.com/sections). This was a project conducted by the Wilson Group for Fortune, and provides a process for developing a retention strategy, survey research and several very interesting case studies. We will be doing this project again next year, and please contact us if you are interested in participating.

In summary, hiring bonuses have been used to offset a job candidate’s options or bonus of the previous employer or address internal equity of pay issues. Retention bonuses are usually tied to the individual being employed with the company when some milestone is achieved. Both are temporary, and create pressure for the company to do something more long term or sustainable. Hence, we expect to see a continuing rise in the use of variable pay plans and equity participation, as well as creative, innovative or distinctive reward programs.

Each of these programs—salaries, incentives, equity and benefits—has a different impact on the organization and meaning to the managers and employees. Some drive key performance factors of the organization, other reflect a unique characteristic or membership benefit for being an employee of the organization. Further, some programs are directly related to cash or reduce an employee’s personal expenses or they are symbolic and have little to no cash value. This framework is shown in the chart below.

Successful companies have a strategy and they execute it well. They use a portfolio approach to rewards, and don’t rely on just one or two programs. Each program therefore has a distinct purpose and structure to encourage a set of actions or attitudes. There is no single program that works. Successful companies have achieved an alignment between what the company needs to achieve with its strategy and to reinforce in its core values.

Therefore, the key questions one needs to ask are:

• What do we do now, where do we place our emphasis?
• What is meaningful to our employees and important to our organization?
• How can one establish the best competitive advantage?

There are more trends happening "out there" and this information should provide with an important perspective of what other firms are doing. The task is to use this data to assess one’s current situation and find a solution that fits your specific challenges in the battle to succeed.