Back to Base

If you were to ask a number of people when variable pay became a significant part of compensation, for a large percentage of the employee population you will get a wide range of answers. Clearly the trend was in full gear by the mid-1980s in most for profit sectors.

I recall a large client of mine in 1986 charged us with the task of developing a variable pay component for all positions in the organization. The challenge was to “take it down as far as it will work and across all areas in the business.” That was not typical for that era, but clearly the trend was taking shape throughout the economy at that time. The variable pay trend became more prominent in the not-for-profit sector over the next decade.

As one would anticipate, as the variable pay trend became more prevalent, the focus on ensuring that the base pay program was consistent with the overall reward strategy of the organization slowly waned. After all why worry if the base structure is “off” by 5% when the individual can earn 15%-20% of base salary in a bonus/incentive payout or even more depending on the level of the position. Of course variable pay had been a significant portion of executive pay for decades, but over the last 25 years it certainly has become a “standard” component of total reward strategies for a large percentage of the employee population.

Of course this philosophy of linking the individual reward more closely with organizational performance certainly was appropriate then and who could argue with that philosophy today?

When the economy provided the opportunity to “max out” on incentive payouts, and it seemed that the opportunities would always be “up,” many organizations did not manage the base salary program as it had been managed in the old days, before the mid-1980s. Also, how many employees in your organization can even remember the days before incentive pay was a staple in their total reward opportunity?

The technology sector has traditionally been one that has subscribed to the philosophy of lower base salaries with significant upside potential in cash and equity over the long-term. However, as we all know, significant changes have taken place in the technology sector…and not just in technological capability and product offerings. This can be seen in a study presented at the recent WorldatWork Conference. Barbara Mackintosh, our firm’s manager of consulting services, attended the conference and found the results interesting and thought they should be shared.

Regarded as one of today’s most successful and forward-thinking organizations, Google’s compensation team was faced with what some may see as an unusual challenge in today’s economic climate. While many organizations today are struggling with how to recognize, motivate and reward employees with limited or no funds, Google’s challenge outlined in this presentation was actually the opposite. Google did in fact have both the funds and the desire to recognize their employees (or “Googlers” as the company refers to them) for their part in the success of the organization through increased compensation. The question became…what component of compensation or mix of components could be used in the form of different packages to reward employees?

True to Google form, the compensation team set out to ask the employees what matters most to them. Through an online survey and extensive statistical analysis, the team solicited feedback on the perceived value of base salary, bonus and equity rewards by using a ranking system. They used conjoint analysis to offer the employees different packages that had various scenarios with the base, bonus and equity opportunities in different mixes. In some of these scenarios, the incentive or equity amounts may have been greater than that of the base increases. So what did they find? In an overwhelming majority, it was discovered that base salary has far more perceived value than that of short term bonuses and/or equity.

In an effort to place their financial resources where they are most valued, Google CEO, Eric Schmidt, delivered, in person and via email, to an audience of over 20,000 Googlers, in November of 2010, that they would all be receiving a 10% base increase, , regardless of level or position, effective January 1, 2011. In addition, the employees also received a $1,000 cash bonus. Needless to say, that was a happy audience. Again, this supports the theory that while base salary is not the only way to reward employees, it certainly carries a great deal of weight in terms of impact.

As our economy slowly recovers from the significant impact of the recent recession, at least in some sectors, employees are looking at compensation with a different point of view. As was discovered in the Google survey, many employees that have always received variable pay are now looking at base salary with a new importance. And who is to wonder…how has your organization’s variable pay plan paid off in the last three years?

This new recognition and view of base salary is not to suggest that organizations should discard the variable pay plans, or the philosophy that has variable pay as a significant component in the total cash reward strategy of the organization. Rather, it suggests that the foundation, the base salary program, must be solid before variable pay is built upon it.

Everyone has now experienced the reality that the variable pay component is truly variable. Many organizations’ employees are skeptical and fearful and have lost trust in the organizations that many have believed in for some time. Without knowing what may happen to their jobs and experiencing the loss of the variable element of compensation, many now trust the base salary as the one foundational element that they can “take to the bank.”

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