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Reward system is fair, allows raises, bonuses

Two years ago, Mark Kozaki and other executives at Discovery Communications Inc. had a morale problem on their hands. Some of the company's top achievers were earning the same salaries as slackers in the same position. In other cases, employees doing the same work as colleagues in other parts of the company were getting paid less.

The only way for managers to reward the workplace stars was to give them a bonus or promote them to another position; Discovery's compensation structure did not allow for big raises for people who stayed at the same job.

"People felt that it was unfair," said Kozaki, who is senior vice president for administration and operations in the United States for Discovery, which owns the Discovery Channel, Animal Planet and 31 other cable networks.

It was not just unfair, it was often counterproductive. Some people accepted promotions to jobs they were not equipped for, while others tried to switch to more generous departments in the company. And so, in early 1998, the company began an overhaul of its compensation policy, switching to a pay-for-performance system that allows for both big raises and bonuses.

And even though the traditional justification for maintaining a relatively fixed pay structure is to promote a sense of equity among employees, by abandoning it, Kozaki said, dissension in the ranks soon dissipated.

"It has eliminated many of the concerns about whether there is across-the-board fairness," he said. "There is not as much discussion or wondering or suspicion" as before.

Experts in employee compensation say more and more companies are shifting away from fixed pay structures that have long been the norm to more flexible, performance-driven arrangements like Discovery's. Though the old practice of keeping pay within narrow boundaries for workers in the same job classification still prevails, an increasing number of managers are realizing that they have to come to grips with the challenge of rewarding their best workers without raising labor costs significantly.

The solution for many companies is to hold automatic pay raises to a minimum, thus punishing mediocre employees, while lavishing merit raises and bonuses on the superstars. The bonuses are increasingly based on measurements of both the individual's attainments and the company's overall profits and other results.

More than half of the 2,400 companies surveyed last year by William M. Mercer Inc., a human-resources consulting firm in New York, reported that they had performance-based incentive programs in place for both management and nonmanagement employees, and 49 percent said that they had increased the number of employees eligible for such programs since 1997.

"It's due to two issues," said Steven E. Gross, who runs the compensation-consulting practice at Mercer. "Attraction and retention of good people, and companies trying not to raise their fixed costs."

And by linking bonuses to corporate results as well as individual attainments, he said, companies can share the wealth in good times, but can cut bonuses before jobs in bad times. "It self-corrects some of your costs," he said.

He said some studies suggested that every $1 invested in an employee incentive program could lead to a $2 increase in revenue, but he cautioned that so many variables had to be considered in making that calculation that conclusions were extremely tentative.

Managers, of course, have always been rewarded for doing well, but expanding financial incentives into the middle and lower ranks of the organization is a relatively recent phenomenon that has accelerated over the last decade, compensation experts say.

At Discovery, which grew so quickly that the compensation structure long went unexamined, Kozaki said that attrition rates had fallen and complaints from employees were less frequent since the new policy went into effect. "Employees think they are being treated fairly," he said.

Under the old system, an information-technology specialist who was doing good work could not have received a raise when competitors' wages rose for comparable employees unless she was also promoted, said Anthony R. Amato, Discovery's vice president for compensation, benefits and human resources.

Under the new system, the specialist could receive a raise — rewarding good performance and also matching competitors — without being burdened with new management responsibilities that she was not ready for, he said.

"Historically, we weren't separating performance" of the individual employee, that employee's job and wages paid by competitors from evaluation of that employee's readiness for more responsibility, Amato said. That meant that employees might be promoted too quickly if they did well or if it was necessary to give them a raise to keep them from defecting.