Gordon Miles admitted to being a little nervous at first. As the chief operating officer for real estate powerhouse Prudential Americana Holdings, he was seeing some hefty bonus checks for branch managers come across his desk. Like any other valley employer, Miles and his team had done their share of cost retooling during the recession.
But one of those tweaks in the past couple of years came in the form of shifting some positions’ pay packages to being more bonus-oriented instead of giving a traditional raise. So when branch managers responded with increased profitability, it was time for Miles and his team to pay up.
“You see this big number, but then that means you had a really profitable operation. … But that takes a little bit of an adjustment to get your mind behind it,” he said.
Today, Miles is glad to pay. He said a real estate branch manager in the current market can make $150,000 to $200,000 annually. In the past, those figures were largely tied to salary increases. But under today’s format, Miles said he knows those employees have really earned their money.
“It (offering bonuses) allows you to maintain your overhead and reward true performance,” he added.
Prudential Americana’s system spans 19 branches covering two markets: Las Vegas and Phoenix. There are 2,000 agents in the Prudential Americana system, and the company oversees more than $2.1 billion in real estate sales annually. Currently in growth mode while eyeing other offices to purchase, the company’s choice to shift to bonuses for some positions is a result of the recession. But some experts say it was in the works long before the current downturn.
Kerry Chou, senior practice leader at WorldatWork, a nonprofit human resources field research group, said about 20 years ago most employees weren’t even eligible for incentives or bonuses. Now it’s different. Except for heavily unionized industries, about 80 percent of employees are eligible for some kind of bonus, his organization estimates.
Chou also recalled a corresponding trend WorldatWork has seen in the past two decades. Up until about six years ago, or before the start of the recession, an annual average of 3.5 to 4 percent raises was the norm. In 2009, that figure dropped to 2 percent and has slowly climbed back to 2.8 percent.
“But it really is climbing back very slowly,” he added.
Chou said his group’s surveys are indicating that bonuses are becoming a “larger piece of the pie” when it comes to an employee’s overall compensation. Twenty years ago, it was about 4 or 5 percent. Today that figure is averaging 12 percent, he added.
Whether the shift is working is tough to say, he said.
“I think, to be candid, from an employee perspective, it’s a little bit of a two-edged sword. … Employees tend to be more risk averse and just as soon have it in their base pay,” he said.
Pros and cons
The advantages to incentive pay, variable pay or what some call pay-for-performance can easily be seen for the employer on some fronts, said David Hames, an associate professor of management in University of Nevada, Las Vegas’ Lee Business School. In many cases, vacation pay and retirement contributions are tied to an employee’s base pay, and in the case of a position with a greater reliance on bonuses there are lower overall costs to the employer because of this.
Hames also said rewarding with a hefty quarterly or annual check can be a great motivator. There are plenty of companies that will spread a bonus out over the course of a year so employees can have the effects of a raise instead of a lump sum. But Hames said, it’s not the best practice.
“They (employees) can link it (the bonus) to what they did well instead of looking back at a previous time period. … (Paying the lump sum) is more timely for reinforcement,” he said.
Further, Hames said when spread out over time, employees can start to view bonuses as an entitlement.
One of the biggest obstacles to implementing any incentive program is communication. Hames said often employees aren’t very clear as to what is expected of them during reviews. So, instead, many think bonuses are based on favoritism.
“I tend to believe that if you can measure performance it can work for anybody. Clearly that becomes more difficult as jobs become more knowledge-oriented and results-deferred,” he said. An example is teachers going to a pay-for-performance model. The result of a teacher’s work isn’t seen for years down the road and can be difficult to evaluate under a pay-for-performance model.
Chou said sales positions are obvious easy targets when it comes to incentive pay, although a factory worker in a low-training model may be less of a clear cut incentive-based compensation option. He also highlights the importance of managers communicating clearly the expectations of the positions and how bonuses are awarded.
“Honestly, I’m a firm believer in having people talk about it and generating that acceptance to make it work,” Chou said.
Hames also referred to what is sometimes called the “peanut butter approach,” where management tends to spread a little bit around to everyone in a company or department, which can really detract from those who are high performers.
“My take is most people are in favor of pay for performance conceptually, but in practice it seems most complain,” he added.
Hames also said a paper titled: “On the folly of rewarding A, while hoping for B” by Steven Kerr, an updated version of which was published in 1995 in Academy of Management Executive, is a great look at what drives reward systems and how often companies may think they are rewarding for one thing, but ultimately rewarding a nonproductive or negative other behavior.
In one example, the paper highlighted an insurance company “attempting to measure and reward accuracy in paying surgical claims.” The company kept track of patient complaints and overall records for claims. But in dealing with difficult-to-read documents, making it hard to understand which surgery was performed or needed and other processing problems, new hires took on what Kerr referred to as an “informal norm: ‘When in doubt, pay it out!’”
Compounding the problems was a merit system increase across the board for all employees. A 5 percent increase was given for “outstanding work,” 4 percent for “above average” (most employees fell into this category) work and 3 percent for workers who “committed gross acts of negligence and irresponsibility for which he or she might be discharged in many other companies.”
Employees were indifferent to the tiny range of pay increases despite there being striking differences in performance. But a policy indicating that three or more absences in a six-month period would forfeit a merit increase ended up being the biggest influence on the whole situation. Ultimately, what the company received were a lot of employees who showed up with little motivation to do their jobs well.
“In this sense, the firm was hoping for performance, while rewarding attendance. What it got, of course, was attendance,” Kerr wrote.
Setting performance bars too low can be devastating in other situations. Chou gives the example of bonuses given to mortgage brokers during the real estate boom offering subprime loans to homebuyers who likely didn’t understand the fine print in a lot of the documents. Real estate agents that were mere order-takers during the boom days are also an example of not really rewarding productivity and possibly encouraging bad behavior, the expert said. Companies with effective bonus plans are constantly reviewing them, and it’s not uncommon to overhaul or make changes every couple of years, Chou said.
“There needs to be an easy and relatively objective and obvious way to differentiate employee performance” for a bonus program to really work, he said. “And you have to be careful when implementing bonus plans that there are reviews, oversight and governance.”
Although pay is the common denominator in most work situations, other factors can play a part. Vanessa Reinhart, a local human resources expert, said thinking through what really drives an employee is important.
“The newer generations in the workforce aren’t necessarily driven only by money or the promise of the corner office, which means that companies have to rethink their incentives. Incentives to them include freedom and control of their time both professionally and personally. They want to be happy at work and they want more responsibilities quickly,” she said.
Companies that do incentives well also realize their “investors are their employees,” Reinhart said. These employees may require a greater sense of ownership instead of just higher compensation.
Reinhart said shifting to incentive pay is not an easy task. Talking to employees and getting feedback from them is key to starting off on the right foot.
“I believe that companies who are not open to discussing new incentives and changing with the times will only hurt themselves in the end,” she added.