Jack Stack - founder/CEO of SRC Holdings, author of The Great Game of Business and considered by many to be the father of open-book management - has this to say about discretionary profit sharing plans (from the Inc. article The Problem with Profit Sharing) (bold emphasis mine):

By profit sharing, I mean the practice of taking a percentage of a company's profits, putting it into a pool, and disbursing it to the company's employees, usually sometime after the close of the year. Understand, I'm not saying that this is a bad thing to do, just that the benefits of doing it are limited. For openers, the recipients seldom know exactly how they helped generate the profits, beyond just doing their jobs. No doubt, they enjoy getting the money. They may even be grateful for it. But they aren't likely to think or act differently because of it or to be greatly motivated by it.

What's more, if they keep getting it, they will eventually come to expect it, depend on it. If they don't know what they've done to deserve the extra money, they will begin to view it as part of their regular compensation--that is, as an entitlement program. At that point, the profit-sharing check is a bonus in name only, no matter how much the amount may vary from year to year. Meanwhile, you're getting results that are the opposite of what you're paying for. You're promoting the same attitudes you had hoped to change by moving to variable pay in the first place.

Many thanks to Mr. Stack, not only for the variable pay wisdom, but for coining a useful new term.

Has your profit sharing plan become a BINO?

Great conversation with a client yesterday who is working to shift her organization's employee bonus plan from a purely discretionary one to one which will more directly engage employees in making the organization better.  This is an enormous change, as those of you who've done it or even contemplated it know.  It goes right to the heart of the employee's relationship with the employer -- and to the core purpose of the pay program.

We talked about ways to have a conversation about this shift with top executives.  I like to do it by positioning plan approaches as either value distribution or value creation in purpose.

A value distribution plan is one where you budget or set aside the monies necessary to fund current award amounts, and then work to devise the best possible design and measures to use in distributing those funds.

A value creation plan is one which strives to create economic value by improving one or more aspects of organization performance, and then provides a mechanism by which some part of the value generated is shared back with the workers who helped make it so.

This is not just a matter of semantics.  While the two approaches can sometimes be difficult to distinguish by plan mechanics alone, they are different in significant ways.

A value distribution plan is a reward plan.  A value creation plan is a business improvement plan, and as such is wider and more ambitious in its scope, operation and impact.  It involves compensation, yes, but it goes beyond that by seeking to involve employees in improving the operations of the organization.  As such, its implementation demands greater levels of communication, information sharing, education and participation. 

Value creation is the taller order, for sure.  It is also the one more likely to generate genuine organizational performance improvement.

The trick, of course, is being clear and honest about which one you're choosing.  You can't do the first and expect to get the results of the second.  Value creation rarely happens in a big way simply by changing the way you distribute compensation dollars - and not changing how work happens.

Image: Creative Commons Photo "Growing Your Investments" by Images_of_Money

Used to be that health insurance premiums were pretty straightforward - varying only by family size and type of plan.  But that may be changing, and in ways that could have interesting implications for the role that health benefit costs play in the overall reward package.

New health care regulations, stemming from the 2010 Patient Protection and Affordable Care Act, will impose penalties on employers (with 50+ employees) that don't offer their workers affordable health coverage.  Affordable, in this case, means that the employee's share of premium for individual coverage doesn't exceed 9.5% of his/her household income.  In an effort to avoid penalties, many employers (according to Kaiser Health News) are considering varying employee premium contributions by salary level as a means of keeping lower earning workers' costs under the 9.5% threshold.

Although salary based health premium models are the exception today (Mercer reports that only 1 in 10 large employers follow such a model), this approach has been in place at some employers - like General Electric - for some time.

General Electric adopted this salary-based premium model more than 20 years ago. With employees in a wide variety of jobs on a wide pay scale, the company wanted to offer a single health plan that would appeal across the board, says Ginny Proestakes, GE's director of health benefits. "It was a recognition that ability to pay made a difference," she says.

The company divides its 140,000 U.S. employees into those paid by the hour and those on salary, then sets employee premium contributions based on seven salary ranges, with lower-wage employees paying relatively less than higher-wage employees. Hourly employees pay 24.5 percent of the premium, on average, while salaried employees pay an average of 35 percent, says Proestakes.

Others, like Pitney Bowes, have taken steps to tie not only premiums, but also other health coverage costs like deductibles and out-of-pocket maximums, to salary.

I think this has the potential to be a game changer.  Once we cross the line into charging different premiums to different employee groups, health coverage costs become a variable element in the reward package.  We may find that this opens up a whole new arena of play for not only reward management but talent strategy as well.

According to Mercer's What's Working survey among other studies, benefits play an increasingly important role in an employee's decision to join and stay with an organization - and health insurance is undeniably the cornerstone of today's benefit package.  Once we take the step into selectively varying coverage costs for different employee groups, might we also be compelled to start thinking about doing that strategically - in a way that offers competitive advantage in attracting and retaining critical talent?  Should reward philosophies, going forward, consider how we allocate health care spending not only relative to affordability but also current and future talent needs?

What about communication?  To what extent must employees' premiums become private information, revealing as they may be of an employee's income level?  Couldn't this present an interesting new twist to total reward statement design - and to reward communication overall?

And how about tying coverage costs to performance?  Could be a path lined with regulatory and other landmines, but here's betting some employers will be taking a closer look at it.

What else?

Image courtesy of webmd.com

Humor is a powerful tool.  Wielded well (particularly in a self-deprecating manner), it can help defuse tension, build rapport and boost morale.  But who would have guessed it had particular application to salary management?

Apparently a good joke can pay off.  In simulations conducted by Todd J. Thorsteinson of the University of Idaho (featured in this month's HBR magazine and in a recent HBR Daily Stat), job candidates who jokingly requested ridiculously high salaries received offers that were 9% higher than candidates who made no such jokes.  Thorsteinson's research found that introducing a high anchor - even an implausibly high one - into salary negotiations influences the ultimate outcome ... the salary offer.

What can we take away from this?

Well, I wouldn't suggest trying this in reverse.  You're not likely to score points in a salary conversation with a employee or job candidate by introducing a ridiculously low salary - no matter how brilliant your sense of comic timing and delivery. 

It should, however, reinforce for us how sensitive pay discussions can be to context and expectation setting.  And remind us of the importance of careful preparation (no winging it!!) for these conversations.

Image courtesy of regretnothing.com.au

In the middle of this busy time of year - with days when it's tough just to keep your head above water - I've been thinking about what it takes to get better at the work we do, beyond the simple act of just continuing to crank it out.

In the aftermath of my webinar on the topic last week, I've been wondering how we can do a better job of helping incentives rise above their tarnished reputation and take their rightful - but rightfully limited - place in broader efforts to improve performance.  I've been reflecting on how to be a better and more trusted advisor to the clients I have the opportunity to serve.

And then I ran into Seth Godin's recent post on creating competitive advantage, in which he chides us for thinking we create advantage simply by staying at work longer or returning emails faster than our cohorts.  Instead, he claims, we succeed because (and only because)...

... you confronted and overcame anxiety and the lizard brain better than anyone else. Perhaps because you overcame inertia and actually got significantly better at your craft, even when it was uncomfortable because you were risking failure. When you increase your discernment, maximize your awareness of the available options and then go ahead and ship work that scares others... that's when you succeed.

More time on the problem isn't the way. More guts is. When you expose yourself to the opportunities that scare you, you create something scarce, something others won't do.

So, fellow strivers-for-success:  Scared anyone today?

There's still time...

Image courtesy of sodahead.com