Four innovative approaches to rewards and incentives
Creative, alternative perspectives on pay and rewards are emerging in Asia Pacific organizations. Employers are hearing their employees and recognizing the need to redefine rewards mechanisms – especially those that may have worked very well for past generations of workers, but are today coming across as ‘tone deaf ’.
We have identified four innovative rewards practices below that are beginning to experience success in select organizations across Asia Pacific today. Some of these ideas may be vanguard and not applicable or appropriate for every organization nor every situation. They are intended to serve as thought-prompters as companies start thinking about evolving their reward programs.
Choose your own pay-mix. Con- ventional practices around executive compensation have long assumed a typical rule of thumb of one-third fixed pay, one-third short-term incentives (STI) and one-third long-term incentives (LTI). However, when presented with the possibility to choose for themselves, most executives would opt for a higher proportion of guaranteed base pay, instead of a highly-leveraged incentive outcome.
Executives who are invested in the longterm success of the company, will likely opt for a higher LTI proportion (with higher upside opportunity) – thus signaling their long-term commitment to the Board and shareholders.
Fundamentally, this policy invites employers to re-examine the balance between executives’ motivation vis-à-vis performance – in the aim of finding tailored outcomes for each executive.
Pay for productivity. As traditional compensation benchmarking often considers only the factor of market pay, employers might easily conclude that workers who are receiving below-market pay should receive a pay increase.
On the other hand, the alternate perspective of paying for productivity considers total compensation as a percentage of profit, thereby factoring in the value that employees bring into the company’s bottom-line.
Total compensation funding framework.
Most companies would set aside a bonus pool as a percentage of profits. An alternate method is to instead set a total compensation pool as a percentage of profits. The primary reason for doing so is, to provide more autonomy to business leaders over their salary budget distribution.
Employers are encouraged to invest more in hiring new people, or making better decisions with their talent recruitment, with the intent of generating more profit. It follows therefore that, if new people do not deliver profits, then the bonus pool shrinks. If employers can manage to deliver profits without hiring more people, then they could potentially benefit from a much higher bonus pool.
Bonus banking mechanism. Several progressive companies use this method to reduce the volatility of their bonus pay-out, thereby also reducing ‘feast or famine’ bonus outcomes. This essentially smooths out bonus pay-out instability – such that companies don’t pay zero bonuses in years of poor performance and very large bonuses in good years.
HOW DOES THIS WORK?
• Employees receive a bonus declared
amount each year based on the prior year’s performance, and the declared amount goes into a ‘notional bank account’.
• Executives are paid out (i.e. take-home
pay) only one-third of this ‘notional’ amount, while the rest is ‘rolled back’ to the ‘bank’.
• Through this rolling bank mechanism,
employees will always be able to take home an amount regardless if the year was good or bad. This makes it a strong retention tool and smoothens pay-out volatility.
Innovation is key as we navigate the future of work. Organizations that are willing to break from the norm and explore new, ground-breaking ideas, may just discover long-term solutions that will take their business to the next level.
SHAI GANU is the Managing Director for Talent & Rewards, South Asia and Rewards Leader for Asia Pacific of Willis Towers Watson, a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has more than 40,000 employees in over 140 countries. For more information, please write to Leah Denoga at leah.denoga@willistowerswatson.com, call 8775148 or visit www.willistowerswatson.com.
WILLIS TOWERS WATSON SHAI GANU