With the fall of the Autumn leaves the attention of most senior management personnel shifts to the upcoming changeover of the business year.   And that click of the fiscal year calendar is accompanied by the beginning of their new annual incentive plan cycle.  So while the left hand is busy processing performance assessments and award payouts as an end-of-year project the right hand is getting ready for the new cycle.

In many companies this fresh start is automatic, an administrative process not given much thought past doing what they did last year, and the year before.

Here’s a thought.  Instead of issuing another rubber stamp copy perhaps now might be a good time to review your annual management incentive plan and take the opportunity to breathe new life into it.   Because if left on autopilot too long it’s surprising how many extra names find themselves added to the incentive-eligible rolls, slowly adding what can become significant costs, and all without proper review.

Eventually senior management will notice the ballooning costs and clamp down, either by reducing eligibility in a broad-based fashion, and /or by reducing incentive payment opportunities.  Perhaps both.  You don’t want to get to this point.

The Sneak Attack On Your Payroll

Has your company made too many people eligible for the incentive program?  Take a quick look at a 3-year growth curve of positions and employees being included.   Would you consider all these deserving?  Is someone making that decision, or has title or grade designation become the deciding factor?  Meanwhile, can you explain the ROI for the growing total in management incentive pay?

Employees deemed eligible for an incentive opportunity should have a line of sight between their performance against measureable objectives and award payments.   If they don’t, what are you rewarding?  Your plan shouldn’t be a profit-sharing scheme, where eligible employees light a candle in the window and hope that the company does well.

Companies typically use the “Manager” title as an eligibility cutoff, but perhaps what you name a position should not be the sole criteria.  What about those whose responsibilities include managing people, versus individual contributors who manage a budget, or a non-staffed function, or a specific responsibility?  Sometimes they’re all called “Manager.”

Perhaps the title is a gift, regardless of roles and responsibilities.  I’m thinking of a “First Impressions Manager.”

Using a grade designation can have its own problems; is everyone in a grade eligible, and if not how do you differentiate between positions, when the company has already deemed each to be similarly valued?  Slippery slope here.

If you’re suffering from title inflation and have granted puffed-up titles for certain employees, are these Managers actually managing at all, are they only supervising, or are they really only technical experts with a gratuitous title?

Have a care that your pay-for-performance management incentive program doesn’t evolve into an entitlement program.

Where’s My Check, Please?

Something else to look at: is the incentive award at risk?  How many of your eligible employees do not receive an award each cycle?  If practically everyone receives an award, perhaps instead of an incentive plan what you have is a delayed reward program; managers put in their twelve months and expect a bonus payment.

Does your incentive program require behavior above and beyond, with individual objectives linked to broader company goals?  Or are your objectives only finalized at the end of the cycle, simply to comply with some Human Resource assessment form that must be completed?

At the lower limits of incentive eligibility some companies start with an incentive target of 5%.  However that low a reward opportunity is not a carrot for anyone.  For that small amount of reward you won’t change anyone’s behavior, never mind maintain their attention for 12 months, so why bother?   If behavior isn’t going to change, if you’ll receive the same performance as before, but now for an additional  5%+ cost increase, what is your return on your investment?  In my view this money is often wasted.

Now is the time that you should have a look-see at the effectiveness of your annual management incentive plan – and to suggest meaningful improvements.   Because once the current payment processing cycle is complete the pressure will be on to roll-out the 2012 program.  And at that point the die will be cast until the following year.

It will be too late.

The one constant theme that Human Resource professionals emphasize when it come to international assignments (expatriate employees) is that the experience costs a great deal of money.  Most of you reading this will simply nod your head at such a cautionary warning, yet not fully understand the why of it.  Perhaps the topic doesn’t concern you, for now, but as managers who may become involved in such adventures down the road, you need to know the cause if you ever hope to manage this expensive proposition.

While companies continue to try new strategies for employing talent overseas (shorter assignments, use of third country nationals, extended business trips, shared responsibilities, etc.) two central premises remain; 1) companies will continue sending employees on overseas assignments, and 2) the cost of those assignments continues to be a big pill to swallow.

Fueling Persistent Cost

If you accept the premise that an employee sent overseas should be kept “whole” (expense-wise) with their home country situation (maintaining their income and expense exposure as if they had never left the U.S.), then certain incurred liabilities naturally fall to the company.

This premise is an important point, and a foundation for future planning.   The  assumption is that the employee should not economically suffer, but neither should they receive a windfall.  To the employee the experience should be cost-neutral.  However the same cannot be said for the organization.  They often have to shoulder a sizeable burden.

First of all, the U.S. is one of the few countries in the world where – no matter where you work – you continue to incur a tax liability on your earnings – while also being liable for earned income taxes in the host country as well.  Uncle Sam demands his share, and will follow you around the globe.

The difference is though, that any additional tax liability would ultimately be paid by the company.

And the second dark cloud over expats?  When establishing the terms and conditions that will govern an international assignment, remember that whatever the company provides the employee beyond what they would have received had they remained in the US, is considered taxable income to the employee.

For example, such taxable items would include, but not be limited to:

• Home leave transportation:  A personal expense (vs. a business trip) that includes air fare, taxis, meals enroute, etc.  Terms and conditions usually allow for one trip per calendar year – though that can be negotiable.

• Cost of living allowances:  That monthly allowance you receive to make up the difference in living costs . . . it’s taxable.

• Housing allowances: If you continue to maintain a U.S. residence (usually advised) the company will provide accommodations, but the cost of that residence is taxable to you.

• Utility payments: From electric to water to phone to garbage collection and more, if the company pays for it then it’s a taxable item.

• Supplementary benefits (host country): Additional local coverage (i.e., National Health Service) to ensure immediacy of care wherever you might find yourself overseas.

And don’t forget the family.  Those expenses paid out to provide dependents with programs or services are also deemed as taxable income of the employee.  For example:

• Language lessons: English may be the international language of business, but not so much in the supermarket.

• Orientation: Teaching the expat and family members about the local culture, how to get along, how to fit in and what to expect, while always useful, is especially important when the local language is not English.

• American-style schooling:  Usually a point of insistence for expats with school age children, the concern here is to ensure that the children are educated in a fashion that would be recognized (credit received) by school authorities back home.

You Don’t Know What You Don’t Know

To compound the internal challenges, too many managers know too little about the true costs of expat assignments.   This ignorance leads to misconceptions, misleading comments to employees and in some cases a too casual consideration of costs.

• “They speak English, so just get on the plane.”  It’s a common refrain, as if we all have the same legal system, health care, work attitudes, etc., and any minor differences could be solved by a short conversation.

• “The money’s been budgeted.”  A classic excuse, as if that in any way justifies an expense.

• “Let’s go around company policy to save money. ”  Short term thinking (and shortcuts) that more often results in a failed assignment.  And how expensive is that going to be?

Having spent five years overseas on an expatriate assignment, here are a few “takeaways” from that experience.

• My first W-2:  The amount was a shock, insofar as the tax preparers lumped together as taxable income everything that the company had provided for me.  That was my first realization of exactly how expensive an expat assignment was to the company.  This is where the 2x and 3x annual salary cost guesstimates were born.

• Local confusion:  My UK Controller was unable to determine the expat costs for his business unit.  Lines of communication between the host country and the corporate-sponsored tax preparers broke down often.  That’s when the finger pointing starts.

• Lost information:  After extensive investigation it seemed that data regarding assignment costs and local liabilities were buried among several budget line items.   Highlighted cost metrics were absent, and no one was watching the store.

• Taxation:  There are many confusing aspects of foreign service credits and reciprocity tax treaties.  Not my area of expertise, but even several years after returning from overseas my tax advisor was still dealing with foreign tax credits.  The back and forth of determining corporate tax liabilities, or avoiding them, is a science unto itself.

So yes, international assignments for your employees can be a very expensive proposition.  But those expenses can be monitored; they can be controlled.

Remember this formula for getting into financial trouble: if you take unknown assignment costs and add the lack of stated assignment ROIs, plus throw in a bit of insensitivity for the realities that expats (and their families) face, that recipe will blow up in your face every time.

That you can take to the bank – for withdrawal, not deposit.

“Why doesn’t my Company consider inflation when determining my pay increase?”

Have you heard this question before?  What this employee is actually asking is: “Shouldn’t my annual pay increase percentage at least match increases in the cost of living?  And as management is always talking about the company’s ”pay-for-performance” philosophy, shouldn’t my increase be higher than that, given that I’m a good worker?”

___________________________________________

Have you ever been in a situation where an employee complains to you that their pay increase is no better than the inflation rate?  Or worse, that it’s lower?  As a further aggravation they might ask you how the company can say there’s a pay for performance policy when all they do is grant increases that no more than match the inflation rate?  Isn’t that like treading water, just staying in place without moving forward?  Is that fair?  Where is the reward for good performance?  Shouldn’t everybody receive at least the inflation rate?

The truth of the matter is that it’s common practice for companies to only give a side look at inflation (cost of living) when determining their annual pay increase budget.  They do make note of it as a reference point, and to compare against a final decision, but what they’re actually focused on are two prime considerations: 1) competitive market survey data that tells them what everyone else is paying for like jobs in their area; and 2) the expense (annual grant and fixed costs) to maintain competitiveness.

Competition and affordability

Companies routinely promise to pay competitively, and as such will analyze what they consider the marketplace to learn what other companies are paying for jobs (base salaries) and standards for increases.  Their so-called “promise” does not include the granting of inflation-proof increases, or even to reflect the cost of living in their analysis.  Their intent is to pay employees a competitive wage – including increases – and competitive means what others are doing, not necessarily what’s happening in the world of inflation.

If budget is an issue for any given year, it’s likely that maintaining competitiveness will have to suffer.  Consider the past two years of layoffs, wage freezes and reduced increases as recession gripped the country.

Is that fair?  Well, let’s imagine that your name is the one on the company door.  How would you plan to spend your money?  Likely you would seek to pay the least that you can, while still attracting, motivating and retaining qualified talent for your business.  That doesn’t mean you would lower pay levels, but as the owner you would want to allocate your substantial payroll expense as effectively and efficiently as possible to staff your business with qualified and engaged employees.  It wouldn’t make good business sense to spend more than you need to, for any overhead, be it facilities, raw materials or employee compensation.

Consider the market for talent as similar to making a purchase at a retail store.  How frequently would you pay more than the advertised price if your extra money purchased nothing more than the same item?  Chances are you wouldn’t often take that approach.

The view from the other side of the desk

Now let’s consider the employee perspective.  What factors weigh heavily on their minds when considering the potential for pay increases?

Most employees expect management considerations to reflect the inflation rate (cost of living), the average increase for their industry / geography (typically as pointed out by newspaper “factoids”), and – if the company had a good year – a share of the financial success.  You can be sure that the figure employees have in mind is the highest number calculated from the three possibilities just mentioned.  And, lest you forget, that figure is for the average performer; better employees should receive more.

Now this view is not necessarily wrong, from their perspective, and one certainly can’t blame employees for a viewpoint that puts their interests first.  However companies typically maintain a “this is a business first” strategy, that seeks to minimize controllable expenses without losing sight of their competitive pay target.  The goal of paying competitive wages, a concept hard to argue against, is not likely to be overturned by changes to the cost of living, newspaper snippets or a feel good moment following company success.

Another factor to consider is that employees are comfortable with changing their reasoning from year to year, while companies are stuck on the same track.  So when inflation goes up or down, or the company has had a good (or not so good) year, or the media is touting higher or lower industry averages, employee expectations may likely swing from one argument to another, rationalizing a consistently more aggressive pay increase strategy.

Now a little tongue-in-cheek: turnabout is not considered fair play.  Employees would not want the size of their increases to fall with their chosen economic indicator.  It should only rise.  They would object to smaller increases if the company hit a rough patch, or if inflation nosed downward.  You shouldn’t be surprised that they want their cake and want to eat it too.

However management strategies tend to be consistent over time, continually focusing on the marketplace and its affordability to maintain their posture of providing competitive pay and pay opportunities.

So how do you avoid a clash of employee expectations with management strategy?  If companies would communicate pay philosophy or strategies they would be able to allay the employee guesses and assumptions that always accompany the grapevine and rumor mill.  Employees would know in advance what to expect.  They might not like what they hear, but the employer / employee relationship would be improved by some straight talk about how the company determines pay increases.

How many success stories have you heard about or read about that started with the phrase, “We took the easy road?”

It doesn’t work that way, does it?

Yet again and again we see examples of companies trying to push that “Easy” button, often in the face of business logic.  That’s especially true when dealing with the diversity of an international workforce.

Most companies with global operations tend to pay their internationally-based top level executives in accordance with some form of global compensation structure.  They do this to level the playing field for those with multiple country responsibilities, or for those whose assignments take them from country to country.

However, for the rest of their international population it’s not as straightforward.

The Challenge

Companies with local national employees (hourly, professional, management) face a challenge and a risk when it comes to the decision as to how to reward performance  in each of their operating countries.  Do they “do as the Romans do” and follow local practice, or do they seek to create a standardized global framework in an effort to somehow equalize pay practices?

For those charged with developing strategies to effectively reward employees across the globe, the headache is in dealing with a diverse collection of economies, cultures and competitive pressures – some of which may be moving in different directions.   This strategic desire to recognize country-specific differences in pay methodology often comes up hard against the interests of corporate staff administrators, those who traditionally look for the easy way, the simple way, and the one-size-fits all way of dealing with far-flung employee groups.  For many companies and international compensation practitioners it is actually the administrators whose resistance you have to overcome.

The headquarters staff will ask, what difference does it make?  Unless otherwise required by legislative action or representation, why can’t we be fair to all our employees in the same way?  Here are a few metrics to illustrate what they wish to standardize:

• The value of jobs (price) irrespective of locale (same pay, just different currencies)

• The pay mix of base salary and incentives (80/20, 70/30, 60/40, etc.)

• Universal date pay increases (everyone’s performance is reviewed on the same date)

• Average pay increase percentages, regardless of local conditions

• Pay-for-performance vs. general adjustment increases (whose culture is it, anyway?)

Why Not?

That’s the easy way.  But why doesn’t one size fit all?  Why can’t you treat all employees in the same fashion – because they all belong to the same “XYZ Corporation,” right?  I would suggest that you consider the following before taking out that cookie cutter.

• Economy:  When you’re dealing with country-specific inflation rates that range from flat to 20%+, do you really want to offer the same percentage salary increases?  What if one country is suffering through a recession and sluggish recovery (US), while another remains relatively unscathed (Australia)?

• Culture: in some areas of the world job and income security needs command paramount interest over pay-at-risk, so in the pay mix the base salary dominates the variable portion.  For example, while China has a very aggressive sales compensation environment, in India there is more interest in base salary and their CTC (cost-to-company) package than variable pay-at-risk compensation.

• Competition: companies react to the cost of labor, not so much the cost of living.  If the local market rewards in a certain fashion (pay mix, commission vs. bonus, quarterly vs. annual rewards, etc.), companies who provide a non common practice approach risk lower employee engagement as well as a talent drain.

• Representation: National unions often dictate pay actions that could reverberate up the hierarchy as companies strive to maintain equitable treatment with their other employees.  Works Councils will have their impact as well.  It’s not unusual for management employees to receive increases based on what the national contract dictated for the rank-and-file.

On the other hand, varying your practices according to country-specific conditions could cause a degree of consternation with the back office staff and their computerized systems.  These are folks who like things neat and pretty.  In their defense though, senior management often asks for standardized metrics that may be difficult develop and compare:

• Tabulating global statistics when definitions or methods vary

• Identifying global trends based on diverse conditions

• Balancing the impact of cross border movement

If you force international operating units to convert their practices to an uncommon format and methodology, the result could be more than just confusion and local administrative difficulties.  It could also mean the greater likelihood of over payments in some quarters while paying less in others – all for the sake of sameness and common report generation. This would offer up a damaging combination of employee inequities and additional expenses – both of which are not helpful to the company’s bottom line.

So it would be worthwhile to remember:  ease of administration is rarely an effective rationale for making good business decisions.

You just received an above average performance rating from your manager, which naturally put a big grin on your face.  Which was subsequently wiped away when you heard that for your annual salary adjustment you would receive what amounted to one percent (1%) more of a salary increase than “Joe Average” down the hall.  Tight budget this year, you’re told.

You know Joe, or his type, right?  He’s the disengaged clock watcher whose most notable accomplishment is keeping his chair warm.  Doesn’t do enough to either get fired or stand above the crowd.  However he’s the standard, and so receives an “average” award.

One percent more, they say?  For delivering what your boss described as 110% effort for the entire performance period.  Not worth it, you say?  Some studies have suggested that, if the differential between performance levels isn’t at least 2%, then you’d be better off with a general adjustment.

How does this happen?

When assessing the dynamics of employees and their work ethic, it is generally agreed that performance rewarded is often performance that is repeated.  Like the Pavlov experiments of so long ago, we tend to repeat that activity which previously gave us pleasure or reward.  We want more of it.  However, if the performer doesn’t feel rewarded, and is certainly not pleased by the company action, does the company gain or lose when that desirable performance is not repeated?

Perhaps your performance reward system is not as effective as you would like.

So the question becomes, how much of a performance differential between the best and just OK is enough to keep your better performers motivated and feeling appreciated?  A good guess is that it’s not 1%.

As a manager, can you balance the need to reward your better performers against the reality of tight budgets?  If you want to retain the high performers, you’d better find a way.  So then, what if you started by figuring out how much reward to provide?  Then whatever is left can be carved out among lesser performers.  That will protect your “stars.”

Ahh, but that won’t make you popular among the masses, will it?  And for many managers being liked is a key element of self-worth.  But how high up the priority list should popularity as a manager be marked?  Will you be assessed for popularity when your performance review is due?  I don’t think so.  Likely it won’t be in the top three of what senior leadership is expecting from you.

Your job description probably doesn’t even list this characteristic, and it is certainly not a factor in job evaluation.  So perhaps there are other criteria for a successful manager that should receive more attention.

If you’re concerned about differentials another consideration is the number of ratings you have in your performance appraisal system.  For example, with a seven scale system the need to provide percentages for at least five makes the division of reward opportunity a bit tight.  And if you try to maintain a two percentage point differential between performance levels, the numbers might become higher than what’s deemed affordable.

I don’t believe in reward for tenure, but I do believe in reward for outstanding job performance.  If the merit spend budget doesn’t have enough monies to recognize and reward everybody, each in turn for their contribution, then I’d suggest that you take care of your better performers first.

The holidays are over.  The melody of jingle bells is slowly fading into the background as employees trudge back to work to face the long winter ahead.  This is also when companies experience their annual January headache – the process of setting new performance objectives for their management incentive plan.

A new year has begun.

Headache?  Most managers would rather focus on closing down the old year and maximizing their bonus calculations.  But at the same time HR starts to compel that attention be paid to managing the new cycle.  Something’s got to give, and right now it’s usually effective planning.

Which presents a risk.  Because with a substantial payroll expense allocated to management bonuses it is critically important for plan designers and implementers to get this first step right.  Everything that follows after is cause and effect.  Poor planning up front usually means that bonus dollars spent later may reward effort neither anticipated or even necessary.  The results you didn’t plan for, or didn’t prioritize, won’t be delivered.

But somehow the bonus pool of dollars will be spent anyway.  And where does it go?  Perhaps not where and why you had intended – but instead rewarding performance that may not be in sync with broader company objectives.

Let’s face it, though – managers enjoy setting objective, quantifiable and measurable goals as much as they enjoy writing job descriptions.  But they don’t, do they?  So as an HR Leader, generalist or specialist, you might soon find yourself acting the dentist – pulling teeth, struggling with recalcitrant managers to get proper employee objectives established by the end of the first quarter.

It can be frustrating.

While you’re grappling with these reluctant managers, trying to help them get their act together, you should remember a few key guidelines regarding the effective use of rewards to motivate achievement of company goals.

• Focus employee attention on company / department objectives via prioritization.  Set relative weightings to reflect their individual importance to each other (this is most important, this is secondary, etc.).  It would be a rare occurrance when all goals are of equal importance.

• As most employees have multiple objectives, any one target weighted 10% or less of targeted incentive compensation will be ignored, if possible.  Why?  Because you’re announcing that this is not an important objective.  And as incentives are all about behavior change, employees may not even cross the street for 10%.  You’ll need a bigger carrot.

• Token objectives only receive attention when expected achievement is considered so easy that success would have occurred even without an incentive.  That’s wasting money, right?  Don’t go there.

• On the other hand, have a care before you assign more than 50% to any one objective.  Employees might figure that exceeding expectations for just one key goal will generate sufficient reward for their efforts.  Then they may not focus on other important business goals.

• Limit objectives to no more more four, else you risk diluting effort and causing an “everything is important, so nothing receives focus” performance year.  The business receives more value for rewarding results vs. activity – so keep the emphasis here.

Human nature suggests that the natural tendency for most employees is to concentrate on the goal with the highest reward and least resistance first.  They may even decide to ignore other objectives – no matter the value to the company – if in their mind the reward for the prime objective makes up for lost opportunities elsewhere.

This is especially true for sales employees, who often ignore small payout objectives in favor of focusing on the bigger ticket reward goals.  So you need to put your money and weightings behind the goals that have the greatest impact on the business.

Bottom line is that you want to avoid disconnected effort.  Your key people should not be keying off on objectives that are less important than those you want them focused on.

Don’t let them head left when you want them to turn right.  Your money might take the wrong turn as well.

The other day I was trimming the landscape of several plants that had outgrown their space (in Florida everything grows, all year long) when my wife asked me, why are you cutting down that plant?  It looks nice and the blossoms have a sweet scent.  Can’t we keep it?

It was a ginger plant, and true enough it was pretty and did smell nice – but it had also over grown the area where we had planted it.  Slowly spreading outward it was crowding other plants and starting to transform our neatly designed landscape into an overgrown jungle.   The plant was no longer providing the value, the benefits we had expected when first planted.  It was time to cut back or cut out.

Which got me thinking; how hard is it for managers to tell someone “it’s time to go”?  Sometimes employees stay too long at a particular job, year after year racking up higher pay levels while not really delivering more performance than they did the previous year.  They end up performing the same activities, over and over again – for more and more compensation.

Reliable workers?  Good workers?  Yes.  Expensive?  Yes to that, too.  Is their value to you increasing?  Not really.

After awhile you will start to realize, that while reliable Bob is doing a fine job, someone else can do that same job for a lot less money.  So what do you do?

Let it slide?

Think about it.  If a loaf of bread is commonly priced at $2.00, what would make you comfortable with paying $3.00?  Or even $2.50?  For the same product, the same taste, the same benefit?  Would your extra money be well spent?  Or would you start searching the store shelves for another $2.00 loaf?

Creating the problem

How did you ever get into this fix, having a few satisfactory but overpriced employees on your staff?  Why do they seem to be stuck in place?

Often times the answer is simple and straightforward; because they are comfortable, to the point where they see no reason to rock their boat.

• They like it here; they like the job, their co-workers, the work environment.  They even like the commute.

• They know everything about the job(s), as well as the company, and so the stress level is not a concern and they feel able to focus less effort to do the job

• They are comfortable doing what they do, and have little motivation to do more.  They are not driven to break out of their mold.  They don’t see themselves as being in a rut.

• The pay is good, or at least ok, so why leave and start fresh somewhere else?  Where they would have to prove themselves all over again?  Job search is a real bother, stressful too, and should be avoided until absolutely necessary.

So now we see why some employees stick around, content to remain on that treadmill.  But why do their managers allow this problem to develop in the first place?

It’s a management issue

Why don’t managers cut off these employees?  Or promote them up and out?  Because many times taking such actions is not perceived as being in the best interest of the manager.

• The cost and headache of replacement; the time, disruption, the added stress

• More work would be created for the manager, filling in for planned projects; their time lines would be negatively impacted

• The perceived damage to the manager’s reputation (employees have quit you), and leadership is watching

What’s a manager to do then?  No one would tell you that corrective action would be easy.  Moving someone along when there isn’t a performance problem is a tough decision to make and to implement.  Though sometimes it’s the right thing to do, both for the company and the employee.

• Encourage employees to learn and grow within the company – preparing themselves for better positions

• Be open to losing the employee to another department that is better able to utilize their capabilities.  Holding on too long doesn’t help either party.

• Expect and demand continued and improved contributions from all your employees

• Plan to move them up or move them out as part of managing an evolving staff

Ask yourself, where is the balance of contribution provided (performance) versus value paid out (compensation)?  When the balance tips too far in either direction, it’s time for action.  When an employee recognizes that there is more contribution on their part than value received, they look for the exit.  However, when the employer sees that there is more value provided than growth of performance contribution, it’s time to move such employees along.

I’m just saying, the day will come – for some.  When it does, will you recognize that it’s time to pull the plug?

How many success stories start with the phrase, “I took the easy road”?

Most companies with global operations tend to pay their internationally-based top level executives in accordance with some form of global compensation structure – in order to level the playing field for those with multiple country responsibilities.

However, for the rest of their international population it’s not as straightforward.

The Challenge

Companies with local national employees face a challenge and a risk when it comes to their decision as to how to reward (pay) in each of their operating countries.    Do they “do as the Romans do” and follow local practice, or do they seek to create a standardized global framework in an effort to standardize pay practices?

For those developing strategies to effectively pay employees across the globe, the headache is in dealing with a diverse collection of economies, cultures and competitive pressures – some of which may be moving in different directions.  However, the strategy of recognizing country-specific differences in pay methodology often comes up hard against the interests of corporate staff administrators, those who traditionally look for the easy way, the simple way, the one-size-fits all way of dealing with far-flung employee groups.  For many international compensation practitioners it is actually the administrators whom you have to overcome.

The headquarters staff will ask, what difference does it make?  Unless otherwise required by legislative action or representation, why can’t we be fair to all our employees in the same way?  The metrics below illustrate what they would wish to standardize:

• Value (price) jobs irrespective of locale
• The pay mix of base salary and incentives
• Universal date pay increases
• Average pay increase percentages
• Pay-for-performance vs. general adjustment increases

Why Not?

Why doesn’t one size fit all?  Why can’t you treat all employees in the same fashion – because they all belong to the same company, right?  Consider the following before using that cookie cutter.

• Economy:  When you’re dealing with country-specific inflation rates that range from flat to 20%+, do you really want to offer the same percentage salary increase?  What if one country is in the grip of recession (US), while another remains relatively unscathed (Australia)?

• Culture: in some areas of the world job and income security needs command paramount interest over pay-at-risk, so in the pay mix the base salary dominates the variable portion.  For example, while China has a very aggressive sales compensation environment, in India there is more interest in base salary and their CTC (cost-to-company) package than variable compensation.

• Competition: companies react to the cost of labor vs. the cost of living.  If the market they are in rewards in a certain fashion (pay mix, commission vs. bonus, quarterly vs. annual rewards, etc.), companies who provide a different approach risk lower employee engagement as well as a talent drain.

• Representation: National unions often dictate pay actions that could reverberate up the hierarchy as companies strive to maintain equitable treatment with their other employees.  Works Councils will have their impact as well.

On the other hand, varying your practices according to country-specific conditions could cause a degree of consternation with the back office staff and their computerized systems.  These are folks who like things neat and pretty.  In their defense though, senior management often asks for standardized metrics that may be difficult develop and compare:

• Tabulating global statistics when definitions or methods vary

• Identifying global trends based on diverse conditions

• Balancing the impact of cross border movement

If you force international operating units to convert their practices to an common format and methodology, the result could be more than just confusion and local administrative difficulties.  It could also mean the greater likelihood of over payments in some quarters while paying less in others – all for the sake of sameness and common report generation. This would offer up a combination of hurting employees while also hurting the business.

Remember that ease of administration is rarely an effective rationale for making good business decisions.

For many global companies with a direct sales force the design and administration of their compensation program is in a constant state of flux.  It always seems to need a further bit of tweaking, as dissatisfaction follows in the wake of any plan design.  Why?  Every uncomfortable participant who’s on the receiving end, from senior management to the employee pounding the street, feels that they know what’s wrong.  The verdict is that not enough money is offered for successful performance.

Of course.

Somehow though, that knee-jerk reaction seems the easy criticism.  You expected that too, right?  The issue though, goes deeper.  You can have in place the most well-designed incentive scheme for your industry (on paper), but if your quota setting process doesn’t work, you’re in trouble.   Because any corresponding reward design will miss the mark by a margin; poor quotas reflect ghosts, not reality.

Improperly designed achievement targets (recognized revenue, products sold, units shipped, etc.) present objectives that are viewed as unreasonable for one reason or another.   Stretch goals can be a useful strategy, but not when the numbers are considered as out of reach.  That perception guarantees that those involved will not try as hard as they could, because they feel the effort will not be rewarded.

This cynical “can’t be done” criticism is a short step away from employee disengagement (failing employees will start to question their skills – and morale will sink) and the inevitable departure of key sales talent for greener pastures.

Why does this happen?

Everyone complains about money, so it always seems easier to moan and snipe than to implement real change by improving the way many companies establish their sales quotas.  How do they get it wrong?

• The “last year plus X%” strategy: a simplistic approach that hits everyone with the same percentage increase in quota.  This approach rewards average performers and penalizes home run hitters (stretch performance becomes expected and a minimum standard for the future).

• Total revenue target divided by the number of sales representatives: another easy to calculate process, where you simply divide the revenue “pie” into equal portions.  Everyone is treated the same, regardless of personal or territorial distinctions.  But the selling process does differ whether you’re in India, Argentina, France or the US.

• Using a top down “here’s what we need you to do” vs. bottom up “here’s what this particular territory can generate” approach to generating targeted goals.  The management decision on gross revenue is based on what the financial analysts say is needed to protect the stock price (Earnings Per Share – EPS).  Those needs (targets) are filtered down to the territories, usually with a lame explanation of where they came from.

Territory or geographic distinctions become blurred, to the detriment of motivating the sales force.

When your quota setting process relates more to an arithmetic exercise or an illusionary “concept” figure, even generous incentive schemes won’t attract or retain talent, because seasoned sales professionals know the odds for success have been stacked against them.

Unrealistic targets can destroy morale, initiative and employee engagement like rain at a picnic – and how do you recoup from a discouraged workforce? Trust is hard to build, but easily broken.

When a workforce feels that they cannot be successful they tend to give up the effort.  They may even give you up as their employer.

Snap your fingers and fix this.

Why is changing the quota setting process so difficult that management is reluctant to even try?

• A salesperson’s natural tendency to complain breeds skepticism.  Sales people cry “wolf” a great deal, always seeking to better their chances to do well.  The easier the target the happier they are.

• In order to protect the company’s stock price from unwanted fluctuations financial analysts often require the company to commit to achieving certain goals.  When those targets are forced on sales employees, the usefulness of even a highly accurate targeting process becomes moot.

• Some managers like to “pad” targets to ensure that lower performers don’t drag down overall success.  This interference by sales management blurs the line between objective and subjective targeting.

• Acknowledging national distinctions in the selling process may be difficult for some managers to explain.  It’s easier to treat everyone the same, no matter the circumstances.

While an overhaul of your company’s quota setting process is likely to be a hard sell, ask yourself a series of questions to gauge whether your current arrangement passes the smell test.

• Are goals based solely on sales history (last year, average of last three, etc.) or are economic realities of a specific territory considered?

• Is a territory given a target without consideration of who is covering it (junior or senior rep)?

• Is sales management allowed to set goals in a way that the sum of all territories would exceed the total goal? This attempt to “make up” for individual failures by stretching everyone is resented by sales employees.

• How many representatives achieve target level performance?  The lower the number the greater the credibility gap with “targeted” incentives.

Goals for your sales force should be based on a combination of sales history, potential, economic conditions, channel shifts and any other factors that would affect the sales effort.  They shouldn’t be an arithmetic exercise that doesn’t take into account territorial realities, national or cultural distinctions and incumbent capabilities.

Your company is seeking to employ a Financial Accounting Manager, and the leading candidate is currently “in transition”.  Human Resources has pegged the market value of the job at $ 75,000 (midpoint), but it’s known that the preferred candidate (Bob) will accept $ 65,000. A seasoned and experienced professional, Bob was previously paid $76,000 by his last employer, but was caught up in a restructuring staff reduction.  He’s been out of work for almost a year and is getting desperate.  Relocation is not an option, and he’s worried about feeding his family and paying the mortgage.

When the decision point arrives, other less qualified candidates are already making $ 70,000 and asking for $75,000.  Some hiring managers would look at this situation as a no-brainer.  “Let’s hire our “A” candidate and save $10,000 to $15,000” would be the smug decision.

That wasn’t hard, was it?   An exceptional candidate has been gained at a low ball price.  The manager deserves a pat on the back for saving the company money, right?  But, wait a minute.   Perhaps it should be a boot in the butt instead.  You make the call.

A savvy professional like Bob will have a sense of the competitive market, so he’ll be aware of having taken a significant pay cut to land this job.  So how excited will he be with the offer?  Today, he’ll be delighted and will celebrate getting a job and finally having money coming in again.  Tomorrow, not so much.

How long before resentment grows that he was taken advantage of – gotten on the cheap?  What will happen to his enthusiasm, engagement, morale?  What will he come to think of the company, never mind the hiring manager?

What is the likely future for Bob?

It is always safe to presume that how an employee is treated will become known; otherwise you’ll be stuffing skeletons into a closet – and you know how that trick never ends well.  So when Bob confirms the low ball treatment, what reaction can you expect?

• Angered by a sense of being taken advantage of he could continue with his job search – looking for a better opportunity – while still working for you

• His job performance will suffer, dropping from 110% to automatic pilot somewhere south of Satisfactory.  He’ll be going through the motions – not exactly the dynamo you thought you had hired.

• Bob’s attitude will turn negative and he’ll become another disengaged employee – critical of the company and management, doing no more than he must in order to get by

• And yes, he’ll ultimately quit, but on his terms and timing.  His anger will have kept simmering and he’ll likely feel little concern as to how his departure affects the organization.

What you have now is a bad hire, in retrospect; that situation is unnecessary and easily avoidable if you treat candidates fairly.  Look at it from the candidate’s perspective; when your back is to the wall and you feel your “rescuer” is taking advantage, that feeling causes a pit-of-the-stomach resentment that lingers and festers.  And it costs.

Let’s tally up the cost

The manager claimed a cost savings by the hiring decision.  But when you factor in the longer term ramifications of that decision, how do the initial savings hold up?

• The hiring decision saved $10,000 to $15,000 per annum by consciously underpaying the candidate

• What is the discounted value of a disengaged employee who doesn’t perform as expected or desired?

• What is the value of time lost when Bob quits and the job is vacant while a replacement is sought?

• What is the value of hiring a potentially more expensive replacement (plus agency costs) and perhaps relocation?

• What is the value of productive time lost while a new employee gets up to speed?

• Finally, what is the subjective value of a discontented employee in your midst, possibly poisoning other employee attitudes?

So the next time a hiring manager proudly announces how to save a bunch of money on a candidate who’s in transition, take a moment to think it through.  You may want to consider a boot in the butt instead.