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Generation Y Expects More Customized Pay Options
With the retirement of Baby Boomers in large numbers, employers
will compete for Generation X and Y workers who will demand even
more job freedom and ¬‚exibility. Also known as Millennials, Gen
Y workers will have shorter job tenures, request work-from-home
arrangements, and seek quarterly bonuses, not yearly ones. To meet
the changing expectations of younger workers, companies will in-
creasingly customize rewards programs to the individual preferences
of workers. In 2001, only 2 percent of companies offered employees
the ability to customize the rewards program to suit their preferences.
By 2003, more than 20 percent of companies were expected to offer
such customization.
Leaders of the Towers-Perrin rewards management consulting
practice believe that ˜˜a customized rewards package will give compa-
nies a competitive edge in hiring and retention, increase the motiva-
tion (and therefore the productivity) of employees, and encourage
creativity and innovation by empowering employees.™™4


For variable pay programs to work, they ¬rst depend on clear communica-
tion of the rationale, measures, and goals to be used both during and after
the roll-out. This puts increased responsibility on senior leaders to openly
discuss how bonuses will be ¬gured and on the manager to do the measur-
ing. Second, goals need to be realistic and achievable while still providing
a reasonable stretch for the employee. Finally, goals have to change as the
business environment and priorities change.

Engagement Practice 37: Reward Employees at a High
Enough Level to Motivate Higher Performance
Studies have repeatedly shown that there is a certain level at which employ-
ees become more willing to put forth the effort to achieve higher goals.
Some experts argue that an award of 10 to 12 percent above base pay is
required, which is signi¬cantly higher than the 7.5 percent that most com-
panies pay.5
Other experts report that variable pay in most companies averages
about 10 percent of base pay for managers and sales professionals, 8 percent
for exempt workers, and 5 percent for nonexempt workers.6
There are other factors to consider in determining the size of the vari-

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able pay opportunity. Generally, variable pay awards should be higher
when:

• The bottom-line impact of the results is signi¬cant.
• The result is dif¬cult to achieve.
• The result takes longer to achieve.
• Base pay is more at risk.

Engagement Practice 38:
Use Cash Payouts for on-the-Spot Recognition
Many top employers reserve 1 to 2 percent of their base pay budget for
cash payouts or lump-sum payments to recognize top performers in the
current time frame. One of the main reasons for the popularity of cash
payouts is the increased motivational power that comes from giving awards
as quickly as possible following an achievement. Such awards also give
organizations more ¬‚exibility, in that they can be used to supplement team
awards and recognize contributors whose value is acknowledged but who
already have a high base pay, or those who may be designated to receive
minimal base pay increases.

Engagement Practice 39: Involve Employees and
Encourage Two-Way Communication When Designing
New Pay Systems
Research consistently shows that employee satisfaction goes up when em-
ployees know how their pay is determined. One study found that 74 per-
cent of employees who understood how their pay was determined reported
being satis¬ed in their jobs. On the other hand, of those who did not
understand how pay was determined, only 42 percent were satis¬ed. The
same study found that only 28 percent of employees saw a link between
their pay and their performance.7
For those in military service, pay is seldom an issue with anyone, since
all know how pay is determined and what everyone else is making. Thus,
it is not the distraction it is in corporations, where so much time and emo-
tion is wasted speculating, gossiping, and being angry about pay.
The best time, but not the only time, to start the process of creating
employee understanding is when designing a new pay system. Inviting the
input of employees is the best way to create an understandable system that
¬ts their needs and gets their buy-in. Forward-thinking companies begin

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the process by linking business objectives with the employee behavior they
want the new pay system to reinforce. After developing a preliminary de-
sign, they may survey the workforce, conducting one-on-one interviews
or focus groups to surface and clarify key issues and ideas. The initial roll-
out meetings should allow plenty of time for two-way communication,
with most-commonly-asked questions solicited and answered.
Even if a pay system has been installed without going through this
process, it is never too late to begin a campaign to communicate how pay
is determined and solicit employee feedback. One survey reported that half
of employees felt that discussing pay was taboo in their organizations.8 This
is an obstacle to engaging and retaining talent that may be an uncomfortable
one to tackle, but is worth making the extra effort to overcome. We need
to constantly keep in mind that when it comes to pay, employees are just
as interested in ˜˜how™™ as they are in ˜˜how much.™™


Engagement Practice 40: Monitor the Pay System to
Ensure Fairness, Ef¬ciency, Consistency, and Accuracy
As we have seen in the comments of employees, there are always questions
about pay systems, and there always will be. Employees should be surveyed
on a regular basis about the pay system, including the effectiveness of man-
agers in coaching them through the performance measurement and man-
agement process discussed in Chapter Six. Continued monitoring will also
be needed to assure that pay practices stay aligned with business goals and
that managers are making effective pay decisions.


The Total Rewards Approach to Scarce Talent
When talent is scarce, as was the case with IT professionals in the late
1990s, many companies respond by increasing levels of base pay and short-
term bonuses. This popular, knee-jerk response often results in payment of
generous sign-on bonuses, stay bonuses, and in making counteroffers to
people after they announce they are leaving. Treating talent as a commod-
ity may serve to attract talent, but often cannot keep it in the absence of
other ˜˜total reward™™ attractions, such as having a great boss, attractive
work-life bene¬ts, challenging work, and opportunities for career advance-
ment. Another downside to this approach is that it only serves to drive up
pay costs and accelerate bidding wars with other companies.
Some companies put more of an emphasis on retaining scarce talent (as

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opposed to just buying it) by actually measuring their managers™ success at
keeping talent in the organization. ˜˜Percentage of employees retained™™
may be factored in to determine managers™ pay. Other employers pay cash
retention awards to key talent for each year they stay with the company.
An employer may even pay stock options to employees who make referrals
of scarce-talent candidates who are hired and stay for pre-set periods.
Employers who want to become true employers of choice typically
pursue a more comprehensive strategy”they design a ˜˜total rewards™™ ap-
proach that balances pay as a key attraction equally along with a full range
of non-pay factors. In other words, employers that pursue ˜˜total rewards™™
strategies focus on delivering a compelling value proposition to prospective
and current employees based on practices like those presented in all the
chapters of this book.


More Words to the Wise About Pay
Noncash rewards are the only real way to differentiate your employ-
ment offerings. Cash is a commodity, so it cannot differentiate one
company™s employment contract from another; it is the intangibles
that distinguish. Besides, when it comes to money, someone will al-
ways pay more.
”Todd M. Manas and Michael Dennis Graham9




Nonpay Best Practices for Valuing and Recognizing
People
The good news about showing people that we value them is that there are
so many ways to do it that are absolutely free. At least they are free in the
sense that you have to spend little or no money, but you do have to invest
some time, energy, and imagination. So, the ¬rst key is to care enough to
make those kinds of investments.
Next, it is important to understand what kind of recognition people
want, that they don™t all want the same kind of recognition, and that they
don™t all want the same kind of recognition as you do. Many studies on
motivation and recognition have repeatedly found that managers thought
employees valued good pay and job security, while employees themselves
reported they most valued intangibles such as managers recognizing them,

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keeping them informed, and being interested in their professional growth.
When workers and supervisors were asked to rank a list of motivators from
one to ten in order of their importance to workers, workers rated ˜˜appreci-
ation for a job well done™™ as their top motivator. Supervisors ranked it
eighth. Employees ranked ˜˜feeling in on things™™ as number two in impor-
tance, while managers ranked it last at number ten.10
This means that managers simply need to ask their people how they
would like to be recognized, which seems so obvious that it™s puzzling that
more managers don™t do it. Of course, there are some forms of recognition
that all employees value, which brings us to our ¬rst recognition best prac-
tice:


Engagement Practice 41: Create a Culture of Informal
Recognition Founded on Sincere Appreciation
Receiving simple and sincere thanks for their contributions is the primary
form of recognition people want. In one recent study, 78 percent of em-
ployees said it was very important for them to be recognized by their man-
ager when they do good work. Another 73 percent said they expected
recognition to occur either ˜˜immediately™™ or ˜˜soon thereafter.™™11 There
are several ways of giving thanks, with face-to-face being the most pre-
ferred, but also including written, electronic, and public. Many employees
like written expressions of thanks, as they can be copied and kept. Not
all employees like public recognition, however, so it is always best to ask
employees whether they mind being singled out in front of others.
Many managers ¬nd it hard to give this simplest of recognition because
they have developed the habit of taking the contributions of their employ-
ees for granted, perhaps because their own contributions have gone unap-
preciated. It is dif¬cult to get managers to develop the new habit of giving
thanks for good work. It is probably easier to change to a culture of recog-
nition by hiring managers whom we know to be good at giving thanks to
their employees than it is to train managers to build new habits. Still, man-
agers can be taught the art of giving thanks, and many companies do in-
clude modules on how to recognize and show appreciation in their basic
supervisory training. It takes practice to build new habits, so most effective
training requires managers to actually try out new ways of expressing ap-
preciation during training sessions.
There are different ways to say thanks, such as:

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• ˜˜I™m glad you™re here.™™
• ˜˜Thank you for being who you are . . . your role here is vital and
much appreciated.™™
• ˜˜You stayed late last night to ¬nish that proposal, and I want you to
know how much that meant to me and the whole team.™™

It also helps to have a list of different ways to express appreciation, like
the following one:

• Send a gift certi¬cate for dinner for two at a local restaurant with a
note of thanks.
• Send out note cards for writing personal thanks with the words ˜˜You
Done Good™™ or ˜˜Bravo™™ printed on them.
• Give employees a way to recognize their peers, such as having them
pass around an old trophy to coworkers for doing something they
view as outstanding.
• Give employees an unexpected half day or day off.
• Take the employee to lunch.
• Give the employee a choice assignment.
• Pay for a massage or manicure.
• Send a gift basket to the home.

Whatever method you chose to use, keep in mind that recognition
works best when it is contingent on desired behavior and performance. If
you bring in donuts every Friday, it won™t take long before employees see


A New Habit in Action
˜˜I try to remember that people”good, intelligent, capable people”
may actually need day-to-day praise and thanks for the job they do. I
try to remember to get up out of my chair, turn off my computer, go
sit or stand next to them and see what they™re doing, ask about the
challenges, ¬nd out if they need additional help, offer that help if
possible, and most of all, tell them in all honesty that what they are
doing is important: to me, to the company, and to our customers.™™12
”John Ball, service training manager,
American Honda Motor Company



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it as entitlement. People actually value recognition more when they have
done something to earn it. For more ideas on how to recognize employees,
read Bob Nelson™s best-selling book, 1001 Ways to Reward Employees, a
great resource for managers who wish to start building new habits of ap-

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