Guess which company was the world’s most innovative company
in 2011? Yes, it is Apple, as determined by BusinessWeek and the Boston
Consulting Group. Regardless of the measures considered, Apple and Google have
consistently been at the top of the list of the most successful companies in
the world. What are the secrets of their success? Among other factors, a
performance based culture is the key driver for their accomplishments and
common in both companies. Like most high performing companies, Apple and Google
offer their people the opportunity to share in the success those people help
create through variable compensation.
A few examples would illustrate the importance of variable compensation
in high performing companies. Steve
Jobs, the late CEO of Apple, drew an annual salary of $1 for 13 years. Wait,
that $1 is not all! He earned billions of dollars through gains in stocks – he
owned 5.5 million shares of Apple and share price of Apple skyrocketed with its
superior performance. If Apple did not perform well and share price went down,
he would have made just $1 annually. Next, Tim Cook, Apple’s current CEO, had a
total compensation of $378 million in 2011 – only $900K of that (less than
0.25% of total) in cash salary and the rest in stock grant. Similarly, Eric Schmidt, the CEO of Google,
had a fixed salary of $1 from 2004 through 2010; He is one of the few people to
become billionaires based on stock options received as an employee. We can go
on and on, but let us stop here. These few examples illustrate that top
executives of the most successful companies are predominantly paid in the form
of variable compensation – when performance of their companies rock, so do
their personal worth. So far, we just established a correlation that the most
successful companies have variable compensation pay structure, but the real
question is, how does this pay structure help corporations drive performance?
Linking variable compensation of employees to
the performance of the organization encourages certain behavior from employees
that reinforces corporate objective. Among all different responsibilities, an
employee is likely to devote more attention on the projects driving his/her
target achievement. When employees are aligned with corporate objectives and
are motivated to work hard, execution becomes easier & more efficient and
financial benefits must follow.
Variable compensation also encourages employees
to take responsibilities of their action – the characteristics of an owner.
They understand that if they can deliver superior performance driving success
for the company, they would be rewarded too. When employees take ownership of
their projects, they take results personally and ‘walk the extra mile’ to
ensure that targets are achieved.
Variable pay structure not only motivates
employees because of the monetary value, but it also creates a sense of
accomplishment which creates hunger among them for more success. Once employees
get the taste of wining, they want to win more and work harder to continue the
momentum – somewhat similar to winning games such as Cricket.
A well designed compensation structure attracts
certain kinds of talent that is desirable by companies. Clear communication
regarding compensation structure to the potential candidates allows for ‘self-selection’
by the applicants – this in turn, increase retention rate which reduces Human Resources
costs related to training, recruiting etc. An example would illustrate the
concept of ‘self-selection.’ Consider three compensation schemes - option 1:
100,000 (BDT) monthly salary with up to 15% bonus opportunity; option 2: 90,000
(BDT) per month with up to 40% bonus opportunity and option 3: 105,000 (BDT)
per month with no bonus opportunity. As evident, if an individual is high
achiever and prefers risk, he/she would prefer option 2, which offers less
fixed salary, but has potential of the highest payoff (136,000 BDT). On the
other hand, if an individual is looking for certainty and do not prefer risk at
all, he/she would choose option 3, which offers the highest fixed salary
(105,000), but no bonus and therefore no risks. Offering the right combination
of fixed and variable compensation, a company can attract employee with right
attitudes. When employees ‘self select’ the organization to work in, they are
more likely to be culturally aligned and therefore low chances of turnover.
Variable compensation is prevalent in most
companies across the globe. According to a survey by Hewitt Associates (now
Aon), a global Human Capital consulting firm, more than 80% of the companies
worldwide offered variable compensation in 2010. In Bangladesh, while most
companies offer bonuses for religious festivals, only a handful has a variable
compensation pay structure. Even in these companies, variable pay plans are not
planned/implemented well - achievements are often discretionary to supervisor’s
ratings and bonus do not vary as much with individual’s performance/efforts. To
be competitive in the global marketplace, Bangladeshi firms need to integrate
variable compensations structures – not because top successful companies have
it, but because of the benefits it provides.
Variable compensation has been a great tool for
most high performing companies to create a performance driven culture and
therefore drive success. However, many companies also failed to reap the full
potential of this pay structure due to poor implementation. It needs to be
carefully designed, complemented by right organizational structure and aligned
with corporate strategy. Different types of variable rewards needs to be
offered at different level of management to balance long term strategic visions
and short term objectives. Since this concept is not well understood and rather
nonexistent in the corporate Bangladesh, the firms that want to pioneer should
seek help from experts in this field. We hope that most companies of Bangladesh
will recognize the benefits of pay for performance concept and implement it
appropriately to become more efficient, successful and competitive in the
global marketplace.
