For younger, faster-growing companies, this pay-for-performance thrust has meant shifting the emphasis from salaries and benefits to bonuses and incentives. The latter two are methods that don't increase fixed costs and, therefore, leave the company more flexible in times of economic downturn -- which more than a few businesspeople are dourly predicting will return after the Presidential election, when Congress takes up the work of reducing the federal deficit.
For many older organizations, however, the switch isn't made so easily. Nearly 25% of the respondents to INC.'s survey are companies that were founded before 1958, and many have had to devise their own methods of meshing the new financial realities with their established ways of doing business. They may still be using salary increases as the chief means of improving the compensation package -- as 72% of the survey respondents do -- but more than a third report that they are moving away from discretionary raises and toward a more merit-based system. Take, for example, the case of a 60-year-old, $30-million telecommunications company on the East Coast that is still floundering for market share following the American Telephone & Telegraph breakup.
"We're expecting a down year," says the company's chief financial officer, "so we're playing our dollars in cash salary, because we don't expect there's going to be much to spread around. See, I've always paid a bonus at the end of the year, good years and bad -- so I'll have to do that again. I probably won't increase employee benefits this year, because that's getting far too expensive a way of compensating people. So by elimination, it'll all go to salary, and in straight increments. I won't be lenient, though. Not everybody's going to get a raise."
The focus, in other words, is on ways of assuring that the company gets what is sometimes referred to as a return on compensation. "Just coming to work and continuing to draw breath doesn't warrant a 10% annual increase anymore," says Peter T. Chingos, a partner at the accounting and management consulting firm of Peat, Marwick, Mitchell & Co. Across-the-board salary increases and discretionary bonuses are giving way, he says, to any of a number of bonus formulas and incentive structures, and salary increases are based less on established ranges than the achievement of certain individual or companywide performance goals.
Many of the executives polled for this year's INC. survey seem to have embraced the pay-for-performance concept. Incentives are gaining favor: 25% of the respondents say that one of the steps they took to improve their compensation package was to add an annual-incentive program, and 14% listed the introduction of a long-term incentive. Bonuses are paid to executives of 81% of the respondents, and, while about half of the companies still set both the size of the pool and the individual allocations on a discretionary basis, 49% of them say they now use a formula to establish the bonus pool. Well over half list sales goals, profit goals, and other benchmarks as the means by which individual bonuses are set.
Consultants who have reviewed these figures find them heartening, but surprising. "I just haven't known of many small companies that have instituted performance-oriented incentive programs," says Chingos. "I keep looking at the surveys to see if there's been a mistake in tabulating those figures, or whether [the respondents] could have misunderstood the question." He says neither is likely -- which makes the numbers all the more intriguing.
William James, the partner in charge of compensation services for the consulting firm of Hewitt Associates in Lincolnshire, Ill., suspects there may be some exaggeration or wishful thinking at work here. "There's a lot of lip service paid to all of this -- particularly in the area of salaries. Smaller companies that have been very informal in the past are coming to grips with the need to put more structure into the program. They want the tools that the bigger companies have had for a long time. But I'd have to say there are very few pay-for-performance programs that actually have teeth in them. You just don't hear about that many employees not
Edward Redling, president of Executive Compensation Service Inc., a subsidiary of The Wyatt Co., agrees. "They talk about pay-for-performance as if it were motherhood and apple pie, but when it comes down to it, a lot of managers aren't tough enough to step up to the hard decision -- to tell that executive he's not getting what he thought he was getting."
There are exceptions, of course. Emmett Pace, owner and president of Oceana Corp., a 22-employee, $10-million-plus steel distributor in Darlington, S.C., is a good example. Not only has he turned down executives for annual bonuses "two or three times" when he felt they were "slackening off totally," he has also been known to deny himself a bonus. "I didn't think I did a good enough job last year," he says, matter-of-factly. "We were not as profitable as we should have been."
But Charles Vranich, vice-president and general manager of Childers Carports & Structures Inc., in Houston, says it is not only lack of gumption that prevents executives from installing pay-for-performance structures -- it is a matter of survival. He and his partners, for example, had wanted from the beginning of the now 20-employee, $3-million manufacturing operation to establish a merit structure for their bonuses. Vranich was particularly keen on it, having worked for a large company that handed out lump-sum bonuses quarterly. "Everybody looked at it as just part of the salary," he says. "The first time the company had a bad quarter and the bonuses didn't come, you'd have thought someone died around there." But, when it came to imposing a different set of rules in his own company, it just didn't seem financially feasible to do anything but leave them discretionary. Revenue was fluctuating too wildly. "If we'd have set bonuses as a percent of income, we'd have strapped the company."
