Team-Based Variable Pay

The growing use of work teams in organizations has implications for compensation of the teams and their members. Interestingly, while the use of teams has increased significantly in the past few years, the question of how to equitably compensate the individuals who compose the team remains one of the biggest challenges. As Figure notes, there are several reasons why organizations have established group or team variable pay plans, and evidently these goals are being met in a number of organizations.

As seen in the results of a survey of the Fortune 1000 large companies, almost 70% of these large firms are using work teams in some manner. About 87% of the executives and HR professionals surveyed were positive about the use of teams.

However, only 45% of those surveyed were positive about the ways those teams were being paid. Also, the satisfaction with team-based pay plans was lower than two years before, despite a significant increase in the use of teams.

Why Organizations Establish Team Variable Pay Plans

Types of Team Incentives

Team-based reward systems use various ways of compensating individuals. The components often include individual wages and salaries in addition to team-based rewards. Most team-based organizations continue to pay individuals based either on the jobs performed or the individuals’ competencies and capabilities.

Several decisions about methods of distributing and allocating team rewards must be made.

Distributing Team Incentives

The two primary approaches for distributing team rewards are as follows:

1) Same size reward for each team member: In this approach, all team members receive the same payout, regardless of job levels, current pay, or seniority.

2) Different size rewards for each team member: Using this approach, individual rewards vary based upon such factors as contribution to team results, current pay, years of experience, and skill levels of jobs performed.

Generally more organizations use the same-size team reward approach as an addition to different levels of individual pay. This approach is used to reward team performance by making the team incentive equal, while still recognizing that individual pay differences exist and are important to many persons. The size of the team incentive can be determined either by using a percentage of base pay for the individuals or the team as a whole, or by offering a specific dollar amount.

For example, one firm pays team members individual base rates that reflect years of experience and any additional training that team members have. The team reward is distributed to all as a flat dollar amount.

TIMING OF TEAM INCENTIVES How often team incentives are paid out is another important consideration. Some of the choices seen in firms with team-based incentives include payment monthly, quarterly, biannually, or annually. As Figure shows, yearly is the most common period used. The shorter the time period, the more likely it is that employees will see a closer link to their efforts and the performance results that trigger the award payouts. A study of team rewards for quality management found that companies generally limited the team rewards to $500 or less, so that the rewards could be paid out more frequently.

Naturally, the nature of the teamwork, measurement criteria, and organizational results must all be considered when determining the appropriate time period.

Characteristics of Team-Based Rewards

DECISION MAKING ABOUT TEAM-INCENTIVE AMOUNTS To reinforce the team concept, some team incentive programs allow group members to make decisions about how to allocate the team rewards to individuals. For example, in one division of Motorola, teams are given a lump sum amount and they decide how to divide up the money. Some teams vote, while others have a team leader decide.

In other companies teams divide the team “pot” equally, thus avoiding conflict and recognizing that all members contributed to the team results.

Although some teams actually make decisions on bonuses for their members, this practice seems to be the exception rather than the rule. Many companies find teams unwilling to handle pay decisions for coworkers. Team-based bonus plans present other problems as well. Should a member be rewarded for trying hard but not quite succeeding? What happens when extra money for a “superstar” has to come from other group members’ forgoing their own bonuses to some extent? Team-based incentives present both opportunities and challenges when they are developed and implemented.

Problems with Team-Based Incentives

The difference between rewarding team members equally or equitably triggers many of the problems associated with team-based incentives. Rewards that are distributed equally in amount to all team members may be perceived as “unfair” by employees who may work harder, have more capabilities, and perform more difficult jobs. This problem is compounded when a poorly performing individual negatively influences the team results. For instance, suppose that holding dataentry errors to below 2% is an objective that triggers payment of a group incentive.

The presence of one or two poor performers who make numerous errors can result in the group being denied an incentive payment for a month. Unfortunately, even if management retrains or removes the poor performers, some incentive amounts already have been lost.

Equitable pay in the minds of many people means distributing the team rewards individually to recognize individual efforts and capabilities. One survey of employees working in teams found a relatively low level of employee satisfaction with rewards that are the same for all, rather than different amounts based on performance, which may be viewed more equitably.

In summary, it seems that the concept of people working in teams is seen as beneficial by managers and organization leaders. But employees still expect to be paid based on individual performance, to a large extent. Until this individualism is recognized and compensation programs developed that are viewed as more equitable by more “team members,” caution should be used in developing and implementing team-based incentives.

Successful Team-Based Incentives

The unique nature of the team and its members is important when establishing successful team-based rewards. One consideration is the history of the group and its past performance.Use of incentives is more successful where groups have been used in the past and where those groups have performed well. However, simultaneously introducing the teamwork concept and changing to team-based incentives has not been as successful.

Another consideration for the success of team-based incentives is the size of the team. If a team becomes too large, employees may feel their individual efforts will have little or no effect on the total performance of the group and the resulting rewards. Incentive plans for small groups are a direct result of the growing number of complex jobs requiring interdependent effort. Teambased incentive plans may encourage teamwork in small groups where interdependence is high. Therefore, it is recommended that team-based performance measures be used.Such plans have been used in many serviceoriented industries, where a high degree of contact with customers requires teamwork.

Team incentives seem to work best when the following criteria are present:

1. Significant interdependence exists among the work of several individuals, and teamwork and cooperation are essential.
2. Difficulties exist in identifying exactly who is responsible for differing levels of performance.
3. Management wants to create or reinforce teamwork and cooperation among employees.
4. Rewards are seen as being allocated in a fair and equitable manner.
5. Employee input is obtained in the design of the team-incentive plan.

If these conditions cannot be met, then either individual or organizational incentives

may be more appropriate.

SALES COMPENSATION AND INCENTIVES

The compensation paid to employees involved with sales and marketing is partly or entirely tied to sales performance. Better-performing salespeople receive more total compensation than those selling less.

1. SALES PERFORMANCE MEASUREMENT

Successfully using variable sales compensation requires establishing clear performance criteria and measures. Generally, no more than three sales performance measures should be used in a sales compensation plan. Consultants criticize many sales commission plans as being too complex to motivate sales representatives. Other plans may be too simple, focusing only on the salesperson’s pay, not on organizational objectives. Although many companies use an individual’s sales revenue compared to established quotas as the primary performance measure, performance would be much better if these organizations used a variety of criteria, including obtaining new accounts and selling high-value versus low-value items that reflect marketing plans. Figure shows the results of one study identifying the criteria used to determine incentive payments for salespeople.

2. SALES COMPENSATION PLANS

Sales compensation plans are generally of several different types. The types are based on the degree to which total compensation includes some variable pay tied to sales performance. A survey of over 260 firms found that plans providing salary with bonus (37%) and salary with commission and bonus (35%) were the most used types. Less used were plans providing commission only (24%) and salary only (5%).19 A look at each type of sales compensation follows next.

SALARY ONLY Some firms pay salespeople only a salary. The salary-only approach is useful when serving and retaining existing accounts is being emphasized more than generating new sales and accounts. This approach is frequently used to protect the income of new sales representatives for a period of time while they are building up their sales clientele. It is also used when both new and existing sales reps have to spend considerable time learning about and selling customers new products and service lines. Generally, the salary-only approach may extend no more than six months, at which point sales plus commission or bonuses are implemented. However, one study found that salespeople who wanted extrinsic rewards were less effective in salary-only plans. They were less motivated to sell without additional performance-related compensation.

STRAIGHT COMMISSION An individual incentive system widely used in sales jobs is the commission, which is compensation computed as a percentage of sales in units or dollars. Commissions are integrated into the pay given to sales workers in three common ways: straight commission, salary plus commission, and bonuses.

In the straight commission system, a sales representative receives a percentage of the value of the sales made. Consider a sales representative working for a consumer products company. She receives no compensation if no sales are made, but for all sales made in her territory, she receives a percentage of the total amount. The advantage of this system is that the sales representative must sell to earn. The disadvantage is that it offers no security for the sales staff. This disadvantage can be especially pronounced when the product or service sold is one that requires a long lead time before purchasing decisions are made. Also, as the HR Perspective on the previous page indicates, commission-only plans may lead to unethical behavior of sales employees. For these reasons just mentioned, some employers use a draw system, in which the sales representative can draw advance payments against future commissions.

The amount drawn then is deducted from future commission checks. From the employer’s side, one of the risks in a draw system is that future commissions may not be large enough to repay the draw, especially for a new or marginally successful salesperson. In addition, arrangements must be made for repayment of drawn amounts if an individual leaves the organization before earning the draw in commission.

SALARY PLUS COMMISSION OR BONUSES The most frequently used form of sales compensation is the salary plus commission, which combines the stability of a salary with the performance aspect of a commission. Many organizations also pay salespeople salaries and then offer bonuses as a percentage of base pay tied to meeting various levels of sales targets or other criteria. A common split is 70% salary to 30% commission, although the split varies by industry and with other factors. Some sales organizations combine both individual and group sales bonus programs. In these programs, a portion of the sales incentive is linked to the attainment of group sales goals. This approach encourages cooperation and teamwork for the salespersons to work together. Team incentives in situations other than

sales jobs are discussed next.