The new contract is based on an exchange. When employees can no longer to have confidence in trust, they need something more specific to remain in the workforce. One thing the company can do is to have something that professional employees want and are willing to work for – the new contract. The new contract will have its own conditions:
- Employees may have an ownership stake in the business; stock ownership plans make this capable of existing, although the same management still runs it.
- Employers create a structure for the terms of employment and employees can negotiate their own terms within its conditions.
- Employers continue to have an interest in making good relations with employees (it is the only way to have a possibility to retain older professional employees).
The first strategy that comes to mind is money. Money is an essential part of organizational life, sometimes even when employees are not talking about it. Money combines salary, incentives, noncash awards, and benefits, and each of those components provides ways to retain professional employees.
The next strategy is career opportunities. Money and career are the two top concerns for professional employees as they think carefully about staying or leaving. The strategy of career opportunities includes the availability of feedback and development planning, innovative training, and the opportunities for changing jobs within the company.
The next strategy is a company’s work environment. It includes organizational policies and procedures and the supervisors and management who act as the interpreters of them. Organizational policies are the statements of how the company treats its employees. Professional employees want to know what employers say. Employees also want to know what they do—how supervisors really treat employees, and how employees treat each other.
From there is look at performance management. Although sometimes it is combined with development and at other times with money, here performance management presents its own response to employees.
The next strategy is linked to work and family – alternative work arrangements. Alternative work arrangements provide flexibility in when and where work is performed that is important in employee decision making about staying or leaving. Employees want to know what the current practices are as well as what organizational culture supports.
Money is a universal topic where people work. It is important to talk about it here too. Before relating money to retention in particular it is important to understand how it fits into everyday organizational life.
How many different pay practices does the company have in its practices? It was not too long ago that the only kind of money that most employees received was what is now called basic pay. Basic pay means the salary and wages that the employer is under an obligation to pay. Pay increased with general additions or step progressions, promotions, or reclassifications. From time to time, organizations used profit sharing, gain sharing, and other alternatives.
Today companies have a variety of pay practices, each used to achieve a different result. Companies need to reward professional employees for working in teams, and, at the same time, for making important individual contributions. Companies need pay employees for learning new skills and also for achieving project goals. An innovative strategy is to have annual incentive plans that pay for meeting organizational purposes and, at the same time, spot awards for special achievements. Here is a list of some of the reasons for receiving various payments (Jamrog 2004):
- Salary and wages—pay for being at work.
increases for demonstrating skills
- Competency pay—demonstrating and using a new competency.
- Skill-based pay—demonstrating and using a new skill.
- Job progression—moving up in responsibility within a technical or professional area.
increases for results
- Incentive—for results achieved against a target.
- Commission—a percentage of sales.
- Gains haring—cost saving, additional production, or similar results.
- Merit increase—individual quantitative and qualitative results achieved.
pay for working more hours or being prepared to work
- Overtime—for hours worked over 40 per week, or other basis used by the organization.
- On-call pay—for being available for work even if not called in to work.
- Premium pay—usually double or even triple the hourly rate, for working on holidays, weekends, or other similar special circumstances.
increases not dependent on performance or new skills or
- Cost of living allowance—to “keep employees whole.”
- General increase—something for everyone.
increases based on the organization’s financial success
- Profit sharing—payout from our profits.
- Bonus—an “extra” when we have the cash.
other forms of increases
- Promotional increase—for assuming new and higher-level responsibilities.
- Market adjustment—in response to competitive pressures in the labor market.
- Suggestion system—for ideas that make a difference.
- Spot award—doing something unexpected.
Companies should use various payments in each pay period. Now companies also have (Jamrog 2004):
- Variable pay—money given as a lump sum payment. It cannot be counted on from year to year because it has to be earned anew each year. Another term for variable pay is “pay at risk.”
- Stock options—money that may or may not be received at some future date. The value is unknown because it depends on the vesting period, exercise price, and future performance of the company’s stock.
There are times when managers want to avoid talking about money. Managers want to do something for an employee that does not imply pay. Still, money is in the background of the consideration of a matter. For instance (Jamrog 2004):
- Manager talks about motivating an employee by offering a great opportunity to learn a new technology and develop new skills. Manager will describe that opportunity but make clear that there is no pay increase, for now. Manager is compensating the employee with a prospect of development instead of money.
While talking about substitutes for money managers should not forget the biggest ones—benefits. Benefits comprise healthcare, holidays and other time off, life insurance, pension, matching contributions, plus unemployment payments, workers compensation, and social security.
- Managers should understand that it is important to express appreciation for a job well done. This is called a noncash award.
- Managers tell employees that one of the favorable positions of working here is that holiday benefit is material. The unspoken result is that time off from work is given to make up for low pay.
So, even when managers are not explicitly mentioning “money” they are actually talking about money. Besides nonmonetary rewards, managers can give money to employees in different ways (Jamrog 2004):
- Manager wants to keep an employee through the end of a project. Manager, for example, offers him a $7500 retention incentive if he stays for the next 13 months. These retention bonuses are very effective.
- Managers have high turnover in customer service representative jobs. After they are trained, they leave for more money. Managers create a higher-level position that pays a dollar an hour more, and promote customer service reps to that new level when they successfully accomplish training, including performance tests.
- The manager thinks that an employee is restless in his job and is talking with recruiters. He speeds up his promotion to the level of senior engineer and gives him a project that he knows this employee wants.
- Manager sends an employee to a professional conference that happens to be at a ski resort—the employee loves to ski.
- The soccer team employee coaches won the local championship and is now going to the regionals. Manager gives him time off with pay so he doesn’t have to use his vacation time.
- Company’s employee survey said that “having the latest technology” is a factor that determines job satisfaction. Manager buys new technology for its productive capacity and to retain employees who want “the latest” happy.
- That same survey showed the interest of employees in having fitness facilities on-site. Manager converted unused space to a fitness facility so employees can work out on their lunch hour.
- If an employee wants to do a project for his college course on quality measurement. Manager gives him time off from his regular tasks to work on the project. At the end of the semester the manager proposes to him to work together to implement it.
Where did all of these pay practices come from? Companies added them in response to union negotiations, competitive market conditions, management requests, or as part of a reward strategy to retain older employees and support organizational goals. Productivity incentives such as gain sharing go back to the 1930s.
Cash incentives and stock options have been used in executive compensation for many years and are now becoming more prevalent at all levels of the companies. Signing bonuses—giving money to someone to agree to come to work for the company—is another practice that has spread. At one time it was used in a few specialized professional and sales jobs. Now the practice can be used to retain older professionals.
Good idea is to use money as messenger. An alternative idea to “money as motivator” is “money as messenger.” The way companies distribute money tells employees what managers value in their organizations. The phrase “follow the money” means that if an employee knows how management distributes money he knows what management really wants. Here are examples of messages that are sent (Jamrog 2004):
- Customer service. An incentive plan that pays employees 2% of salary for improving customer service may not motivate, but it does tell everyone what the organization values.
- Development. An organization that gives employees $1000 to spend on development, subject to minimal supervisory approval, communicates that development is important.
- Trust. When the manager tells frontline employees that they can authorize expenditures up to $100 to help a customer, they show more trust than if they have a $25 limit or if all requests must be approved.
- Pay for performance. A 4% merit budget with awards ranging from 2% to 6% tells employees:
We do not recognize wide differences in performance.
If an employee’s performance is highly rated his reward is recognition and not money.
If his performance is low-rated, then he will not get a big increase; but don’t worry—you will get something.
- Focus. If employees can get a bigger financial reward soliciting funds for an organized charity than they can for good performance in the organization, then the message is that skill in raising funds for an outside organization is more important than skills needed for the job.
The messages tell employees how they will be paid. If the organization pays for good customer service, then employees can decide if they want to work in an organization that puts its money into customer service. If the organization keeps base pay stable and uses variable pay such as incentives to reward performance, then it puts pay at risk. Employees can decide if that meets their needs.
Incentives are a method of distributing pay. If managers think of paying for different types of performance with different forms of pay, then incentives fit in with base pay, merit increases, and gain sharing as just one way of matching compensation to performance.
It could be argued that incentives have an advantage over most other pay practices. In an incentive plan, if the goal is not achieved the money is not paid. As a regular practice companies recruit employees and give promotional increases in the hope that performance will match the pay. Incentive plans are stated as “if-then.” If an employee achieves the objective then he will get a reward. It is this conditional form that gives companies the ability to retain employees while they receive the benefit of their contribution.
Bonuses are different from incentives. Bonuses are an extra. Employees do not have to achieve anything in order to receive one. For example:
- An organization has a good year and decides to give each employee a bonus of 2% of salary. The definition of a “good year” may be as simple as having the money to pay a bonus. The bonus goes to whoever is on payroll when it is paid.
- For example, last year we lost money and did not pay merit increases. Now, six months later, we appear to have turned a corner and we give all employees a $400 bonus to help morale. Many organizations, including nonprofits, have annual incentive plans. They are built on the operational objectives of the business plan. Typical goals are related to: customer service, safety, market penetration, turnaround time, quality, or cost cutting. The usual potential payout is less than 5% of salary. Annual incentive plans are a useful part of the overall pay strategy, but the payout is too low to retain employees. Two types of cash incentives that do have the potential to retain employees are:
- Project completion incentives. If an employee stays eight months, through the end of the project, the company will give him $5000.
- Stock options. The company will give an employee options on 1000 shares of its stock. If the company prospers, the options will be worth a lot of money.
Here are overviews of these two methods and how they work.