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Planning rewards.

PLANNING REWARDS

To some association leaders, incentive compensation plans may seem controversial or too sensitive to touch. Yet they need not be. If structured and administered property, an incentive pay plan can be an especially effective way to reward employees.

Incentive compensation plans are formal plans that provide employees an opportunity to receive annual cash awards based upon their performance. The plans have been prevalent in for-profit organizations for many years. In fact, studies show approximately 90 percent of publicly owned companies and two thirds of privately owned companies have such plans for managers. (Incentives compensation for nonmanagement employees is growing, too, as companies seek new ways to reduce fixed personnel costs, reward productivity, and give employees more of a stake in the company's success.)

A look at associations reveals a different story, as incentive compensation is not widely used in nonprofit organizations. Recent surveys of a variety of nonprofits (associations, hospitals, foundations, and others) show that approximately one third of the participants offer some form of incentive plan. In the 1990 ASAE study of association executives' compensation, only 16 percent of the associations surveyed maintain an incentive pay system for the chief staff executive (18 percent of national and international associations surveyed maintain incentive pay programs for chief staff executives), and only 5 percent gave incentive pay to the deputy chief.

The reasons for associations' reluctance to adopt incentive plans are unclear but may include the fact that such plans are not traditional in the nonprofit workplace, that they require decisions on the amount to award and to whom, and that nonprofit groups inherently lack a profit measure on which to base such plans.

Reasons to consider incentive

compensation

Many associations have competitive salaries and benefits for their employees. So why should they add a new method of compensation that may be controversial and difficult to install or administer? The answer is to motivate and reward superior organizational and individual performance.

There is nothing quite like an incentive compensation plan for rewarding superior individuals' performance. Extra-large salary increases can be useful, but they are usually limited by salary structure and salary administration guidelines. Additionally, salary increases build permanent compensation costs into the budget, while the more flexible incentive awards do not.

An association can award cash bonuses on a discretionary basis to recognize an individual's performance, but it is difficult to decide when such bonuses are warranted without the guidelines a formal plan can offer. Purely discretionary bonuses also depend heavily on the chief staff executive's judgment and selling skills, and even on the mood of the board of directors or the executive committee when the latter two groups consider the matter. As a result, inequities can occur easily. On the other hand, a formal plan provides the authority, funds, and structure for such awards.

Plan principles

To implement an effective incentive compensation plan, an association needs to * define eligibility for awards by position or salary grade; * determine target awards, expressed as a percentage of annual salary, for each position or salary grade, and budget for them; and * establish objectives annually for both organizational and individual performance, which, if met, will earn the target award. The association can bestow awards below target if employees do not meet objectives and ones above target if employees exceed the objectives.

Eligibility. A small association can adopt an incentive compensation plan that covers its entire staff, provided objectives can be established for each position. A larger association with more than 15 employees, however, may want to restrict eligibility to management positions, at least initially. This will allow association leaders to establish procedures for a relatively small number of people and become comfortable with them before expanding the plan.

Ultimately, nonmanagement-employee participation in incentive plans is an option upon which the board of directors, the chief executive, or both must decide.

Target awards. Statistics from compensation-consultant organizations cite target awards for private-industry managers as usually 15-50 percent of an individual's annual salary; awards for nonmanagers often range from 5 percent to 10 percent. In contrast, I have found that while associations with incentive compensation plans usually match the private sector's nonmanagement figures, they typically give managers target awards that range only from 10 percent to 20 percent of salary. This gap in incentive compensation between association managers and their private-sector peers reflects the fact that incentive earnings are not as prevalent in associations, where generally salary alone provides competitive pay.

If you do offer incentive pay, you must consider these awards when setting salary ranges. A guideline is to set a lower salary than that for the equivalent position at an organization that does not offer incentive bonuses.

In setting salaries and incentive pay, you may want to compare pay with salaries for similar positions at comparable, non-bonus-paying associations. One way to do this is to use the following formula: Take the midpoint of the salary range your organization is paying or thinking of paying for a position and add half of the chosen target award. The result is a figure you can use to compare your association's total annual compensation with that offered at a non-bonus-paying firm. For example, assuming the salary range for a position is $80,000-$120,000, the midpoint would be $100,000. Half of a chosen target award of, say, 20 percent would be $10,000. Adding that to $100,000 makes $110,000 the compensation figure to use for comparison.

Objectives and performance. In associations, setting the right performance objectives for a compensation plan is critical, since no traditional profit measure exists. First, the association's directors (or someone they designate) must create a set of five to eight association-wide objectives to serve as the basis for funding the plan and for determining the size of the chief staff executive's award. These objectives should be measurable. You won't want to omit objectives covering key areas, such as public relations and government relations, simply because you may be unable to attach numbers. You should avoid objectives that are vague and unmeasurable (e.g., to coordinate or cooperate with other associations) as well as those that are measurable but that do not allow the association's performance to be determined. The latter include, for example, successful strategies to pass or prevent enactment of legislation in which other organizations' influence is significant.

For each objective, the appropriate person or people involved (generally the board and the chief executive) should predetermine a performance range by identifying a level of performance that is minimally acceptable (warranting a less-than-target award) and a level of performance that exceeds the objective but still is attainable (warranting a maximum award).

Suppose, for example, a professional association has set an objective of increasing its membership by 10 percent in one year. The association considers this a stretch objective, since normal growth and membership development activities have produced average increases of 7 percent in the past. An increase of 15 percent is considered outstanding.

In this case, meeting the objective of 10 percent could earn 100 percent of the target award for this objective, a 7 percent increase could yield 50 percent, and 15 percent or more could produce a maximum 150 percent of the target. Similarly, the incentive plan's managers would prorate performances that fall between these three points.

Additionally, the board and chief executive should weight the association's objectives by assigning each a percentage so that together they total 100 percent. This sets the stage for ready measurement of performance and calculation of the incentive fund after the end of the year.

In evaluating association performance, the board of directors may need to exercise some discretion to account for unforeseen crises that arose during the year that prevented accomplishment of certain objectives. The use of such discretion should be limited, however, to ensure that the objective-setting process is not undermined.

Objectives and performance ranges that are consistent with the association's objectives should also be established in a similar manner for each eligible staff position. Staff managers should evaluate the performance of their people in the same way the board evaluates association performance.

Finally, the association must determine the relative weighting of association performance versus individual performance to calculate the awards for individuals who are under the chief staff executive. Frequently, association performance and individual performance hold equal weight. For managers, association performance can be weighted more heavily than individual performance if the management group functions as a team on most key activities. Likewise, individual performance can be weighted more heavily than association performance for nonmanagement personnel.

Conditions for success

Incentive compensation plans are not wise for every association. Before an association's directors can consider adopting a plan, they must be able to establish plan objectives confidently, provide the proper climate, and administer the plan soundly.

Establishing objectives confidently. As it is, incentive compensation plans are not easy to administer in for-profit companies. Not surprisingly, such plans are even harder to administer in non-profit groups, in which no traditional profit measure exists to serve as a basis for the plan. Therefore, an association's leaders should have solid experience in setting and measuring organizational and individual objectives before introducing an incentive plan. The board should already have confidence that the objectives will meet association members' needs, that its own role in approving objectives and evaluating association performance is sound, and that managers have demonstrated skill and experience in measuring the performance of their people.

One appropriate time to consider introducing an incentive compensation plan is one year after adopting a strategic plan. The strategic plan should include multiyear goals and one-year objectives that will lead to achieving those goals. The first year of operation under the plan gives the association an opportunity to demonstrate the legitimacy of the plan's goals and objectives and the board and staff managers' performance-measuring capability.

Providing the proper climate. The association governance and staff management must be healthy for an incentive compensation plan to succeed. The board must have confidence that both it and the chief staff executive will administer the plan properly. If the chief staff executive is experiencing management problems, or if board members are trying to usurp staff management responsibilities, introducing an incentive compensation plan may worsen the situation.

It is also necessary that the individuals who will be eligible for incentive awards be willing to have a portion of their compensation vary.

Administering the plan soundly. An incentive compensation plan will not work if effective salary administration procedures are not used. These procedures include position evaluation, salary ranges for each position, salary administration guidelines that relate association's salary increases to performance, and periodic reviews of the external competitiveness of the salary structure. If no formal salary ranges exist, or if salary increases are based on longevity or cost of living instead of performance, the board must address those conditions before adopting an incentive compensation plan.

A fresh perspective

One of the major problems with incentive compensation plans in the private sector is that they become routine. Awards become expected and automatic because they were paid last year and the year before that.

Associations hold an advantage over most for-profit organizations in operating an incentive compensation plan: The faster turnover of board members can help ensure that the plan is reevaluated continually. New directors may question the plan to determine why it exists, what its purpose is, and why salary alone does not provide sufficient incentive to employees.

The association chief staff executive who lacks experience with incentive compensation plans may think justifying them continually to board members is somewhat burdensome. Yet, that need not be the case. Instead, regular fresh looks at an association's incentive compensation plan affords everyone involved the opportunity to keep the plan healthy, successful, and relevant to the association's needs.

Dean Hilderbrandt is president, Dean Hilderbrandt & Associates, Simsburg, Connecticut.
COPYRIGHT 1991 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:incentive compensation programs
Author:Hildebrandt, Dean
Publication:Association Management
Date:May 1, 1991
Words:1962
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