IT Employment

Incentives and perils of at-risk pay for project managers

At-risk pay programs can be innovative and bold, but will they work for project managers? Tom Mochal discusses the issues you should consider before implementing such a program.

TechRepublic columnist Tom Mochal receives dozens of e-mails each week from members with questions about project management problems. He shares his tips on a host of project management issues in this Q&A format.

Question
I’m the development manager at a medium-size company. I have been considering implementing an “at-risk” compensation program for our staff managers and project managers. By “at-risk” I mean that managers will actually place a part of their salary, say 20%, on the line. If they achieve their objectives, they will earn back the 20%, plus an additional reward. If they don’t hit their objectives, they may make less money. For the project managers, my goal is to provide a powerful incentive to complete their projects on time and within budget. What are your thoughts on this type of program?

Answer
At-risk pay presents some interesting scenarios—some very good, and some very bad. On the surface, at-risk pay seems like a good way to get employees to buy in to the common goals and objectives of the company. If objectives are met, the individual’s pay objectives will be met as well.

First of all, I must mention that I’m not an HR specialist. However, I was involved with at-risk compensation packages at Cap Gemini Ernst & Young and The Coca-Cola Company. So I have some perspective, and I can offer an opinion.

Look at an example
Let’s first put together an at-risk pay scenario and then discuss its implications. Let’s say your company is moving from a traditional compensation plan to one where some portion of the pay is at risk. In this example, let’s assume that 20% of the total salary is at risk, but there’s a 10% additional pay incentive available to high achievers. Just so we can use round numbers, we’ll take an individual who currently makes $100,000 per year.

You sit down with him and say that he’s now making $80,000 guaranteed, with an additional $40,000 paid to him if he achieves a certain set of objectives (these could be a combination of personal and company objectives. For instance, half might be based on the company achieving its revenue numbers). So it’s possible that this guy might lose up to $20,000 from his salary, but it’s also possible that he could end up making $20,000 more than his salary. This provides a very powerful positive incentive to achieve the stated objectives.

Where at-risk pay works well
Salespeople deal with this type of incentive all the time. They might receive a base salary, but part of the base might be tied to achieving a minimum level of sales. If the sales revenue doesn’t come in, their base salary may go down. On the other hand, if they exceed their target, they can make a lot of extra money.

However, at-risk compensation doesn’t work for everyone in an organization. People need to feel that they have control over earning their at-risk pay. If they’re too low on the organization chart, they may have a limited ability to control their own fate.

People in lower or mid-tier positions may feel that objectives based on company performance are not directly in their hands. This is usually not an issue with incremental bonuses. Employees don’t normally expect to receive large bonuses if the company isn’t making money. But if people see their base salary cut and don’t feel they have the power to get the money back, there will be problems.

Make sure you’re focused on the right areas
You’re obviously considering this program because of the issues you raised in your question. Before you begin, make very sure you know what objectives you’re trying to meet and what problems you’re trying to resolve. The at-risk motivation must directly affect the goals and objectives of your organization, or it must be aimed at resolving problems or barriers to your success. If an at-risk program’s goals don’t line up with your organization’s critical success factors, the whole premise is flawed.

For instance, let’s say that one group at your company is focused on improving the quality of your manufacturing process, and another group is focused on reducing costs. The first group feels it needs to spend money to improve product quality, while the second group doesn’t want to spend the money. Obviously, the overall objectives are not aligned. You’ll have trouble if you try to use at-risk pay incentives to reach nonaligned or contradictory goals.

Additional considerations
Here are more things to think about in the at-risk pay scenario described above. Even though your program might be different, most of these points apply to any at-risk compensation program.

Define whether you have an all-or-nothing plan or if there are degrees of success
For instance, if you have 20% at-risk, can you achieve 10% or 15%? Or must you achieve all the objectives to hit the full amount?

Remember that people have cash-flow needs and monthly obligations
Not everyone can absorb a lower monthly salary in the hopes of coming out whole (or ahead) in the end. If people can’t afford to live at the reduced pay level, they may not stay around to see if they can earn more under the new plan.

You still have to account for annual merit and promotion increases
Annual merit increases usually reflect the additional skills and value a person brings to the organization. You should also take into account internal promotions. Promotions reflect performance at a higher level as well.

Understand the risks
Make sure you know what financial and nonfinancial risks the company is undertaking. From a financial standpoint, it’s possible that everyone could achieve and even exceed their objectives. Hopefully, this will be a good thing. However, it will also mean more expense for the company. Again, aligning personal and company objectives is important.

Other potential risks include bad morale, increased turnover, confusion, and resentment. You may have a perception problem if it appears that the employees are taking too much risk and the company is not taking enough. You need to look at the skill sets of your people. If there’s a demand for their skills, your people might not tolerate your putting their base pay at risk. If it looks like they’re not going to make the money they need or expected, they might just go somewhere else.

Will at-risk pay work for project managers?
At-risk pay programs can be innovative and bold, but each company needs to decide if the potential benefits are worth the potential risk, or if it would be wiser to leave base compensation alone and instead tie incremental bonuses to the at-risk program.

I don’t know if at-risk pay programs can work at the project manager level in most organizations. If you decide at-risk compensation is right for your situation, you must be willing to give your people the responsibility and authority they need to get the job done.
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