Towers: Cost Pressures Drive Employee Performance Programs

September 15, 2003 ( - Cost pressures are motivating high-performing companies to seek the best path at cost management or reduction while continuing to recognize and reward their best employees.

High-performing companies – companies with an average five-year total shareholder return that exceeds the Dow Jones market sector average for their industry – are responding to the current economic environment by focusing on cost as well as how reward practices affect business performance over the longer term, according to a Towers Perrin study. Specifically, these companies utilize methods that include:

  • balancing organization and individual performance in determining rewards
  • creating a broad mix of noncash programs besides pay that encompass employee development opportunities and recognition.

“The survey shows that high-performing companies manage both short-term costs and long-term performance by using variable reward approaches,” said Ravin Jesuthasan, co-leader of Towers Perrin’s Rewards and Performance Management practice. “Variable rewards give companies the flexibility to exercise fiscal responsibility and respond based on current financial circumstances while rewarding the best contributors at the same time.”

Comparatively, Towers found other companies are focusing solely on near-term cost issues, which Jesuthasan says causes them to miss opportunities to manage costs more effectively. “Companies experiencing heavy cost pressures are less likely to shift from fixed pay to variable reward approaches, which limits their ability to manage total costs in response to changing economic and business conditions.”

As evidence, Towers points to the majority of companies (76%) that indicate they were under the gun of severe cost pressure. However, while two-thirds of companies have taken some action, most have not yet significantly reduced their reward investments.

“As cost pressures increase, emphasis on rewards for high-performing individuals actually diminishes,” noted Jesuthasan. For example, Towers found 46% of respondents who are feeling only some cost pressure – nothing beyond business as usual – say their high performers receive total compensation packages that are significantly above market levels. By comparison, only about a quarter (27%) of those feeling significant cost pressures say they reward high performers at above-market levels. Further, 56% of those polled that responded to feeling some cost pressure extend incentives to the broad population, a number that dropped to 40% of those companies that report feeling significant or severe cost pressure do so.

“If operating efficiency is a priority,” Jesuthasan added, “senior management is more likely to demand a better return on investment (ROI) than our survey results indicate current programs can deliver. Also, as the economy improves, increasing numbers of employees, including high performers, are apt to leave for better opportunities and more attractive reward-for-performance propositions. Companies need to take the opportunity at hand to differentiate talent and rewards now or miss the opportunity to both optimize cost and retain their high performers.”

Not surprisingly, a significant number of companies are pursuing longer-term strategies designed to position them optimally for a business upturn in addition to the majority of companies that are focused on near-term cost management. This group, which also emphasizes links to business strategy, fiscal responsibility, workforce segmentation, rewards for performance and the line of sight between organizational and individual goals are at the forefront of a trend dubbed "business performance management," said Emory Todd, a Towers Perrin Rewards and Performance Management consultant.

"Business performance management aligns employee goals, performance and rewards with key business objectives," continued Todd.

In this environment, the key drivers of business performance are translated into critical actions and behaviors, with programs subsequently built to support the connection. For example, Towers found that more than three-quarters (76%) of high-performing companies versus 53% of low performers increasingly emphasize organizational performance in determining incentive payouts. Thus, the top level of management can better articulate to individual employees how their goals directly impact the company's bottom line through proper incentives, Todd concluded.

High-Performing Company Actions

Separating the cream from milk is that high-performing organizations are taking actions now that seem to reflect a recognition and concern for how changes made today might affect business performance over the longer term. Among the habits of the more successful companies:

  • offer their best employees equity in the company through stock-based programs
  • more likely to segment the workforce according to performance by rewarding high performers and managing out low performers
  • over twice as likely to provide employee training on how the business works
  • twice as likely to provide extra development opportunities to reward high-performing individuals.

Additionally, the companies labeled higher performers by Towers:

  • build integrated programs, with links to business performance as a driving force
  • take a more systemic approach to performance overall - integrated programs with mutually reinforcing elements that support interrelated objectives
  • may hold employees more directly accountable for organization performance through incentive design, but at the same time balance employee risk with training on how the company works and with development opportunities that give employees tools to succeed.

"High-performing companies clearly aim for close connections between the business, the workforce and programs that support employees day to day, all while exercising a high degree of fiscal responsibility," said Jesuthasan. "We see increased alignment between organizational and employee goals, a balance between organizational and individual performance in determining rewards, and a balance within the reward mix among pay, development, recognition and other reward components."

"The next frontier for the majority of high-performing organizations is enhancing formal processes for measuring ROI in employees and supporting programs in order to maximize the value of management efforts," noted Jesuthasan.

The Towers Perrin TP Track survey, entitled Managing Performance and Rewards in a Challenging Business Environment, drew responses from over 240 decision makers in the United States and Canada. Copies of the study can be obtained through Towers Perrin by calling (800) 525-6741.