Big Bonus? None at All? In Throwback to '80s, Employees Make Call
Mark Trento and Adam Chelini had a rare opportunity last year. They got to pick their own salaries, in a range between $125,000 and $150,000. The catch: Choosing a lower salary meant a shot at a larger bonus.
Mr. Trento, a vice president for San Francisco-based Skyline Construction Inc., chose the safety of $150,000. Mr. Chelini, a Skyline senior project manager, opted for $125,000, and wound up with a larger bonus than he would have received otherwise. While neither would say what their bonuses were, both say they were happy with their choices.
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Messrs. Trento and Chelini are among 15 participants in Skyline's unusual management-compensation system, which lets employees put a portion of their pay at risk. Compensation experts say the approach is rare and potentially risky, but Skyline employees say it offers flexibility and motivates them to succeed.
Executives at Skyline, which specializes in building and renovating commercial interiors, introduced the plan in 2005 when employees bought the company from its former owners. During a brainstorming session on cutting costs, a project manager proposed the idea to encourage Skyline's biggest earners to take lower upfront salaries, says Chief Executive David Hayes.
The idea proved popular. Twelve of the 15 eligible managers this year chose lower salaries and higher potential bonuses. "It's their way of throwing a little skin in the game," Mr. Hayes says. Compensation experts say giving employees a choice in designing their compensation is unusual but not unheard of. In the 1980s, Semco SA of Brazil, a company known for unusual management practices, began allowing some employees to set their own pay and hours and to hire and fire their managers.
Myrna Hellerman, a pay specialist at Sibson Consulting in Chicago, says Skyline's plan is reminiscent of "cafeteria-style" compensation programs that gained popularity in the 1980s and allowed workers to choose from a mix of pay and benefit options. The approach lost steam as such programs proved administratively unwieldy, Ms. Hellerman and others say. "Employers want better control of their compensation dollars," she says.
RISKS & BENEFITS
Compensation experts identify pros and cons of allowing employees to choose their mix of salary and potential bonus.
• Employees can cater to their personal needs.
• Employees can adjust the mix to market factors.
• Motivates those who choose bigger potential bonuses; others may feel the need to "earn their keep."
• Can lead to unequal compensation and foster resentment.
• Can leave some employees vulnerable to market downturns.
• May sap motivation of employees with high salaries and smaller potential bonuses.
Sources: Frank Glassner, Compensation Design Group; Steve Gross, Mercer; Myrna Hellerman, Sibson Consulting.
Flexible-compensation plans made a comeback in the late 1990s when employers fought for talent in a tight labor market, says Ravin Jesuthasan, a practice leader at Towers Perrin, a Stamford, Conn., consulting firm.
Among a few companies experimenting with such programs today to cater to more diverse work forces, he says, is a European bank, which he declines to name. It is testing a program like Skyline's that allows managers to swap some base pay for higher target bonuses. Flexible health-care benefits are a more popular remnant of the cafeteria-style movement. Some employers also offer flexible incentive packages that let executives mix cash, stock options or restricted stock. But nearly all companies offer fixed salaries, Ms. Hellerman says.
That promotes fairness, especially in volatile times when bonuses may shrink or disappear. Frank Glassner, head of Compensation Design Group, San Francisco, offers another concern: Employees with a high salary and lower potential bonus may not push themselves as hard. "What really works well are very easily understood pay-for-performance programs," he says.
Skyline's plan works by adjusting managers' commission targets; those who take lower salaries get lower commission targets, allowing them to accrue bigger bonuses for exceeding their targets. Other bonus factors include nonfinancial measures such as customer satisfaction and timely project completion. No bonuses are paid if Skyline doesn't generate an operating profit.
Only top managers were included in the plan, because they have the biggest influence on profits, says Mr. Hayes, the CEO. As an employee-owned company, Skyline shares profits with its 82 employees through a separate long-term equity plan.
Mr. Hayes says the pick-your-salary plan has been a success, noting that Skyline's revenue grew to $76 million last year, from $42 million in 2004. When profits rise, he says, the company may spend more on compensation than it would under a traditional pay plan.
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Mr. Trento, who has been with Skyline for more than three years, says he prefers the security of a higher salary. "I can bank on that, and I don't have to take the risk," says the 47-year-old, who has a wife, two children and a home in suburban Alamo, Calif.
But Mr. Chelini, 38, says he is comfortable taking on the added risk. The seven-year veteran of Skyline says switching from a traditional pay system was "scary" at first.
All four senior executives at Skyline regularly opt for lower salaries and higher potential bonuses. Mr. Hayes, 44, says the plan fits well with Skyline's culture, which focuses on open-book management and employee ownership.
"Owners get more reward for taking risk," he says. "That's business, and that's the entrepreneurial spirit that we are seeking to capture."
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