"Variable compensation plans are not a way of paying people, they are a wayof managing people" Adil Malia, Director (HR), Coca-Cola India

More than a bad year throwing up glitches in Care Soft's newly-introduced variable compensation scheme, it is poor conceptualisation, lack of top management support, absence of modelling, and weak execution that have caused the plan to come unstuck.

A Variable Pay Plan (VPP) needs to progress systematically through a five-phased life-cycle: strategy, design, modelling, documentation, and execution. While passing through each of these phases, the organisation needs to handle certain critical aspects and elements of the plan. Care Soft's problems can be diagnosed if we reconstruct facts through these five phases of its life-cycle.

Strategy Phase: Whilst Care Soft appears to have a plethora of compensation programmes in place, the absence of a corporate reward strategy commonly linking these plans to its business strategy, is evident. The CEO's total buy-in as a sponsor of the VPP appears to be the Achilles' heel. In fact, his lack of involvement as the CEO in the hr issues is the sore point for concern. The compensation committee, even a year after announcing the VPP, is still confused about its role.

There exists only a single-point goal for measurement of success-growth. Rather than fostering cross-departmental co-operation and viewing of a common big picture, the VPP seems to have had an adverse effect at Care Soft.

Design Phase: The compensation committee has made a very poor attempt to engage its managerial staff in the buy-in process. While Arora blames it on an unrealistic three-month timeline given to him to execute the programme, Care Soft has no justification for introducing the new VPP in the company through an article in its in-house newsletter followed by an e-mail on the subject.

Modelling Phase: Care Soft does not appear to have done any meaningful modelling of the consultant's plan prior to its final application in the system. Had it planned its activities for analysis effectively, the post facto concerns expressed by members of the compensation committee, would been addressed long before its final announcement. If focus group discussions on the proposed plans had been organised with people like Anil Mathur, issues like unrealistic growth targets would also have been raised much before the plan was announced.

Documentation Phase: A final plan is worked out and documented at this stage. Care Soft does not at present have a mechanism built in its VPP to communicate the year-to-date performance against an agreed metric. As a consequence, the managers wake up to the fact that they will not be able to meet their targets only at the end of the year. Hence the panic.

Communication and Execution: The best-managed VPPs are clearly and continuously communicated before and during execution. Cranking up communications about variable pay is a major chance for hr to help the business and allowing the company's employees to act as 'business partners'. Care Soft appears to have done none of that. The only trace of communication is the newsletter article and the one-off e-mail. The Care Soft managers are expected to have comprehended, internalised, and bought-into the new VPP through such a poor and weak communications initiative. Throughout the first year of its operations, the management did nothing to reinforce its belief in the new VPP. The hr head seems to have done little to educate, communicate, and build a consensus during the new plan's first year of operation.

Suddenly, like Rip Van Winkle, the entire system seems to have been shocked out of its slumber by the sound of dissent...thanks to Mathur and the like.

The Way Forward: Care Soft would now be committing a colossal blunder if it scraps its VPP and returns to the fixed pay system. It would be missing the woods for the trees. Its plan failed because of poor conceptualisation, weak design, and poor execution. Care Soft needs to take some initiatives immediately to handle its burning fires and, thereafter, plan to rejuvenate and relaunch its VPP, effectively.

Urgent Action: Arora needs to chalk out an immediate plan of action with the Compensation Committee (including the CEO).

Care Soft already has a merit-pay plan that links individual performances to earnings. It needs to identify its key performers of the last fiscal and plan a higher pay-off through this merit-pay programme. This would not only recognise and reward the efforts of key contributors, it would also help assuage their sagging morale. Through small group and open-house discussions, Care Soft should reaffirm its belief in the VPP as a part of its reward strategy and also use these fora to collect feedback on the plan.

Immediate Initiatives: Nitin Arora needs to discuss the situation with his CEO. He needs to persuade the CEO into playing a critical role not only in the VPP, but in other HR initiatives as well. The Compensation Committee needs to take on the role of a champion. Based on the feedback received, the critical issues identified earlier need to be debated and thrashed out at a meeting. The focus of the exercise should be to:

• Create a positive and natural reward experience.
• Align rewards with business goals and create a win-win relationship.
• Extend people's line of sight.
• Integrate various pay options into a larger reward strategy.
• Reward individual on-going value with base and merit-pay plans.
• Reward results with variable pay.

Once this is done, the VPP should be relaunched after being modified. Variable compensation plans are not a way of paying people, they are a way of managing people. If Care Soft does not allow the tail to wag the dog, its variable pay plan could be up and running again, this time successfully.

"It is necessary to involve employees in the setting of performance measures, targets, and payouts" Dhruv Prakash, Practice Leader (People Management Systems), Hewitt Associates

The problems of care soft are typical of organisations that link performance to pay during a business downturn. It is usually done in a hurry and is not backed with adequate effort on defining, measuring, and managing performance.

Notwithstanding the above, introduction of variable pay does focus on performance and creates a pull from the employees for clearer and better performance measurement and management system. It would, therefore, be wrong to scrap the scheme and revert to the fixed-pay system.

Mathur and the others have conveyed their dissatisfaction with the new system. The targets assigned to them were unrealistic and the means to achieve them not completely under their control. The tremendous efforts that they made to meet the tough targets went completely unrecognised. This is what needs to be tackled first. Patel, Sinha, and Arora should meet with as many of the affected employees as are considered key talent and reassure them about the Care Soft's appreciation of their efforts and its concern for them. It may even be worthwhile to do a quick benchmarking exercise and if Care Soft salaries are found to have fallen behind, to make a correction. The top management, not only Patel but the others too, need to demonstrate their commitment to the variable pay programme by the manner in which they speak about it. From the deliberations at the Compensation Committee meeting, it appears that Sinha and others do not have complete confidence in the system. This may be reflected in their interaction with their people, deepening the discord.

At the same time, steps should be taken to ensure that the current year's scheme gets better acceptance. For that, it is necessary to involve the employees in the setting of performance measures, thresholds, targets, and payouts. A good way of doing that is to give the responsibility to a group, including a cross-section of employees and the CEO/COO, and one or two function heads with the head of hr as the convener. This will ensure that the scheme balances the company's performance requirement with employee concerns. Issues such as stretch targets and functional interdependence must be addressed and provided for. Subgroups of this group should then take the lead in communicating to all the participants as well as monitoring and the actual performance of employees from time to time.

Arora's concern with the top management's commitment is justified. He needs to convince them that this is not just about compensation but about performance, about building an organisation that regularly converts aspirational goals into reality. When a new compensation system is introduced, certain amount of discontent is inevitable. Arora should anticipate and take action before it snowballs into a serious talent management problem.