When money talks, nobody walks. Here's how to make your dollars speak volumes.
Can money stop I.T. workers from going from shop to shop?In this article you'll learn Different ways to leverage bonuses How to target the employees who should receive them What types of bonuses work best in which situations When Barbra Cooper stepped in as CIO of MicroAge in 1994, IT talent was hemorrhaging from the Tempe, Ariz., technology and integration services company at an alarming rate. Within weeks of her arrival, one of the key programmers handling the company's mission-critical systems (inventory control and distribution) left to become an independent consultant. Cooper had no choice but to hire him back. At triple his former salary.
Two years later, in December 1996, now group vice president and CIO of Toyota Motor Sales USA Inc. in Torrance, Calif., Cooper immediately instituted an aggressive retention program in hopes of avoiding a similar scenario.
First Toyota analyzed the market to determine the market value of all the programmers working on the company's Y2K project. The people who were being paid below market level immediately received salary increases.
Then Toyota allocated a "milestone bonus" pool within the Y2K budget to be disbursed at the discretion of the project director. Another bonus pool was set aside as a "completion bonus" to be awarded to project participants at the end of the Y2K project.
Toyota also instituted a short-term "hot skills," or "star pay," bonus for Cobol and RPG programmers - between $US 100 and $US 500 a month above their base salaries. They'd be eligible for this bonus for the duration of the Y2K project but not beyond.
Finally, Cooper instituted a policy giving managers the flexibility to award bonuses to key employees who were being recruited by other companies.
Given Toyota's historically low turnover rate of 2 per cent, why did Cooper feel compelled to rush in and mandate such an extensive policy? As she saw it, being a large Cobol shop, Toyota's Y2K effort would fall squarely on the shoulders of long-tenured employees whose salaries hadn't been leveled against the market. In other words, they were grossly underpaid.
Since Cooper instituted her multipronged retention bonus program in March 1997, Toyota's Y2K project has not lost a single person.
The Price of Doing Business
Cooper isn't alone. With the well-reported labor shortages in the industry, CIOs across the country are groping for strategies to keep competitors and consulting houses from luring their best IT talent. According to Linda Pittenger, CEO and president of Somerset, N.J.-based People3 Inc. (a company affiliated with Stamford, Conn.-based GartnerGroup Inc. that specializes in human resources consulting to IT organizations), GartnerGroup has determined that the demand for skilled IT professionals currently outstrips supply by 30 per cent. She says it's not uncommon for $US 55,000-a-year programmers to command a six-figure salary the minute they have trained in SAP and implemented just one SAP module. And if your IT organization isn't willing to meet that price, well, lots of other companies are. According to a January 1999 report published by GartnerGroup, about 40 per cent of North American companies offer bonuses to their IT professionals in response to the current IT turnover rate, now hovering between 8 per cent and 17 per cent a year. And by 2001 GartnerGroup projects 70 per cent will have instituted IT bonus programs as a regular part of their compensation practices. (See "Showing Them the Money".) "The problem with bonuses is that they're no longer perceived as value-added [because they're so ubiquitous]," asserts Joyce Gioia, president of Greensboro, N.C.-based management consulting company The Herman Group Inc. "But if you don't have [them] and everybody else does, you're at a competitive disadvantage." Gioia calls the decision of whether or not to pay bonuses a "no-brainer." Depending on how critical the employee's job, industry experts place the cost of replacing him or her anywhere between one and three times the person's annual salary, at a minimum. And when you figure in the cost of recruiting and training a replacement, not to mention the financial impact of delaying an important project for lack of expertise, it often seems smarter to shell out the extra bucks for the talent you already have on hand.
Of course, money isn't everything. Few employees will remain loyal if you're simply correcting outdated compensation practices or if you fail to provide other, nonmonetary incentives such as continuing education credits, onsite day care, health club memberships, flexible vacation policies and so on. Nevertheless, bonuses can be an important element in a comprehensive retention strategy.
One stays, the other doesn't
When Josh Bregman was a programmer at IBM Corp.'s Integrated Systems Solution Corp. in Southbury, Conn., he was offered a hefty increase at another company.
To convince him to stay, his manager offered him a 30 per cent raise and reassigned him from his Lotus Notes project to a new team involved in what to Bregman was more interesting - electronic commerce technology.
"It wasn't so much the money," says Bregman. Though the money was "a genuinely nice gesture," he continues, "the thing that really mattered to me is that they found a way to get me back on the career track that had been promised to me by going to work there." The bonus bought IBM another eight months of Bregman's time. But eight months was all it bought. Only two years out of school, he was lured away by GTE Laboratories Inc. in Waltham, Mass., with a further increase in pay, the attraction of living near a big city (Waltham is just outside Boston) and, most important to him, the promise of more exciting Web-based projects.
On the other hand, Bob Roth, a development manager for Pleasanton, Calif.-based enterprise resource software company People-Soft Inc., decided that lucrative stock-option bonuses and quarterly merit bonuses, up to 10 per cent of his salary, were a convincing argument for staying put.
"I don't even talk to headhunters anymore," says Roth, who adds that, in his opinion, it makes sense to pay to retain your best people. "To me," he says, "the thing that's important is that [the bonus] is not part of your salary. It's based on your performance." And Roth suggests that the bonus a company offers a top performer should be a significant one - at least $US 2,000 a quarter - "to make a difference." Formerly a teacher, one of the reasons Roth left the classroom was that his compensation wasn't tied to either talent or effort. "I worked my butt off," he says. "I thought I was the best teacher these kids ever saw. And I got the same pay and no bonuses, just like the bonehead in the room next to me." Two men, two different bonus strategies, two different outcomes. Bregman is in his early 20s, single and carefree. Roth is in his late 40s with a wife, two children and roots in the community. The lesson? Simple. You have to understand what motivates your employee, what is important to him, before you can decide on a bonus strategy.
Frank talk from Burger King
Executives at Miami-based Burger King Corp. faced the same issues as Cooper did at Toyota. Burger King programmers and analysts trained in SAP were being heavily recruited, with companies offering substantial increases, sometimes double whatever they were making. The employees' decision to jump ship was understandable, but it put the company's SAP project in dire straits. Tom Giordano, senior vice president of MIS and CIO of Burger King, recalls that the company had to employ consultants to staff a number of projects to keep the company's SAP Financials implementation on schedule. "We augmented the implementation with consulting services and continued to deliver the key milestones on time," he says, but "it had a significant impact on the cost." Giordano believes part of what put him in this unfortunate situation was Burger King's ad hoc bonus program. When he joined the company in July 1998 it had no formal bonus program, although occasionally a project-specific milestone bonus would be paid. It wasn't clear to staffers what type, magnitude or length of project would qualify for a bonus, nor what the size of the bonus would be.
Because IT staff members felt they couldn't count on the bonus, Burger King's retention strategy was ineffective: Turnover shot up to around 35 per cent.
Giordano has since instituted a formal Hot Skills Bonus Program to compete with market scale. Some skills, like SAP, Oracle, SQL Server and point-of-sale system technology, get quarterly bonuses ranging from 10 per cent to 30 per cent of the employee's base salary. Since instituting this program in the summer of 1998, Giordano has watched turnover decline steeply to 10 per cent to 12 per cent.
Giordano adds a caveat: To avoid misunderstandings, you have to be upfront with employees as to who gets paid a premium and why. Before launching its Hot Skills program, Burger King spent a lot of time with focus groups at all levels of the IT organization. Management was open about the process. "It's a very market-driven mechanism," explains Giordano. Burger King's IT staff now understands that given present market anomalies, the company has to pay a premium to retain certain people with high-demand, limited-supply skills critical to its operation.
Golden Handcuffs
The premium paid to retain people with the skills you need is climbing every day. According to Bruce Clark, chairman and CEO of Danbury, Conn.-based IT retention consultancy Stabiliteam Inc., IT salaries for workers with hot skills like GTE's Bregman are climbing by over 30 per cent a year. "You have to have bonuses to make sure that people are paid close to market," Clark warns. "And you've got to make rapid adjustments to make sure that their compensation stays there." In working to stabilize client companies' project teams, Stabiliteam first adjusts workers' salaries to market rate and then keeps them current through regular indexing. Premium skills and completion bonuses ensure that there's continuity to the end of a project. "We focus the [incentive] program on trying to keep the [consultants and in-house staff] together," says Clark. Everyone on the project - excluding upper management - gets the same deal (the same percentage of salary, not the same dollar amount). If you stay to the end of the project, you get the bonus.
Stabiliteam's clients typically experience turnover rates ranging from 50 per cent to 75 per cent. Clark says that after his company goes in, turnover often drops to zero. In the longer term, those rates typically will rise again, to between 10 per cent and 15 per cent, but not, he asserts, for financial reasons.
Clark's ultimate goal is to bind employees to Stabiliteam by making sure that they're not going to jump ship in order to find better-paying jobs.
GartnerGroup calls this practice "golden handcuffs" - trying to lock employees into their jobs with big bucks. It can be proactive, as in the case of Stabiliteam, where the continual reassessment of current market rates for specific skills is corporate policy. Or it can be reactive, as was the case with Bregman, where the threat of his departure resulted in a cash offer. In either case, keeping the handcuffs on can be expensive. If money is the only tool a company employs to keep an employee happy, then there will always be someone with more money (or someone who is more desperate) than you. What money can't do is alleviate the anxiety felt by talented people who fear they're missing out on a rising market, as did Bregman. Roth, on the other hand, has remained loyal to PeopleSoft, not only because of the equity he holds but because he genuinely likes working for the company and feels it acknowledges his contributions.
Adding Value to Dollars
People want to feel valued," says Herman Group's Gioia. "They want to feel appreciated." In the market, money is - pardon the expression - the gold standard for making people feel appreciated. But according to Gioia it's not just a matter of how much, it's how the money is delivered that counts.
For example, CCBN.com, a 1997 startup that provides leading-edge investor communication services over the Internet, took a different tack in spending to retain employees. Rob Adler, president of the Boston-based, 60-person firm (its IT department numbers 15), explains that "from the day we opened our doors, we've paid below-market salary." To compensate, CCBN.com rewards performance aggressively with a liberal bonus policy. Employees can earn up to an additional 20 per cent of their base salaries at six-month intervals, depending on individual performance and on whether the company hits its business-plan targets. Some would call this a milestone bonus, others a retention bonus and still others might call it long-term incentive pay. Adler also motivates key staff by offering equity in the company. Employees own 20 per cent of CCBN.com through a vesting program. You get some stock options upon joining (a long-term strategy), and additional grants are awarded semiannually according to performance.
"We've been fortunate that people continue to be willing to take less to be here for what they perceive as the future financial rewards," says Adler. But he also credits the extremely low turnover rate (he's lost two people since February 1997: one was fired; one left after 30 days) to an environment that allows IT people to stretch their talents in the latest Internet communication technology. IR Eye, the company's delivery system, enables publicly traded companies to present investor relations data to shareholders on their Web sites.
Toyota's Cooper agrees that monetary rewards cannot stand alone. As she sees it, IT professionals with hot skills are "going where the cool technology is, where the pay is best and where they think they can get continued skill-building." If you can't create an environment that combines all those attractions, she believes you'll find it very difficult to keep and even recruit people, no matter how much money you throw at them.
Fostering Long-Term Loyalty
Offering bonuses is often a knee-jerk reaction to turnover. But outdated compensation aside, turnover is often a sign of other underlying problems: ineffective managers, limited opportunities for professional growth, a hostile corporate culture. If you want to attract and retain good people, don't forget the fundamentals. In addition to fair compensation, you have to create an environment that nurtures career development. If that means recruiting more skillful, supportive managers, do it. If it means using contractors to support legacy systems in order to give your in-house staff a crack at the sexier new technology, do it. If it means setting aside an escalating annuity for training in a hot technology, do it. Toyota offers an aggressive education program to its Y2K project team, and Stabiliteam provides accelerated education credits to Y2K project participants that will help bring them up-to-speed on the latest IT skills once their long-term commitment to the current project has ended.
As many CIOs are discovering, the way to your programmer's heart isn't always through his wallet. Be creative. You'll never stop turnover. But there's a lot you can do to keep it manageable.
Debby Young is the owner of d'scribe, a freelance writing business based in Framingham, Mass. She can be reached via e-mail at dscribe@erols.com.
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