What Goes Around

Tying pay to performance, companies stick tech workers with a dose of comeuppance.
David KatzJune 5, 2002

Maybe it’s payback time — or pay less time — for information technology workers.

You don’t have to be Jerry Lucas to remember the days when corporate IT departments ruled the roost at many companies. During the new economy boom of the late nineties, tech employees were alternately coddled, stroked, and kowtowed to. They asked for — and routinely received — flexible hours, game rooms, and top-notch benefits. They also got paid real well.

And what happened? CFOs at traditional companies (not necessarily the most IT-literate bunch), watched in horror as some E-commerce projects ran long and over-budget, rarely producing demonstrable results. At many dot-coms, ambitious IT staffs did deliver something: disastrous cash-burn rates.

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Finance chiefs no doubt recall those days of largesse when they mull how much to pay their tech workers in a down economy. Some, in fact, may still be sore about those frantic days new economy. “A lot of CFOs and CEOs felt out of control,” says David Van De Voort, head of the IT workforce unit at Mercer Human Resource Consulting. “All they could do was write big checks [to tech employees].”

A yen for retribution and a lust to take back some of the power ceded to chief information officers may well be in the air, particularly in HR and finance departments. “There’s a deeply held resentment because of the investments that have been made in the last few years,” Van de Voort acknowledges.

Revenge, though satisfying, has its risks. If tech workers suspect senior managers of a desire for IT comeuppance, “your company will be faced with a retention problem” when the economy bounces back, says Van De Voort. And he expects companies will be doing a lot more tech hiring in the second half of the year.

It would be hard to do less hiring than they’ve done so far during the downturn. When it comes to IT jobs, Corporate America has undergone a huge case of shrinkage. U.S. companies have shed more than 500,000 tech jobs in the past year, trimming the IT sector to 9.9 million workers early in 2002, according to a survey released in May by the Information Technology Association of America (ITAA). The survey was based on interviews with 532 hiring managers at tech and non-tech companies.

To be sure, the message about the demand for qualified tech people is mixed. Hiring managers estimate they will try to fill 1.1 million tech slots in the next year, up 27 percent over last year, according to the ITAA survey. Of that number, about 600,000 will go unfilled because qualified workers are lacking.

Staffing experts cite a crying need for data-security experts in the wake of September 11. They also say there’s a paucity of people who can keep costly enterprise resource planning (ERP) and customer relationship management (CRM) systems running on time. Mercer’s Van De Voort cites “tremendous shortages of skilled project managers” that have financial and operations skills.

For the moment, however, tech payrolls reflect a bleak, non-competitive job market for all but top IT executives. Between Q1 2001 and Q1 2002, bonuses paid to IT folks up to the vice president level were cut by a whopping 26.6 percent on average, while base salaries fell by 5.5 percent, according to data culled by Foote Partners, an IT workforce research firm and management consultancy in New Canaan, Connecticut. The firm tracks the pay of 30,000 IT workers at 1,840 private and public organizations on a quarterly basis.

Among the hardest hit: the previously high-flying E-commerce workers and those who toiled on the Web. The bonuses and base salaries of E-commerce employees dropped 47 percent and 15 percent respectively, according to Foote Partners, while those of Web workers dove 42 percent and 14 percent.

The only tech sector employees to see a boost in bonuses? Security specialists, with an increase of 9.5 percent.

No Big Whoop

Now that they’ve finally got their IT payrolls under control, finance executives seem less than enthused about growing their companies’ overall tabs for tech workers. Indeed, finding qualified IT personnel ranked just ninth out of ten priorities on the American Institute of Certified Public Accountants Top Technologies list. The AICPA online survey, which drew 195 responses, was aimed at ranking the importance of 42 tech issues.

To be sure, many companies did a “lot of warm-body hiring” in IT during the expansion, says Van De Voort. But with all the layoffs, many companies might be reaching the point where they can’t cut any more.

That’s because for many organizations, managing information has become the business, rather than a servicer of the business. Tech has become so crucial to some financial-services companies, for instance, that they look more like “IT companies in the financial domain,” notes Diane Tunick Morello, a vice president with Gartner Research.

Hence, many corporate managers are now wrestling with how to reward essential IT workers — without adding to their companies’ fixed costs.

The answer some employers are coming up with is an idea stolen from the sales side: paying out chunks of cash according to tightly targeted performance goals.

Called “variable pay,” the bonus schemes enable employers to compensate tech performers for meeting tough deadlines and delivering quality work. Under the schemes, IT staffers who are higher up on the organizational ladder typically have more of their total compensation (salary plus bonus) at risk, says Janet Fuersich, a principal in charge of Towers Perrin’s Northeast compensation practice. Base salary, of course, is almost never cut.

The stakes in incentive pay, however, can be pretty high. For instance, a data-security executive who reports directly to a company’s chief information officer, could gain (or lose) incentive pay that amounts to as much 25 percent of the security executive’s salary, says Fuersich. An applications programmer who hits certain performance targets, on the other hand, might get a bonus of 8 percent to 10 percent of base pay.

Risk, in other words, is shifted from employer to IT employee. Ed Goldfinger, CFO of Empirix, a private Web testing and monitoring company that could go public if there’s an upturn, suggests that his company’s bonus structure, which rewards upper-level tech employees, helps him get the company’s priorities straight.

“The first question left open is the question of whether [Empirix’s business metrics] are going to be flattish or grow,” says Goldfinger. “The great news about variable compensation is that it’s variable.”

Another plus for employers is that the payouts don’t boost worker salaries and other fixed costs associated with them, which can be hefty. Modest though a percentage raise may seem, it can add to life insurance premiums, 401(k) contributions, and other benefits that are keyed off salary, says Fuersich.

But offering one-shot, performance-based payouts — rather than companywide bonuses based on earnings per share, for instance — also dovetails with the spirit of payback. “Part of it is to get away from the entitlement mentality” that IT people developed during the boom, says Fuersich. “It took this major downturn in business [for employers] to say incentives and bonuses are not guaranteed.”

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