It´s bonus time at his company. The sales people have been paid commissions based on exceeding their quotas. The company achieved 110% of its revenue target, and bonuses will be paid out across the organization equally. Despite remarkable strides and extra effort by the marketing team, where Joe works as a Web Manager, to launch three new products, update five international Web sites, improve customer retention and meet other group objectives, each person on the team only receives the same 3% merit increase and standard bonus.
As the top performer behind a stunning new Web site design that has won several awards, and the web lead generation engine that has outperformed all expectations, Joe is not happy. In fact, he wonders if it is time to finally return that recruiter´s call. Despite the fact that he exceeded performance goals and executed superbly against his personal development plan, he received the same amount as the under-performing public relations manager in the next cube who arrives late and leaves early.
If this sounds familiar to you, it could mean that your company´s compensation approach is flawed and will cost you and your organization your best employees. More specifically, it may be time to refocus your culture to concentrate on growing and rewarding top performers.
A successful pay-for-performance strategy can be the key to retaining top talent and driving organizational performance that exceeds all expectations.
Enter Pay-for-Performance
More and more organizations are turning to pay-for-performance as a key building block to drive organizational success. This pay policy is becoming more popular as it is one of the best ways of aligning employee goals and activities with high level corporate initiatives.
Pay-for-performance is about building a culture focused on organizational performance. This is a culture driven by linking organizational goals to individual goals to motivate and reward top performers, while growing under performers, helping them strive to become greater assets in your organization.
The underlying strategy is based on two different models for pay-for-performance;
For the purposes of this article, we will focus on a combination of both models. We will examine the building blocks for such systems and how compensation, incentive, performance, and goal management all play key roles in managing, motivating, and retaining staff to drive performance.
The Building Blocks of Pay-for-Performance
With retention and recruitment critical priorities in every organization today, a sound pay for performance program will signal to your employees, and potential employees, that this is a desirable place to work. Unfortunately, we cannot all be Google and incent employees with a piece of a dramatic IPO, however a well thought out incentive strategy can serve a similar purpose. At its core, pay-for-performance must serve to align your people with the goals and objectives of the company.
To design an effective strategy there are four areas that must be considered:
While these concepts are simple, the implementation of processes and systems to manage them can quickly become highly complex. High level initiatives must drive down through the organization to be supported by each individual´s goals and those goals must be shared between departments. Incentive programs and policies must be budgeted, reviewed and deployed in an organized and traceable manner. Consistent performance procedures and measurement must be applied throughout the enterprise.
To properly accomplish the implementation of a pay-for-performance program, processes and systems must be in place to ensure that all of these tasks and others are completed in a timely and consistent manner. Carefully consider the following four steps when designing your program:
Step 1: Compensation Planning
The first step to implementing a pay-for-performance system is defining the overall compensation plan for the organization. The necessity of managing numerous compensation plans and policies with multiple variables is challenging, and before they are defined an organization must decide its approach to compensation.
There are many types of compensation that can be balanced to create a compensation plan. An employee can be rewarded by salary, bonuses, stock options, 401K contributions, etc, or non-financial rewards such as luxury items or gifts. Organizations must decide where they would like to be in each area as compared to the current market for employees. Also, they must decide how increases will compare to the rest of the market to retain employees.
There are many separate plans for different types of employees. Managing and applying these policies in a consistent and controlled basis requires constant review and oversight. Organizations must ensure that policies are followed consistently throughout the enterprise and properly roll-up into budgetary plans.
Step 2: Goal Management
Once the compensation strategy is determined, organizational goals must be organized and cascaded to all employees, providing a clear view of the company´s mission. In many organizations there is no method of communicating goals set by executives and upper management to individual contributors in a way that enables employees to effectively contribute to the accomplishment of those organizational goals. For Joe Superstar, this means making sure his goals are aligned with things within his control when possible, not solely on revenue which he cannot directly influence.
At the same time, typical bonus plans often include both organization and individual performance. An employee receives a 5% bonus if they meet all their personal goals and another 5% if the company makes its revenue number. If the company only reaches 80% of its revenue goal then the employee will only receive an additional 4% bonus.
As in the case of Joe Superstar, the trouble with this traditional manner of splitting reward potential is that an individual employee may have no way of affecting the organization´s goals in a traceable manner. This leads to employees being rewarded and penalized arbitrarily based upon organizational groupings.
Step 3: Incentive Management
Once objectives are properly assigned and published throughout the organization, additional incentives can encourage and further motivate each employee to reach their assigned goals. Properly defined incentive plans are one of the best motivators, but they must be appropriate to the target audience and focused to their needs.
Taking a proper view of incentive management streamlines incentive policy administration, and provides long-term incentive planning for both market-based and performance-based plans, as well as variable pay flexibility for individuals, teams, sales, or executives. Proposed actions can be compared with policy rules to determine whether they fall within guidelines and budgets. Incentive management provides the mechanism to apply corporate compensation rules to proposed incentive events to systematically plan and manage performance plans.
Step 4: Performance Management
The final aspect of a pay-for-performance model is to be able to properly measure the performance of the employees within the organization. Many organizations fail to take this last step to integrate goal and incentive measures with performance. If they did, the organization could accurately gauge the success of the individual employee, and also create a standard that will enable the comparison between workers even if they work in different departments, divisions or countries. Without those connections, and the connection to budgetary constraints, changes in compensation become too arbitrary and subjective.
The key to successfully managing the performance review process is to change the paradigm from a yearly event to a more continuous method of tracking activities and engendering a dialog between employee and manager. Too often performance reviews are viewed as a tedious activity that must be completed at the end of each year. By integrating individual goals that derive from higher level organizational goals, the process becomes more regular and can be used to guide the activities of the employee to ensure that goals and changing goals can be properly communicated and achieved.
Act Now or Pay Later
Forward thinking companies are already taking a proactive stance on how they reward their employees. They are defining pay-for-performance as a process, strategically integrating compensation, goals management, incentive management and performance management to clearly articulate and align corporate and individual goals, while appropriately rewarding employees. It is the integration of these components that is key to successfully implementing a pay-for-performance system. Unfortunately, many organizations haven´t integrated the processes that drive these areas and are faced with a number of Joe Superstars. Without addressing this crucial problem today, your organization could lose more than just time and money, you could lose knowledge, employees and ultimately, your competitive edge.