Pay for Performance - One more time

The Wall Street Journal reported in Managing: Theory & Practice (July 7, 2008, p. B6) on the success of one company in providing flexible compensation choices to its employees. The byline called it a “throwback to (the) ‘80s.” In an era of scarcity for high quality workers – despite the unemployment numbers you read – why would such an idea be so out of favor? While the article focused on one particular arrangement where managers could opt for a lower salary in return for a higher bonus potential, there are lots of incentive options that employers could use to motivate employees to the benefit of all, yet most companies don’t even try. Pay-for-Performance is an idea with profound potential, yet it is not widely used outside the sales force.

We think a significant reason is the lack of trust that has developed between employees and employers over the past couple decades. Just ask any sales person what goes through his/her mind when their company announces any changes to their compensation plan and you’ll hear something like: “OK, I wonder what they’re taking away this time?” I wrote about this a few years ago, and urged company managements to consider some form of open book philosophy to re-establish some of that lost trust, especially when it comes to calculations that affect their paychecks, like bonus plans, profit sharing plans, and the like. The reality is that companies have not earned that trust in many cases – often adjusting bonus plans to limit success payments, crafting elaborate plans to favor top executives despite ostensibly offering equitable sharing of rewards, promising a lot but delivering a lot less, and so on.

It is true that a successful incentive compensation plan needs to be adapted to the level of employee management is seeking to motivate – factory workers will not be moved by the same options that move vice presidents. It is also true that responsive incentive plans are more work to develop and administer than straight salary plans, and the more responsive the plan the more administration it will require. But once you get past the design stage, most of the work is around performance evaluation: goal setting, getting buy-in, evaluating results and monetizing those results in a credible way. Performance evaluation that should be taking place anyway, don’t you think?

We have a long-time client whose plant work force has produced a consistent 15%+ increase in productivity per person, with roughly half the overtime compared to previously, with the implementation of a simple profit sharing bonus plan that was clearly tied to getting product shipped to customers.

Here’s what we’ve experienced:
· An employer who acts as if their employees should be adequately motivated by having a job and a salary will consistently get these results: high turnover and mediocre performance.
· An employer who is willing to share the fruits of above average performance with the workers who delivered that above average performance will continue to get above average performance, often dramatically above.
· An employer who wants their employees to accept a loosely defined methodology for determining incentive pay without significant transparency may be rewarded with skepticism and loosely delivered performance.
· Profits are produced by employees who want to do a good job, who feel their efforts are contributing to the company’s profits, and who have the clear sense that the company appreciates their contribution to those profits.

As always, your feedback is welcome.