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.

Incentives work – for everyone!

Good workers are hard to find, many CEOs report. Despite an economy that some feel is in recession – don’t you believe that part – unemployment statistics across the country are just shy of levels traditionally thought of by economists as full employment. That means you work harder to hire good people and then you have to keep working to keep them, because someone across town is willing to pay them more than you are to induce them to come to work for them. How do you cope? You can count on the familiarity of your company being an advantage vs. an unknown new situation. Unless your business is a sweat shop that should be a positive. But what about the pay issue?

I strongly believe customized incentive programs are a powerful glue to keep good people fastened to your payroll. Let me give you an example: a long-time client of mine is in a manufacturing business that requires highly skilled workers, and everyone wants them. Because their industry is booming, they were working all the overtime they could get from their people just to keep up with the orders. And they weren’t keeping up well enough, in the eyes of several of their key customers. Enter the simple bonus/profit sharing plan.

We installed a quarterly bonus plan that applied to everyone on the payroll, down to the shipping clerk. It’s funded from a percentage of profits and allocated to each worker based on their evaluated performance. To keep it simple the evaluation is a short check list of critical activities that are deemed directly supportive of timely and accurate delivery of goods to their customers. Every quarter each employee gets an additional amount in their paycheck or, at their option, added to their 401(k) account. A typical bonus can add $2-3 an hour or more to everyone’s paycheck for the entire quarter, all in one chunk of cash. The program has been in place for about 18 months now. The results:

With no major additions to equipment or plant layout changes, the company is now shipping roughly 15% more in sales than they were 2 years ago, with higher quality and better on-time delivery. And overtime has been reduced by 75%! As a result, profit margins have soared and morale has rarely been higher.

Your comments are welcome.

Accounting recruiters nightmare

With the current shortage of good accounting staff now approaching epidemic proportions, companies are looking to recent graduates for talent that is both current on technology tools and still affordable. But there’s a big caveat to that strategy, ably demonstrated by a recent Robert Half International survey published in CFO Magazine. They surveyed these “millennials” to find out what they most valued on the job. The top ranked results on a scale of 1 to 10 are shown in the graph below.
They don't need explanation, although the writer had a one-liner to add, hinting at a backlash against companies' declining sense of loyalty to their employees over the past generation.

"If you want loyalty, get a dog."

I welcome your comments.

Old Chinese proverb: "Don't let the tail wag the dog"

I got a call from one of my clients today, a company that recently hired on a trial basis a new accountant. While not fully qualified as a staff accountant, the young recruit is bright, reasonably experienced and very motivated to do the job well and give the client what they want. At the same time, he is an aggressive negotiator for himself: more money, better title, sooner rather than later, etc., to the point of sending his boss copies of employment ads that supposedly support his position. Since he is the sole full-time accounting person for the moment, his on-site boss gets nervous that he might leave if he doesn't get his wishes met.

If you've been in the market for good accounting people lately, you already know that they're scarce, and if you got 20 resumes in response to your ad, it is likely that 15 of them are patently underqualified but won't say so and 3 of them are marginal in one or more of your key areas but won't admit it because they're trying to be upwardly mobile. Of the remaining two, one or both of them will find other jobs before you discover how good they are.

"So, what to do?" asked my client.

Many young employees in an effort to take maximum advantage of this seller's market will press like children to get all they can, often not because they believe they deserve it but because they might get it anyway. Remember: "If you don't ask, you don't get." The problem of course is that you, the employer, end up paying more than you should to get less than you should, not a great deal for your bottom line. This is what I told my client:

If he wants to work for you, he will understand sound logic and value-for-value. If he is using your job to accelerate his pay rate for the next job, you need to find it out now. So offer him a modest increase consistent with his stronger-than-expected early performance, and set with him performance goals to be met in the next 90 to 180 days which, if met, will result in a nice additional raise (although not at the level he was lobbying for). Deny his rich title request, but give him the best title you can that is consistent with his job description. Explain why each of these actions is consistent with company policy and his current qualifications, and remind him of the potential that exists for him within the company as it grows.

The salary issue was settled easily as he accepted the increase offered. The rest of the plan is in motion now, and we'll soon see if we have a long-term employee.

This is an example of the kind of guidance I provide to coaching and consulting clients, so that they can become better managers within finance and throughout the company.

Got a story of one that worked for you? Disagree with my approach? Tell us about it...