Pay for Performance

Overview

What is a strategic plan but a set of objectives with measures, targets and initiatives to get there. Done well, it represents the future of the organization; it is the opportunity to remain a going concern.

Any strategy, though, is only as good as its execution. Plus, it is more than a little likely that you will need to rely on your people – all of your people – to make it happen.

This is where collaboration and teamwork comes in.

War for talent

For most organizations, their people-related expenses are among the biggest line items in the budget. Where functions can’t be controlled within appropriate quality levels as variable outsourced costs, you want to get, keep and grow the best possible employee base you can afford.

Everyone else is trying to do this, too.

At the same time, people come in many flavours and pursue their own life happiness, possibly through employment in an organization such as yours. They are looking for many things, including possibly an opportunity to follow a passion, or contributing to society, or making a lot of money to pay for periodic travel, or something that provides a secure, ongoing cash flow to support a family.

They may or may not be loyal.

Compensation

You want to find the sweet spot of paying not a penny too much nor a penny too little for the right person for the job. For this, you need to establish a philosophy and strategy for rewarding your people.

Compensation may include cash components, benefits, pensions, and other intangibles such as learning opportunities, skills development, career movement, flexible work style arrangements, and so on.

Speaking only of the cash components, they break down typically into a fixed base salary plus a variable performance bonus. Additionally, companies may provide equity in the form of stock options or restricted share units to key individuals as a long-term incentive for strategic retention purposes.

For each job in your organization, at each level, you need to establish a range for each that remains appropriately competitive in the marketplace (the war for talent). Data is derived from participants in national and international surveys conducted by large human resource consulting firms.

From there, salary and bonus ranges are established by job title at a specific percentile in the marketplace, depending on your compensation strategy to achieve the optimal attraction and retention levels (i.e., not too much staff turnover, not too little).

Sharing the risks and rewards

Generally speaking, the higher the targeted bonus amount as a percentage of the total compensation – and, hence, the lower the percentage for the base salary – the more you are attempting to create an incentive for people, including yourself, to focus time and energies on the critical tasks to achieve the strategy, knowing that there will be a higher level of compensation as a result. These strategies could range from new product introduction to customer service levels, or both.

If your balanced scorecard has been set up and communicated clearly for all to understand what is needed for success, you can then design a program to determine the actual performance bonus level for each participating employee. This is pay-for-performance.

Differentiation

Paying individuals different amounts for the same job can be – and is – highly charged as a topic. Many will claim that it is ineffective or creates undesirable competitive situations, causing performance to slip. They may prefer a system based on longevity or education level.

That possibility is certainly there if the set of objectives and measures aren’t constructed appropriately to provide the necessary balance. Generally, however, no single person can be successful on their own.

Ultimately, it is a philosophical decision. The whole organization may or may not get a full pay-out of the performance bonus pool depending on how well it achieved the strategic plan. This may or may not drive the employee behaviours and engagement you want.

Even more, if you decide to introduce an individual component to the bonus structure, you will want to create individual scorecards for measuring the performance of people. This introduces the element of differentiation among your people. It requires strong management skills in setting meaningful individual objectives, and then coaching to them and providing regular feedback. At the end of the performance period (e.g., semi-annually, annually), it will require the strength to have difficult conversations for low performers.

Some people will agree intellectually that some people are higher performing than others and should earn more, but translating that into a compensation structure requires care, communication and strong followthrough.